Interim Results - NatWest Group (Part 1 of 2)

RNS Number : 9945G

NatWest Group plc

30 July 2021

 

  Interim Results 2021

   natwestgroup.com

NatWest Group plc

Interim Results for the period ending 30 June 2021

Alison Rose, Chief Executive Officer, commented:

"These results have been driven by good operating performances across the Group, underpinned by a robust loan book and a strong capital position. Defaults remain low and, given the improved outlook, we have released a further £0.6 billion of impairment provisions in the quarter. While we see the potential for a more rapid recovery, we will continue to take an appropriate and conservative approach as the government schemes wind down and the economy reopens.

As a result of our strong and resilient performance, coupled with our capital strength and cautiously optimistic outlook, we are announcing an interim dividend of 3p per share and share buy-back of up to £750 million. We are also increasing our minimum annual distribution to shareholders to £1.0 billion for the next three years. Taken together, this means our total distributions for 2021 will be a minimum of £2.9 billion.  

We continue to make progress against our strategic targets and to accelerate our digital transformation as we build a bank that is relevant to our customers in every region of the UK and supports them at every stage of their lives. As the UK's leading business bank, we are determined to remove barriers to entry and help the economy build back better. Against the background of an ongoing pandemic, our commitment to helping people, families and businesses to rebuild and thrive has never been more important. Because if they thrive, so will we."

Financial performance in a challenging environment

· H1 2021 operating profit before tax of £2,505 million compared with an operating loss before tax of £770 million in H1 2020. H1 2021 attributable profit of £1,842 million.

· Income across the UK and RBSI retail and commercial businesses, excluding notable items, decreased by £160 million, or 3.3%, compared with H1 2020 reflecting the lower yield curve and subdued transactional business activity, partially offset by balance sheet growth. NatWest Markets (NWM) income, excluding asset disposals/strategic risk reduction and OCA, decreased by £492 million, or 59.6%, compared with H1 2020 reflecting the exceptional level of market activity generated by the spread of the COVID-19 virus in the prior period, together with weak performance in the Fixed Income business in the current period.

· Bank net interest margin (NIM) of 1.61% decreased by 3 basis points compared with Q1 2021 principally reflecting increased levels of liquidity.

· Other expenses, excluding operating lease depreciation (OLD) and Ulster Bank RoI direct costs, were £185 million, or 5.9% lower than H1 2020.

· A net impairment release of £707 million in the first half of 2021 mainly reflects releases in non-default portfolios as a result of the improved economic outlook.

Robust balance sheet with strong capital and liquidity levels  

· CET1 ratio of 18.2% was in line with Q1 2021.

· An interim dividend of 3 pence per share is proposed.

· The liquidity coverage ratio (LCR) of 164%, representing £75.3 billion headroom above 100% minimum requirement, increased by 6 percentage points compared with Q1 2021, reflecting the continued growth in customer deposits.

· Net lending increased by £2.2 billion to £362.7 billion during H1 2021. Across the UK and RBSI retail and commercial businesses, net lending excluding UK Government support schemes, increased by £4.1 billion, or 2.8% on an annualised basis, including £7.0 billion of mortgage growth.

· Customer deposits increased by £35.5 billion during H1 2021 to £467.2 billon, as customers sought to retain liquidity and reduced spending. Treasury repo activity drove £11.5 billion of balance growth.

· RWAs decreased by £7.3 billion to £163.0 billion during H1 2021 mainly reflecting business movements in Commercial Banking. 

Outlook ⁽¹⁾

The rollout of COVID-19 vaccines over the first half of 2021 has contributed towards an improved economic outlook. Our central forecasts are disclosed on pages 20 to 23. The outlook remains subject to significant uncertainty and we will continue to refine our internal forecast as the economic position evolves. We retain the guidance provided at the full year results announcement with the exception of the following:

· We now expect NatWest Markets exit/disposal costs and the impact of Commercial Banking capital management actions to total a combined £150 million in 2021;

· Noting impairment losses in the first half of 2021 were a net release of £707 million, we now expect the 2021 full year impairment loss to be a net release;

· We now expect NatWest Group RWAs to be below or at the lower end of our previously guided range of £185-195 billion on 1 January 2022;

· NatWest Group now aims to distribute a minimum of £1 billion per annum from 2021 to 2023, via a combination of ordinary and special dividends, and intends to commence an ordinary share buy-back programme of up to £750 million in the second half of the year.

N ote:

(1)  The guidance, targets, expectations and trends discussed in this section represent management's current expectations and are subject to change, including as a result of the factors described in the Risk Factors section on pages 112 and 113 of this announcement, pages 345 to 362 of the NatWest Group plc 2020 Annual Report and Accounts, pages 48 and 49 of the NatWest Markets Plc 2021 Interim Results announcement and on pages 156 to 172 of the NatWest Markets Plc 2020 Annual Report and Accounts. These statements constitute forward-looking statements. Refer to Forward-looking statements in this announcement.

 

Our Purpose in action

We champion potential, helping people, families and businesses to thrive. If they succeed, so will we. By being relevant to our customers and communities and by supporting our colleagues, we will deliver long-term value and drive sustainable returns to our shareholders. Some key achievements from H1 2021:

People and families

●	Supported customers with 1.5 million financial capability interactions including 515,000 financial health checks.
●	273,000 customers have grown their savings with us by £100 or more for the first time.
●	Use of chatbot Cora has grown with 2.7 million conversation in Q2 2021 compared to 2.5 million in Q2 2020.
●	Facial biometrics and cheque deposits are now live in our app and Know My Credit Score has been used 20 million times since launch.
●	We've introduced 95% mortgages to help more young people onto the property ladder and Retail Banking has supported customers with £19.3 billion of gross new mortgage lending in H1 2021.
●	Launched Career Sense, a new programme to support 13 to 24 year-olds with readiness for work, aiming to reach over 10,000 young people this year.
Businesses
●	c.92% of Bounce Back Loan Scheme (BBLS) customers due to commence loan repayments had begun repayments on, or ahead of, schedule and c.5% of all BBLS customers had repaid in full as at 30 June 2021.
●	Held 35,000 interactions with entrepreneurs to help them launch their business so far this year through mentoring, webinars and coaching, 76% of which are outside London and the South-East and 53% are female led.
●	Relaunched our entrepreneurship proposition and refocused 11 of our 12 Entrepreneur Accelerator hubs to support high growth, female led, black and minority ethnic led and B Corp focused businesses.
●	Coutts has collaborated with the Business Growth Fund to provide additional funding, growth capital, and to support small and medium sized enterprises (SMEs).
●	Our Springboard to Recovery report launched in March 2021, showed how targeted support for SMEs could unlock £140 billion of additional Gross Value Added (GVA) growth by 2030 equivalent to creating around 3.2 million new jobs across the UK. In response we committed £6 billion to help SMEs grow, of which £4 billion will be allocated outside London, and we doubled our funding of female entrepreneurship to £2 billion.
●	Our digital investment platform across NatWest Invest, Royal Bank Invest and Coutts Invest saw £0.5 billion of inflows in H1 2021.

Colleagues

●	Launched a framework for NatWest Group's new hybrid working model, balancing the needs of our customers, communities and colleagues.
●	Named as one of the top 25 workplaces in the UK to grow a career by LinkedIn. NatWest Group was also recognised in The Times Top 50 Employers for Women for the 11th year running.
●	Extended our package of COVID-19 support available to colleagues in India, including access to interest-free salary advances to meet medical expenses, reimbursement for the cost of vaccines and extended leave.
●	Launched the Talent Academy, a new talent initiative, open to all colleagues with an initial cohort of just over 3,500.
Communities
●	NatWest Group joined the Net Zero Banking Alliance and Coutts Asset Management has joined the Net Zero Asset Managers initiative, working with other financial organisations to help deliver the Paris Agreement.
●	NatWest Group was the first UK bank to introduce a carbon tracking feature in our mobile banking app to help customers reduce the climate impact of their spending. Following a successful pilot, we've partnered with carbon tracking experts CoGo to let personal customers see the carbon impact of their daily spending.
●	NatWest Group issued a €1 billion affordable housing social bond, the first of its kind by a UK bank. The proceeds will support lending to not-for-profit, UK housing associations as part of our commitment to provide £3 billion of funding to the UK's affordable housing sector by the end of 2022.
●	Coutts has become the first major UK Private Bank and Wealth Manager to be certified as a B Corp demonstrating its commitment to meeting the highest standards of verifiable social and environmental performance, public transparency and legal accountability.
●	Applications opened for the Circle Fund to support victims of economic and domestic abuse. NatWest pledged £1 million to the fund to help frontline specialist services who provide crisis intervention and recovery support.

For further detail refer to the Climate, Purpose and ESG measures supplement H1 2021.

 

Business performance summary

	Half year ended			Quarter ended
	30 June	30 June		30 June	31 March	30 June
Performance key metrics and ratios	2021	2020		2021	2021	2020
Total income	£5,319m	£5,838m		£2,660m	£2,659m	£2,676m
Operating expenses	(£3,521m)	(£3,750m)		(£1,706m)	(£1,815m)	(£1,909m)
Profit before impairment releases/(losses)	£1,798m	£2,088m		£954m	£844m	£767m
Operating profit/(loss) before tax	£2,505m	(£770m)		£1,559m	£946m	(£1,289m)
Profit/(loss) attributable to ordinary shareholders	£1,842m	(£705m)		£1,222m	£620m	(£993m)
Excluding notable items within total income  (1)
Total income excluding notable items	£5,314m	£5,844m		£2,641m	£2,673m	£2,797m
Operating expenses	(£3,521m)	(£3,750m)		(£1,706m)	(£1,815m)	£1,909m
Profit before impairment releases/(losses) and
excluding notable items	£1,793m	£2,094m		£935m	£858m	£888m
Operating profit/(loss) before tax and excluding notable items	£2,500m	(£764m)		£1,540m	£960m	(£1,168m)
UK and RBSI retail and commercial income excluding
notable items  (2)	£4,687m	£4,847m		£2,368m	£2,319m	£2,325m
Performance key metrics and ratios
Bank net interest margin  (2,3)	1.62%	1.78%		1.61%	1.64%	1.67%
Bank net interest margin excluding liquid asset buffer  (2)	2.40%	2.48%		2.40%	2.39%	2.38%
Bank average interest earning assets  (2,3)	£487bn	£440bn		£494bn	£480bn	£458bn
Bank average interest earning assets excluding
liquid asset buffer  (2)	£329bn	£316bn		£330bn	£328bn	£321bn
Cost:income ratio  (2)	65.7%	63.8%		63.7%	67.8%	70.9%
Loan impairment rate  (2)	(38bps)	159bps		(66bps)	(11bps)	229bps
Earnings per share - basic	15.6p	(5.8p)		10.6p	5.1p	(8.2p)
Return on tangible equity  (2)	11.7%	(4.4%)		15.6%	7.9%	(12.4%)

				30 June	31 March	31 December
				2021	2021	2020
Balance sheet
Total assets				£775.9bn	£769.8bn	£799.5bn
Funded assets  (2)				£666.3bn	£646.8bn	£633.0bn
Loans to customers - amortised cost				£362.7bn	£358.7bn	£360.5bn
Loans to customers and banks - amortised cost and FVOCI				£375.6bn	£371.0bn	£372.4bn
UK and RBSI retail and commercial net lending excluding UK Government
support schemes  (2)				£302.0bn	£300.1bn	£297.9bn
Impairment provisions - amortised cost				£4.7bn	£5.6bn	£6.0bn
Total impairment provisions				£4.9bn	£5.8bn	£6.2bn
Expected credit loss (ECL) coverage ratio				1.31%	1.56%	1.66%
Assets under management and administration (AUMA)  (2)				£34.7bn	£32.6bn	£32.1bn
Customer deposits				£467.2bn	£453.3bn	£431.7bn
UK and RBSI retail and commercial customer deposits  (2)				£428.7bn	£415.3bn	£403.2bn
Liquidity and funding
Liquidity coverage ratio (LCR)				164%	158%	165%
Liquidity portfolio				£277bn	£263bn	£262bn
Net stable funding ratio (NSFR)  (4)				154%	153%	151%
Loan:deposit ratio  (2)				78%	79%	84%
Total wholesale funding				£66bn	£61bn	£71bn
Short-term wholesale funding				£23bn	£20bn	£19bn
Capital and leverage
Common Equity Tier (CET1) ratio  (5)				18.2%	18.2%	18.5%
Total capital ratio				24.9%	24.0%	24.5%
Pro forma CET1 ratio, pre dividend accrual  (6)				19.1%	18.6%	18.8%
Risk-weighted assets (RWAs)				£163.0bn	£164.7bn	£170.3bn
UK leverage ratio  (7)				6.2%	6.2%	6.4%
Tangible net asset value (TNAV) per ordinary share				266p	261p	261p
Number of ordinary shares in issue (millions)  (8)				11,569	11,560	12,129

 

Notes:

(1)	Refer to page 5 for details of notable items within total income.
(2)	Refer to Non-IFRS financial measures Appendix for details of basis of preparation and reconciliation of non-IFRS financial measures and performance metrics.
(3)	NatWest Group excluding NWM.
(4)	NSFR reported in line with CRR2 regulations finalised in June 2019.
(5)	Based on CRR end-point including the IFRS 9 transitional adjustment of £1.2 billion (31 March 2021 - £1.7 billion; 31 December 2020 - £1.7 billion). Excluding this adjustment, the CET1 ratio would be 17.5% (31 March 2021 - 17.2%; 31 December 2020 - 17.5%).
(6)	The pro forma CET1 ratio at 30 June 2021 excludes foreseeable items of £1.4 billion, £500 million for ordinary dividends and £924 million foreseeable charges and pension contributions (31 March 2021 excludes foreseeable charges of £547 million for ordinary dividend including £200 million (11bps) in Q1 2021; 31 December 2020 excludes foreseeable charges of £364 million for ordinary dividend (3p per share) and £266 million pension contribution). At 31 March 2020 there was no charge in CET1 for foreseeable dividends or charges.
(7)	Based on UK end-point including the IFRS9 transitional adjustment of £1.2 billion (31 March 2021 - £1.7 billion; 31 December 2020 - £1.7 billion). Excluding this adjustment the UK leverage ratio would be 6.0% (31 March 2021 - 6.0%; 31 December 2020 - 6.1%)
(8)	In March 2021, there was an agreement with HM Treasury to buy 591 million ordinary shares in the Company from UK Government Investments Ltd (UKGI). NatWest Group cancelled 391 million of the purchased ordinary shares and held the remaining 200 million in own shares held. The number of ordinary shares in issue excludes own shares held which comprises the remainder of the shares purchased and shares held by the NatWest Group 2001 Employee Share Trust.

 

Summary consolidated income statement for the period ended 30 June 2021

	Half year ended			Quarter ended
	30 June	30 June		30 June	31 March	30 June
	2021	2020		2021	2021	2020
	£m	£m		£m	£m	£m
Net interest income	3,916	3,852		1,985	1,931	1,910
Own credit adjustments	-	53		(2)	2	(102)
Other non-interest income	1,403	1,933		677	726	868
Non-interest income	1,403	1,986		675	728	766
Total income	5,319	5,838		2,660	2,659	2,676
Litigation and conduct costs	18	89		34	(16)	85
Strategic costs	(332)	(464)		(172)	(160)	(333)
Other expenses	(3,207)	(3,375)		(1,568)	(1,639)	(1,661)
Operating expenses	(3,521)	(3,750)		(1,706)	(1,815)	(1,909)
Profit before impairment releases/(losses)	1,798	2,088		954	844	767
Impairment releases/(losses)	707	(2,858)		605	102	(2,056)
Operating profit/(loss) before tax	2,505	(770)		1,559	946	(1,289)
Tax (charge)/credit	(435)	208		(202)	(233)	396
Profit/(loss) for the period	2,070	(562)		1,357	713	(893)
Attributable to:
Ordinary shareholders	1,842	(705)		1,222	620	(993)
Preference shareholders	9	16		4	5	8
Paid-in equity shareholders	178	192		91	87	95
Non-controlling interests	41	(65)		40	1	(3)
Notable items within total income
Own credit adjustments	-	53		(2)	2	(102)
FX recycling (loss)/gain in Central items & other	-	(103)		-	-	(39)
Liquidity Asset Bond sale gain	-	110		-	-	17
IFRS volatility in Central items & other (1)	44	(11)		45	(1)	55
Loss on redemption of own debt	(138)	-		(20)	(118)	-
Retail Banking debt sale gain	-	3		-	-	3
Commercial Banking fair value and disposal (loss)/gain	(22)	(11)		(8)	(14)	8
Commercial Banking tax variable lease repricing	32	-		32	-	-
NatWest Markets asset disposals/strategic risk reduction (2)	(40)	(63)		(36)	(4)	(63)
Share of associate profits for Business Growth Fund	129	16		8	121	-
Total	5	(6)		19	(14)	(121)

Notes:

(1)  IFRS volatility relates to derivatives used for risk management not in IFRS hedge accounting relationships and IFRS hedge ineffectiveness.

(2)	Asset disposals/strategic risk reduction relates to the costs of exiting positions, which includes changes in carrying value to align to the expected exit valuation, and the impact of risk reduction transactions entered into, in respect of the strategic announcements of 14 February 2020.

 

Business performance summary

Chief Financial Officer review

We have progressed against our strategic objectives and have delivered a good financial performance in the first half of the year. The interim results include a £707 million impairment release reflecting the improved economic outlook, our capital and liquidity positions remain robust and we have increased our commitment for capital returns.

Financial performance

Total income decreased by £519 million, or 8.9%, compared with H1 2020 reflecting the lower yield curve, subdued transactional business activity and a more normalised level of customer activity in NatWest Markets, partially offset by balance sheet growth. We continue to expect a full year reduction in structural hedge income of around £250 million compared with 2020, of which £157 million was incurred in H1 2021. Excluding notable items, Q2 2021 income decreased by £32 million, or 1.2%, compared with Q1 2021 as a weaker performance in the NWM Fixed Income business was partially offset by positive signs of an initial recovery in transactional business activity as COVID-19 restrictions eased. Bank NIM of 1.61% decreased by 3 basis points compared with Q1 2021 principally due to excess levels of liquidity, 4 basis points, lower structural hedge income, 1 basis point, and lower asset margins, 1 basis point, partially offset by tax variable lease repricing in Commercial Banking following the enactment of future corporation tax rate changes, 3 basis points.

We achieved a cost reduction of £185 million, or 5.9%, compared with H1 2020 mainly reflecting Customer Journey Transformation, the continued shift from physical to digital and actions taken in NatWest Markets in line with the strategic announcement made in February 2020. Strategic costs of £332 million in the first half of 2021 included £87 million redundancy charges, £48 million related to property charges and a £27 million charge related to technology spend. We remain committed to our 4% full year cost reduction target.

Whilst we continue to navigate a high degree of uncertainty in the wider economic environment, a net impairment release of £707 million for the first half of 2021 reflects an improved economic outlook. We have assessed the downside risk posed by COVID-19 to be diminishing over the course of 2021. Given the vaccination roll-out and positive economic data observed since the gradual relaxing of lockdown restrictions, it is appropriate to apply a higher probability to upside-biased scenarios than at the year-end 2020. Total impairment provisions decreased by £0.9 billion to £4.9 billion in the quarter, which resulted in a reduction in the ECL coverage ratio from 1.56% at Q1 2021 to 1.31%. Whilst we are comfortable with the strong performance of our book, we continue to hold economic uncertainty post model adjustments (PMA) of £0.8 billion, or 16.9% of total impairment provisions. We will continue to assess this position as UK Government support winds down and we emerge from the pandemic.

As a result, we are pleased to report an interim attributable profit of £1,842 million, with earnings per share of 15.6 pence and a return on tangible equity (RoTE) of 11.7%.

We continue to support our customers to recover and grow during this period of continued uncertainty, whilst taking a measured approach to risk. Across the UK and RBSI retail and commercial businesses, net lending excluding UK Government support schemes increased by £4.1 billion in the first half of 2021, or 2.8% on an annualised basis, including £7.0 billion of mortgage growth, partially offset by lower unsecured balances and lower Commercial Banking lending volumes. The £1.9 billion increase in the second quarter of 2021 included mortgage lending growth of £3.6 billion.

Customer deposits increased by £35.5 billion, or 8.2%, to £467.2 billon in the first half of 2021. Across the UK and RBSI retail and commercial businesses customer deposits increased by £25.5 billion, or 6.3%, as customers sought to retain liquidity and reduced spending. Treasury repo activity drove a further £11.5 billion.

TNAV per share increased by 5 pence in the quarter to 266 pence largely reflecting the attributable profit partially offset by the full year dividend payment.

Capital and leverage

The CET1 ratio of 18.2%, or 17.5% excluding IFRS 9 transitional relief, remains robust and was in line with Q1 2021 as the attributable profit for the period and the reduction in RWAs were offset by a £0.5 billion decrease in IFRS 9 transitional relief and foreseeable capital deductions in respect of our proposed in-market buy-backs, dividends and associated pension contribution. The total capital ratio increased by 90 basis points in the quarter to 24.9%.

RWAs of £163.0 billion decreased by £7.3 billion, or 4.3%, in the first half of 2021 reflecting business movements of £2.9 billion, risk parameter improvements of £1.4 billion and FX movements of £1.2 billion. The £1.7 billion reduction in the second quarter of 2021 mainly relates to Commercial Banking business movements. The UK leverage ratio of 6.2% was in line with Q1 2021.

Funding and Liquidity

The liquidity portfolio was £277 billion at the end of Q2 2021, £14 billion higher than Q1 2021, and the LCR increased by 6 percentage points to 164%, representing £75.3 billion headroom above 100% minimum requirement, primarily reflecting the £13.9 billion increase in customer deposits in the quarter. The loan:deposit ratio remained broadly stable with Q1 2021 at 78%.

Total wholesale funding increased by £5 billion compared with Q1 2021. Short term wholesale funding increased by £3 billion in the quarter to £23 billion.

 

Business performance summary

Retail Banking

	Half year ended			Quarter ended
	30 June	30 June		30 June	31 March	30 June
	2021	2020		2021	2021	2020
	£m	£m		£m	£m	£m
Total income	2,150	2,185		1,094	1,056	1,035
Operating expenses	(1,187)	(1,075)		(600)	(587)	(546)
of which: Other expenses	(1,102)	(1,169)		(545)	(557)	(577)
Impairment releases/(losses)	57	(657)		91	(34)	(360)
Operating profit	1,020	453		585	435	129
Return on equity	27.5%	10.7%		32.0%	23.0%	5.7%
Net interest margin	2.07%	2.23%		2.08%	2.06%	2.18%
Cost:income ratio	55.2%	49.2%		54.8%	55.6%	52.8%
Loan impairment rate	(6)bps	79bps		(20)bps	8bps	87bps
				As at
				30 June	31 March	31 December
				2021	2021	2020
				£bn	£bn	£bn
Net loans to customers (amortised cost)				178.1	174.8	172.3
Customer deposits				184.1	179.1	171.8
RWAs				35.6	35.0	36.7

During H1 2021, Retail Banking continued to pursue sustainable growth with an intelligent approach to risk. Lending growth was supported by a strong performance in mortgages, partially offset by continued UK Government restrictions impacting customer spending and the continued repayment of unsecured balances, although both customer spending and demand for new unsecured lending continued to improve over H1 2021 as the UK Government restrictions eased.

As at 30 June 2021, Retail Banking had c.500 active mortgage repayment holidays, representing less than 0.1% of the book by volume, and approximately 2,300, or 0.3%, of personal loan customers on active repayment holidays.

H1 2021 performance
●	Total income was £35 million, or 1.6%, lower than H1 2020 primarily due to regulatory changes impacting fee income, lower deposit returns and lower unsecured balances, partially offset by strong balance growth in mortgages and improved asset margins.
●	Other expenses were £67 million, or 5.7%, lower than H1 2020 primarily reflecting a 10.5% reduction in headcount as a result of the continued digitalisation, automation and improvement of end-to-end customer journeys.
●	A net impairment release of £57 million in H1 2021 primarily reflects ECL releases related to an improvement in the economic outlook. Stage 3 defaults remain at a low level.
●	Net loans to customers increased by £5.8 billion, or 3.4%, in H1 2021 due to continued strong mortgage growth of £6.2 billion, with gross new mortgage lending of £19.3 billion, and flow share of 11.4%, supporting a stock share of 11.0%. Personal advances and cards reduced by £0.4 billion and £0.2 billion respectively as customers spent less and made higher repayments, reflecting the impact of continued UK Government restrictions.
●	Customer deposits increased by £12.3 billion, or 7.2%, in H1 2021 as continued UK Government support schemes combined with restrictions, resulted in lower customer spend and increased savings.
●	RWAs decreased by £1.1 billion, or 3.0%, in H1 2021 largely reflecting lower unsecured balances and continued quality improvements supported by rising house prices and customer behaviour.
Q2 2021 performance
●	Total income was £38 million higher than Q1 2021 as strong mortgage completions and a full quarter impact of savings customer rate changes were partially offset by the non-repeat of an insurance profit share. In comparison with Q2 2020, total income was £59 million, or 5.7%, higher due to stronger asset margins and transactional related fee income, partially offset by lower deposit returns. Non-interest income in Q2 2021 benefitted from a debt sale, along with other one-off items which will not repeat in Q3 2021, totalling around £12 million.
●	Net interest margin increased by 2 basis points compared with Q1 2021 reflecting strong mortgage completion margins and a full quarter of savings customer rate changes. Mortgage completion margins of around 165 basis points were higher than the back book margin of 163 basis points, with application margins of around 155 basis points in the quarter decreasing to around 145 basis points in the latter part of Q2 2021, reflecting increased competition in the market.
●	Other expenses were £12 million, or 2.2%, lower than Q1 2021 as continued cost reduction activity was partially offset by the annual pay award.
●	A net impairment release of £91 million in Q2 2021 primarily reflects ECL releases related to an improvement in the economic outlook.
●	Net loans to customers increased by £3.3 billion compared with Q1 2021 reflecting continued mortgage growth, supported by a retention rate of 79%, partially offset by lower personal advances. Cards balances increased by £0.1 billion as customer demand and spend levels increased.
●	Customer deposits increased by £5.0 billion compared with Q1 2021 as continued UK Government support schemes combined with restrictions, resulted in lower customer spend and increased savings.

 

Business performance summary

Private Banking

	Half year ended			Quarter ended
	30 June	30 June		30 June	31 March	30 June
	2021	2020		2021	2021	2020
	£m	£m		£m	£m	£m
Total income	368	392		183	185	191
Operating expenses	(249)	(252)		(128)	(121)	(129)
of which: Other expenses	(242)	(241)		(120)	(122)	(123)
Impairment releases/(losses)	27	(56)		27	-	(27)
Operating profit	146	84		82	64	35
Return on equity	14.2%	8.2%		15.9%	12.4%	6.6%
Net interest margin	1.77%	2.20%		1.75%	1.79%	2.14%
Cost:income ratio	67.7%	64.3%		69.9%	65.4%	67.5%
Loan impairment rate	(30)bps	70bps		(60)bps	-	67bps
				As at
				30 June	31 March	31 December
				2021	2021	2020
				£bn	£bn	£bn
Net loans to customers (amortised cost)				18.0	17.5	17.0
Customer deposits				34.7	33.5	32.4
RWAs				11.2	11.2	10.9
Assets under management (AUMs) (1)				29.6	27.6	27.0
Assets under administration (AUAs) (1)				5.1	5.0	5.1
Total assets under management and administration (AUMA) (1)				34.7	32.6	32.1

Note:

(1)  The definitions of AUMs/AUAs have been updated to provide clarity on assets where the investment management is undertaken by Private Banking. AUMs now comprises assets where the investment management is undertaken by Private Banking irrespective of the franchise the customer belongs to. AUAs now comprises third party assets held on an execution-only basis in custody. Total AUMA remain as before. 

Private Banking delivered strong balance growth and a resilient operating performance in H1 2021, including a £27 million impairment release, which supported a return on equity of 14.2%. AUMA growth in H1 2021 included £1.4 billion of AUM net new money, of which £0.5 billion related to digital investing inflows into NatWest Invest, Royal Bank Invest and Coutts Invest, more than double H1 2020 levels.
H1 2021 performance
●	Total income decreased by £24 million, or 6.1%, compared with H1 2020 primarily reflecting lower deposit returns, partially offset by strong balance growth.
●	Other expenses increased by £1 million, or 0.4%, compared with H1 2020 principally due to an increase in headcount, related to the enhancement of AUMA growth and other client propositions, partially offset by the movement of costs associated with the planned sale of Adam and Company Investment Management business to strategic costs in Q2 2021 and a property revaluation charge in H1 2020.
●	A net impairment release of £27 million in H1 2021 reflects ECL releases related to the improved economic outlook.
●	Net loans to customers increased by £1.0 billion, or 5.9%, in H1 2021 due to continued strong mortgage lending growth, whilst RWAs increased by £0.3 billion, or 2.8%.
●	Customer deposits increased by £2.3 billion, or 7.1%, in H1 2021 reflecting strong personal and commercial inflows as UK Government restrictions resulted in customers continuing to build and retain liquidity.
●	AUMAs increased by £2.6 billion, or 8.1%, in H1 2021 largely due to AUM net new money inflows of £1.4 billion and AUM positive investment performance of £1.2 billion.
Q2 2021 performance
●	Total income decreased by £2 million compared to Q1 2021 as lower fee income was partially offset by continued balance growth. In comparison to Q2 2020, total income decreased by £8 million, or 4.2%, as lower deposit returns were partially offset by strong balance growth. Net interest margin decreased by 4 basis points compared with Q1 2021 reflecting higher liquidity portfolio costs.
●	Net loans to customers increased by £0.5 billion compared with Q1 2021 supported by £0.4 billion of mortgage lending growth.
●	AUMAs increased by £2.1 billion compared with Q1 2021 largely due to AUM net new money inflows of £0.8 billion and AUM positive investment performance of £1.2 billion.

 

Business performance summary

Commercial Banking

	Half year ended			Quarter ended
	30 June	30 June		30 June	31 March	30 June
	2021	2020		2021	2021	2020
	£m	£m		£m	£m	£m
Total income	1,923	2,003		982	941	995
Operating expenses	(1,152)	(1,221)		(569)	(583)	(611)
of which: Other expenses (excluding OLD)	(983)	(1,066)		(470)	(513)	(534)
Impairment releases/(losses)	568	(1,790)		451	117	(1,355)
Operating profit/(loss)	1,339	(1,008)		864	475	(971)
Return on equity	21.9%	(17.9%)		29.3%	14.9%	(32.5%)
Net interest margin	1.57%	1.76%		1.60%	1.54%	1.70%
Cost:income ratio	58.4%	59.5%		56.4%	60.5%	59.9%
Loan impairment rate	(107)bps	311bps		(170)bps	(43)bps	472bps
				As at
				30 June	31 March	31 December
				2021	2021	2020
				£bn	£bn	£bn
Net loans to customers (amortised cost)				103.8	106.6	108.2
Customer deposits				176.0	169.4	167.7
RWAs				69.5	71.6	75.1

Note:

(1)  EU Divestment balances from Q2 2021 integrated within business banking (Q4 2020 - £1.1 billion, Q1 2021 - £1.7 billion) and SME & mid corporates (Q4 2020 - £4.8 billion, Q1 2021 - £4.1 billion), as the Incentivised Switching Scheme (ISS) closed at the end of June 2021.

Commercial Banking delivered a solid performance in H1 2021 as business activity increased. The £1,339 million operating profit includes a £568 million impairment release, largely reflecting the improved economic outlook. During H1 2021 Commercial Banking delivered £2.5 billion towards NatWest Group's Climate and Sustainable Funding and Financing 2021 target.

Commercial Banking continues to support its customers with active payment holidays on c.3,000 customer accounts, representing 1% of the lending book by value as at 30 June 2021. c.92% of BBLS customers due to commence loan repayments had begun repayments on, or ahead of, schedule and c.5% of all BBLS customers had repaid in full as at 30 June 2021.

H1 2021 performance
●	Total income decreased by £80 million, or 4.0%, compared with H1 2020 as lower deposit returns and lower transactional banking activity were partially offset by higher other non-interest income.
●	Other expenses, excluding OLD, decreased by £83 million, or 7.8%, compared with H1 2020, reflecting cost reduction actions, lower staff costs and a reduction in back office operations costs.
●	A net impairment release of £568 million in H1 2021 mainly reflects ECL releases related to the improved economic outlook, with limited defaults. Excluding amounts related to economic uncertainty held within the PMA, the ECL coverage ratio was 1.65%.
●	Net loans to customers decreased by £4.4 billion, or 4.1%, in H1 2021 mainly reflecting reductions across Large Corporates & Institutions, SME & mid-corporates and Real Estate Finance related to net revolving credit facility (RCF) repayments of £1.5 billion, active capital management of £0.6 billion and targeted sector reductions partially offset by £0.8 billion lower loan provisions.
●	Customer deposits increased by £8.3 billion, or 4.9%, in H1 2021 as customers continued to build and retain liquidity in light of economic uncertainty and the continued impact of UK Government initiatives.
●	RWAs decreased by £5.6 billion, or 7.5%, in H1 2021 mainly reflecting business movements, excluding active capital management, of £3.0 billion, active capital management of £0.8 billion, a £0.8 billion reduction reflecting a CRR COVID-19 amendment related to a Housing Association supporting factor, £0.2 billion lower risk parameters, and FX movements of £0.4 billion.
Q2 2021 performance
●	Total income increased by £41 million compared with Q1 2021 mainly reflecting tax variable lease repricing and a partial recovery in transactional banking volumes, partially offset by lower lending volumes. In comparison to Q2 2020 total income decreased by £13 million, or 1.3%, primarily reflecting lower deposit returns. Net interest margin increased by 6 basis points compared with Q1 2021 mainly reflecting tax variable lease repricing following the enactment of future corporation tax rate changes. Underlying net interest margin decreased by 2 basis points reflecting lower deposit returns.
●	Other expenses, excluding OLD, decreased by £43 million compared with Q1 2021 mainly reflecting the transfer of remediation costs to Litigation and conduct costs.
●	A net impairment release of £451 million in Q2 2021 mainly reflects ECL releases related to the improved economic outlook.
●	Net loans to customers decreased by £2.8 billion compared with Q1 2021 as net RCF repayments of £1.2 billion, net UK Government financial support scheme repayments of £0.4 billion and targeted sector reductions were partially offset by £0.6 billion lower loan provisions. RCF utilisation was c.20% of committed facilities, significantly below the COVID-19 peak of c.40%.
●	Customer deposits increased by £6.6 billion compared with Q1 2021 as customers continued to build and retain liquidity.
●	RWAs decreased by £2.1 billion compared with Q1 2021 mainly reflecting business movements, excluding active capital management, of £1.1 billion, a £0.8 billion reduction reflecting the CRR COVID-19 amendment and active capital management of £0.2 billion.

 

Business performance summary

International Banking & Markets

RBS International

	Half year ended			Quarter ended
	30 June	30 June		30 June	31 March	30 June
	2021	2020		2021	2021	2020
	£m	£m		£m	£m	£m
Total income	256	259		133	123	115
Operating expenses	(112)	(126)		(55)	(57)	(65)
of which: Other expenses	(104)	(121)		(52)	(52)	(61)
Impairment releases/(losses)	29	(46)		27	2	(31)
Operating profit	173	87		105	68	19
Return on equity	22.1%	11.8%		26.5%	17.5%	4.3%
Net interest margin	1.04%	1.30%		1.02%	1.06%	1.15%
Cost:income ratio	43.8%	48.6%		41.4%	46.3%	56.5%
Loan impairment rate	(38)bps	72bps		(71)bps	(5)bps	97bps
				As at
				30 June	31 March	31 December
				2021	2021	2020
				£bn	£bn	£bn
Net loans to customers (amortised cost)				15.1	14.7	13.3
Customer deposits				33.9	33.3	31.3
RWAs				7.6	7.7	7.5
Depositary assets (1)				460.4	452.0	427.5

Note:

(1)  Assets held by RBSI as an independent trustee and in a depositary service capacity.

During H1 2021 RBSI delivered £256 million of income, supported by customer lending growth and contributed £0.6 billion towards NatWest Group's Climate and Sustainable Funding and Financing 2021 target. RBSI also implemented a range of new payment features on the mobile app for both personal and business customers, including the introduction of face biometrics to authorise payments and the ability to deposit cheques.
As at 30 June 2021, RBSI was supporting 22 mortgage repayment breaks, reflecting a mortgage value of £4.8 million, and was providing 161 business customers with working capital facilities, reflecting a value of £434 million, whilst continuing to suspend some fees.
H1 2021 performance
●	Total income was £3 million, or 1.2%, lower than H1 2020 with net interest income £19 million lower, impacted by lower deposit funding benefits partially offset by higher customer lending volumes and depositary fees in non-interest income.
●	Other expenses were £17 million, or 14.0%, lower than H1 2020 due to a 11% reduction in headcount from simplifying the business and the non-repeat of COVID-19 related costs last year.
●	A net impairment release of £29 million in H1 2021 mainly reflects Stage 1 and Stage 2 releases. Stage 3 defaults remain low.
●	Net loans to customers increased by £1.8 billion, or 13.5%, in H1 2021 due to higher demand from customers in the Institutional Banking sector.
●	Customer deposits increased by £2.6 billion, or 8.3%, in H1 2021 due to £2.3 billion of short-term placement inflows in the Institutional Banking sector and a £0.6 billion increase in Notice products as clients switched from short-term call products to longer term products.
●	Depositary assets have increased by £32.9 billion in H1 2021 in both operating jurisdictions, Luxembourg and UK, as a result of increases in fund performance and new business.
Q2 2021 performance
●	Total income was £10 million, or 8.1%, higher than Q1 2021 due to higher average lending and deposit volumes in the Institutional Banking sector and was £18 million, or 15.7%, higher than Q2 2020 principally due to higher depositary and non-utilisation fees. Net interest margin decreased by 4 basis points compared with Q1 2021 largely due to lower returns from higher surplus deposits.
●	A net impairment release of £27 million in Q2 2021, mainly reflects Stage 1 and Stage 2 releases. Stage 3 defaults remain low.
●	Net loans to customers increased by £0.4 billion compared with Q1 2021 due to higher demand from customers in the Institutional Banking sector.
●	Customer deposits increased by £0.6 billion compared with Q1 2021 following an inflow of short term call deposits in the Institutional Banking sector as customer activity increased.

Business performance summary

International Banking and Markets

NatWest Markets⁽¹⁾

	Half year ended			Quarter ended
	30 June	30 June		30 June	31 March	30 June
	2021	2020		2021	2021	2020
	£m	£m		£m	£m	£m
Total income	295	816		106	189	273
of which:
- Income excluding asset disposals/strategic risk
reduction and own credit adjustments	334	826		143	191	438
- Asset disposals/strategic risk reduction (2)	(40)	(63)		(36)	(4)	(63)
- Own credit adjustments	1	53		(1)	2	(102)
Operating expenses	(560)	(707)		(285)	(275)	(365)
of which: Other expenses	(456)	(569)		(216)	(240)	(271)
Impairment releases/(losses)	16	(40)		10	6	(45)
Operating (loss)/profit	(249)	69		(169)	(80)	(137)
Return on equity	(9.2%)	0.8%		(12.1%)	(6.3%)	(7.1%)
Cost:income ratio	189.8%	86.6%		268.9%	145.5%	133.7%
				As at
				30 June	31 March	31 December
				2021	2021	2020
				£bn	£bn	£bn
Funded assets				111.8	105.7	105.9
RWAs				26.9	26.5	26.9

Notes:

(1)  The NatWest Markets operating segment is not the same as the NatWest Markets Plc legal entity (NWM Plc) or group (NWM or NWM Group). The NatWest Markets segment excludes the Central items & other segment.

(2)  Asset disposals/strategic risk reduction relates to the cost of exiting positions, which includes changes in carrying value to align to the expected exit valuation, and the impact of risk reduction transactions entered into, in respect of the strategic announcement on 14 February 2020.

NatWest Markets continued to support customers with innovative financial solutions and to deliver on plans to become a more sustainable part of NatWest Group. NatWest Markets has further developed its capability to offer better integrated solutions, particularly in foreign exchange and funds financing, targeted to the investment management community. NatWest Markets continued to build momentum in Climate and Sustainable Funding and Financing, with a strong performance during the first half of 2021, delivering £6.3 billion towards NatWest Group's 2021 target.
H1 2021 performance
●	Income excluding asset disposals/strategic risk reduction and OCA decreased by £492 million, or 59.6%, compared with H1 2020 reflecting the exceptional level of market activity generated by the spread of the COVID-19 virus in the prior period, together with weaker performance and reshaping of the Fixed Income business in the current period. Capital Markets and Currencies performed broadly in line with expectations. The H1 2021 results also included a £20 million loss from a liability management exercise which thereafter reduces the cost of funding.
●	Other expenses decreased by £113 million, or 19.9%, compared with H1 2020 reflecting continued reductions in line with the strategic announcement in February 2020.
●	RWAs were in line with 31 December 2020 however, following the announcement of GBP LIBOR cessation in March 2021, market risk RWAs became elevated by £2.5 billion as a result of including modelled GBP LIBOR basis risk post 4 January 2022. Regulatory approval has been obtained in July 2021 to update the VaR model and this will remove this impact in Q3 2021. If this model approval was back dated to Q2 2021 the reported RWAs would have been £24.4 billion. Underlying levels of market risk were low and progress continues to be made on asset disposals in line with the strategy.
Q2 2021 performance
●	Income excluding asset disposals/strategic risk reduction and OCA decreased by £48 million compared with Q1 2021 reflecting a weaker performance in Fixed Income and a reduction in Currencies as volatility decreased. In comparison to Q2 2020, income excluding asset disposals/strategic risk reduction and OCA decreased by £295 million, or 67.4%, reflecting more normalised levels of customer activity, with the prior period impacted by exceptional levels of market activity generated by the spread of the COVID-19 virus.
●	Other expenses decreased by £24 million compared with Q1 2021 reflecting the timing of discretionary expense and continued reductions in line with the strategic announcement in February 2020.
●	RWAs increased by £0.4 billion compared with Q1 2021 reflecting the impact of GBP LIBOR cessation highlighted above. Underlying levels of market risk were low and progress continues to be made on asset disposals in line with the strategy.

 

Business performance summary

Ulster Bank RoI

	Half year ended			Quarter ended
	30 June	30 June		30 June	31 March	30 June
	2021	2020		2021	2021	2020
	€m	€m		€m	€m	€m
Total income	279	285		137	142	135
Operating expenses	(299)	(283)		(156)	(143)	(140)
of which: Other expenses	(281)	(271)		(149)	(132)	(134)
Impairment releases/(losses)	13	(278)		(1)	14	(246)
Operating (loss)/profit	(7)	(276)		(20)	13	(251)
Return on equity	(0.7%)	(24.3%)		(4.1%)	2.6%	(45.5%)
Net interest margin	1.46%	1.52%		1.43%	1.49%	1.49%
Cost:income ratio	107.2%	99.3%		113.9%	100.7%	103.7%
Loan impairment rate	(13)bps	260bps		2bps	(27)bps	460bps
				As at
				30 June	31 March	31 December
				2021	2021	2020
				€bn	€bn	€bn
Net loans to customers (amortised cost)				19.4	19.8	20.0
Customer deposits				21.6	21.7	21.8
RWAs				12.2	13.1	13.2

In June 2021, UBIDAC entered into a binding agreement with Allied Irish Banks p.l.c. for the sale of around €4.2 billion of gross performing commercial lending and associated undrawn exposures of around €2.8 billion. The timing of completion remains uncertain and the sale is subject to obtaining regulatory and other approvals. In July 2021, NatWest Group plc and UBIDAC entered into a non-binding Memorandum of Understanding with Permanent TSB Group Holdings p.l.c. for the proposed sale of a perimeter comprising performing non-tracker mortgages, performing micro-SME loans, UBIDAC's asset finance business and 25 branch locations. The proposed perimeter included approximately €7.6 billion gross performing loans as at 31 March 2021. Ulster Bank RoI remains focused on supporting its customers as it continues its withdrawal from the Republic of Ireland.
H1 2021 performance
●	Total income decreased by €6 million, or 2.1%, compared with H1 2020 primarily reflecting lower lending levels and fee income as a result of the continued impact of COVID-19 and the recent announcement to commence a phased withdrawal from the Republic of Ireland, partially offset by increased FX gains.
●	Other expenses were €10 million, or 3.7%, higher than H1 2020 due to increased regulatory levies and higher VAT charges, partially offset by a 7.1% reduction in headcount and lower back office operations costs.
●	A net impairment release of €13 million in H1 2021 reflects improvements in the mortgage portfolio, including releases related to the final de-recognition of assets from a non-performing loan (NPL) sale agreed in Q4 2019, offset by post model adjustments to reflect loan disposal strategies not captured within loss modelling.
●	Net loans to customers decreased by €0.6 billion, or 3.0%, in H1 2021 as repayments exceeded gross new lending of €0.8 billion.
●	Customer deposits decreased by €0.2 billion, or 0.9%, in H1 2021 due to a large short term placement at the end of 2020 partially offset by increased personal balances.
Q2 2021 performance
●	Total income decreased by €5 million compared with Q1 2021 due to lower lending income and reduced FX gains. Net interest margin decreased by 6 basis points compared with Q1 2021 reflecting lower lending volumes and a stable deposit base, resulting in higher liquid assets in a negative interest rate environment.
●	Other expenses increased by €17 million compared with Q1 2021 mainly due to increased Single Resolution Fund (SRF) levies, much of which relates to prior years, and higher VAT charges, partially offset by a 3.7% reduction in headcount.
●	Net loans to customers decreased by €0.4 billion compared with Q1 2021.
●	Customer deposits decreased by €0.1 billion compared with Q1 2021 resulting in loan:deposit ratio of 90% compared with 91% in Q1 2021.
●	RWAs decreased by €0.9 billion compared with Q1 2021 mainly due to improvements in asset quality, lower lending volumes and the impact of the NPL de-recognition.

 

Business performance summary

Central items & other

	Half year ended			Quarter ended
	30 June	30 June		30 June	31 March	30 June
	2021	2020		2021	2021	2020
	£m	£m		£m	£m	£m
Central items not allocated	83	(216)		110	(27)	(146)

●

An £83 million operating profit within central items not allocated mainly reflects a £129 million share of associate profits for the Business Growth Fund, a litigation and conduct release and IFRS volatility, partially offset by a £138 million day one loss on redemption of own debt related to the repurchase of legacy instruments, which will result in annual net interest savings of c.£51 million.

Segment performance

		Half year ended 30 June 2021
					International Banking & Markets			Central	Total
		Retail	Private	Commercial	RBS	NatWest	Ulster	items &	NatWest
		Banking	Banking	Banking	International	Markets	Bank RoI	other	Group
		£m	£m	£m	£m	£m	£m	£m	£m
Income statement
Net interest income		1,976	232	1,308	182	(3)	187	34	3,916
Own credit adjustments		-	-	-	-	1	-	(1)	-
Other non-interest income		174	136	615	74	297	56	51	1,403
Total income		2,150	368	1,923	256	295	243	84	5,319
Direct expenses	- staff costs	(232)	(67)	(280)	(52)	(188)	(94)	(768)	(1,681)
	- other costs	(111)	(20)	(131)	(24)	(64)	(68)	(1,108)	(1,526)
Indirect expenses		(759)	(155)	(642)	(28)	(204)	(83)	1,871	-
Strategic costs	- direct	(16)	(5)	(39)	(6)	(90)	(1)	(175)	(332)
	- indirect	(60)	(7)	(23)	(2)	(16)	(2)	110	-
Litigation and conduct costs		(9)	5	(37)	-	2	(13)	70	18
Operating expenses		(1,187)	(249)	(1,152)	(112)	(560)	(261)	-	(3,521)
Operating profit/(loss) before impairment releases/(losses)		963	119	771	144	(265)	(18)	84	1,798
Impairment releases/(losses)		57	27	568	29	16	11	(1)	707
Operating profit/(loss)		1,020	146	1,339	173	(249)	(7)	83	2,505
Additional information
Return on tangible equity  (1)		na	na	na	na	na	na	na	11.7%
Return on equity  (1)		27.5%	14.2%	21.9%	22.1%	(9.2%)	(0.8%)	nm	na
Cost:income ratio  (1)		55.2%	67.7%	58.4%	43.8%	189.8%	107.4%	nm	65.7%
Total assets (£bn)		204.2	27.7	185.8	37.0	219.4	25.4	76.4	775.9
Funded assets (£bn)  (1)		204.2	27.7	185.8	36.9	111.8	25.4	74.5	666.3
Net loans to customers - amortised cost (£bn)		178.1	18.0	103.8	15.1	6.3	16.7	24.7	362.7
Loan impairment rate  (1)		(6)bps	(30)bps	(107)bps	(38)bps	nm	(13)bps	nm	(38)bps
Impairment provisions (£bn)		(1.6)	(0.1)	(2.1)	(0.1)	(0.1)	(0.7)	-	(4.7)
Impairment provisions - Stage 3 (£bn)		(0.8)	-	(0.8)	(0.1)	(0.1)	(0.4)	-	(2.2)
Customer deposits (£bn)		184.1	34.7	176.0	33.9	2.5	18.5	17.5	467.2
Risk-weighted assets (RWAs) (£bn)		35.6	11.2	69.5	7.6	26.9	10.5	1.7	163.0
RWA equivalent (RWAe) (£bn)		35.6	11.3	69.5	7.7	28.6	10.5	1.8	165.0
Employee numbers (FTEs - thousands)		15.3	1.9	9.1	1.6	1.6	2.6	27.1	59.2
Third party customer asset rate  (2)		2.70%	2.36%	2.74%	2.23%	nm	2.28%	nm	nm
Third party customer funding rate  (2)		(0.07%)	(0.00%)	(0.01%)	0.07%	nm	0.01%	nm	nm
Average interest earning assets (£bn)  (1)		192.5	26.4	168.2	35.3	32.3	25.8	nm	519.2
Bank net interest margin  (1)		2.07%	1.77%	1.57%	1.04%	na	1.46%	nm	1.62%

nm = not meaningful, na = not applicable.

For the notes to this table, refer to page 18.

 

Segment performance

		Half year ended 30 June 2020
					International Banking & Markets			Central	Total
		Retail	Private	Commercial	RBS	NatWest	Ulster	items &	NatWest
		Banking	Banking	Banking	International	Markets	Bank RoI	other	Group
		£m	£m	£m	£m	£m	£m	£m	£m
Income statement
Net interest income		1,982	251	1,370	201	(34)	194	(112)	3,852
Own credit adjustments		-	-	-	-	53	-	-	53
Other non-interest income		203	141	633	58	797	55	46	1,933
Total income		2,185	392	2,003	259	816	249	(66)	5,838
Direct expenses	- staff costs	(268)	(79)	(341)	(65)	(326)	(100)	(617)	(1,796)
	- other costs	(103)	(25)	(140)	(27)	(94)	(42)	(1,148)	(1,579)
Indirect expenses		(798)	(137)	(658)	(29)	(149)	(92)	1,863	-
Strategic costs	- direct	(1)	-	(2)	(3)	(120)	(4)	(334)	(464)
	- indirect	(103)	(10)	(73)	(5)	(16)	(8)	215	-
Litigation and conduct costs		198	(1)	(7)	3	(2)	1	(103)	89
Operating expenses		(1,075)	(252)	(1,221)	(126)	(707)	(245)	(124)	(3,750)
Operating profit/(loss) before impairment losses		1,110	140	782	133	109	4	(190)	2,088
Impairment losses		(657)	(56)	(1,790)	(46)	(40)	(243)	(26)	(2,858)
Operating profit/(loss)		453	84	(1,008)	87	69	(239)	(216)	(770)
Additional information
Return on tangible equity (1)		na	na	na	na	na	na	na	(4.4%)
Return on equity (1)		10.7%	8.2%	(17.9%)	11.8%	0.8%	(24.2%)	nm	na
Cost:income ratio (1)		49.2%	64.3%	59.5%	48.6%	86.6%	98.4%	nm	63.8%
Total assets (£bn)		187.1	23.9	186.0	31.5	303.8	27.6	47.0	806.9
Funded assets (£bn) (1)		187.1	23.9	186.0	31.5	122.9	27.6	44.5	623.5
Net loans to customers - amortised cost (£bn)		164.5	16.0	112.0	12.7	11.4	18.7	17.0	352.3
Loan impairment rate (1)		79bps	70bps	311bps	72bps	nm	248bps	nm	159bps
Impairment provisions (£bn)		(1.9)	(0.1)	(3.0)	-	(0.2)	(0.9)	-	(6.1)
Impairment provisions - Stage 3 (£bn)		(0.9)	-	(1.2)	-	(0.1)	(0.6)	-	(2.8)
Customer deposits (£bn)		161.0	29.8	159.6	29.5	5.5	20.0	2.9	408.3
Risk-weighted assets (RWAs) (£bn)		36.7	10.4	78.3	6.8	35.1	12.8	1.4	181.5
RWA equivalent (RWAe) (£bn)		36.7	10.4	78.4	6.9	37.2	12.8	1.5	183.9
Employee numbers (FTEs - thousands)		17.1	1.8	9.6	1.8	5.0	2.8	24.6	62.7
Third party customer asset rate (2)		2.97%	2.67%	3.04%	2.65%	nm	2.27%	nm	nm
Third party customer funding rate (2)		(0.28%)	(0.21%)	(0.15%)	(0.05%)	nm	(0.07%)	nm	nm
Average interest earning assets (£bn) (1)		178.6	23.0	156.5	31.2	38.0	25.7	nm	477.9
Bank net interest margin (1)		2.23%	2.20%	1.76%	1.30%	na	1.52%	nm	1.78%

nm = not meaningful, na = not applicable.

For the notes to this table, refer to page 18.

 

Segment performance

		Quarter ended 30 June 2021
					International Banking & Markets			Central	Total
		Retail	Private	Commercial	RBS	NatWest	Ulster	items &	NatWest
		Banking	Banking	Banking	International	Markets	Bank RoI	other	Group
		£m	£m	£m	£m	£m	£m	£m	£m
Income statement
Net interest income		1,003	117	665	93	4	93	10	1,985
Own credit adjustments		-	-	-	-	(1)	-	(1)	(2)
Other non-interest income		91	66	317	40	103	26	34	677
Total income		1,094	183	982	133	106	119	43	2,660
Direct expenses	- staff costs	(116)	(33)	(139)	(26)	(77)	(47)	(371)	(809)
	- other costs	(50)	(11)	(65)	(11)	(35)	(45)	(542)	(759)
Indirect expenses		(379)	(76)	(301)	(15)	(104)	(38)	913	-
Strategic costs	- direct	(5)	(5)	(13)	(2)	(60)	(1)	(86)	(172)
	- indirect	(43)	(3)	(14)	(1)	(11)	(1)	73	-
Litigation and conduct costs		(7)	-	(37)	-	2	(4)	80	34
Operating expenses		(600)	(128)	(569)	(55)	(285)	(136)	67	(1,706)
Operating profit/(loss) before impairment releases/(losses)		494	55	413	78	(179)	(17)	110	954
Impairment releases/(losses)		91	27	451	27	10	(1)	-	605
Operating profit/(loss)		585	82	864	105	(169)	(18)	110	1,559
Additional information
Return on tangible equity (1)		na	na	na	na	na	na	na	15.6%
Return on equity (1)		32.0%	15.9%	29.3%	26.5%	(12.1%)	(4.3%)	nm	na
Cost:income ratio (1)		54.8%	69.9%	56.4%	41.4%	268.9%	114.3%	nm	63.7%
Total assets (£bn)		204.2	27.7	185.8	37.0	219.4	25.4	76.4	775.9
Funded assets (£bn) (1)		204.2	27.7	185.8	36.9	111.8	25.4	74.5	666.3
Net loans to customers - amortised cost (£bn)		178.1	18.0	103.8	15.1	6.3	16.7	24.7	362.7
Loan impairment rate (1)		(20)bps	(60)bps	(170)bps	(71)bps	nm	2bps	nm	(66)bps
Impairment provisions (£bn)		(1.6)	(0.1)	(2.1)	(0.1)	(0.1)	(0.7)	-	(4.7)
Impairment provisions - Stage 3 (£bn)		(0.8)	-	(0.8)	(0.1)	(0.1)	(0.4)	-	(2.2)
Customer deposits (£bn)		184.1	34.7	176.0	33.9	2.5	18.5	17.5	467.2
Risk-weighted assets (RWAs) (£bn)		35.6	11.2	69.5	7.6	26.9	10.5	1.7	163.0
RWA equivalent (RWAe) (£bn)		35.6	11.3	69.5	7.7	28.6	10.5	1.8	165.0
Employee numbers (FTEs - thousands)		15.3	1.9	9.1	1.6	1.6	2.6	27.1	59.2
Third party customer asset rate (2)		2.67%	2.36%	2.82%	2.18%	nm	2.28%	nm	nm
Third party customer funding rate (2)		(0.06%)	(0.00%)	(0.02%)	0.09%	nm	0.01%	nm	nm
Average interest earning assets (£bn) (1)		193.8	26.8	167.1	36.4	32.3	25.8	nm	526.1
Bank net interest margin (1)		2.08%	1.75%	1.60%	1.02%	na	1.45%	nm	1.61%

nm = not meaningful, na = not applicable.

For the notes to this table, refer to page 18.

 

Segment performance

		Quarter ended 31 March 2021
					International Banking & Markets			Central	Total
		Retail	Private	Commercial	RBS	NatWest	Ulster	items &	NatWest
		Banking	Banking	Banking	International	Markets	Bank RoI	other	Group
		£m	£m	£m	£m	£m	£m	£m	£m
Income statement
Net interest income		973	115	643	89	(7)	94	24	1,931
Own credit adjustments		-	-	-	-	2	-	-	2
Other non-interest income		83	70	298	34	194	30	17	726
Total income		1,056	185	941	123	189	124	41	2,659
Direct expenses	- staff costs	(116)	(34)	(141)	(26)	(111)	(47)	(397)	(872)
	- other costs	(61)	(9)	(66)	(13)	(29)	(23)	(566)	(767)
Indirect expenses		(380)	(79)	(341)	(13)	(100)	(45)	958	-
Strategic costs	- direct	(11)	-	(26)	(4)	(30)	-	(89)	(160)
	- indirect	(17)	(4)	(9)	(1)	(5)	(1)	37	-
Litigation and conduct costs		(2)	5	-	-	-	(9)	(10)	(16)
Operating expenses		(587)	(121)	(583)	(57)	(275)	(125)	(67)	(1,815)
Operating profit/(loss) before impairment (losses)/releases		469	64	358	66	(86)	(1)	(26)	844
Impairment (losses)/releases		(34)	-	117	2	6	12	(1)	102
Operating profit/(loss)		435	64	475	68	(80)	11	(27)	946
Additional information
Return on tangible equity (1)		na	na	na	na	na	na	na	7.9%
Return on equity (1)		23.0%	12.4%	14.9%	17.5%	(6.3%)	2.5%	nm	na
Cost:income ratio (1)		55.6%	65.4%	60.5%	46.3%	145.5%	100.8%	nm	67.8%
Total assets (£bn)		199.2	26.9	187.1	36.7	226.8	25.9	67.2	769.8
Funded assets (£bn) (1)		199.2	26.9	187.1	36.7	105.7	25.9	65.3	646.8
Net loans to customers - amortised cost (£bn)		174.8	17.5	106.6	14.7	7.5	16.9	20.7	358.7
Loan impairment rate (1)		8bps	-	(43)bps	(5)bps	nm	(27)bps	nm	(11)bps
Impairment provisions (£bn)		(1.8)	(0.1)	(2.7)	(0.1)	(0.1)	(0.7)	(0.1)	(5.6)
Impairment provisions - Stage 3 (£bn)		(0.8)	-	(0.9)	-	(0.1)	(0.5)	(0.1)	(2.4)
Customer deposits (£bn)		179.1	33.5	169.4	33.3	2.4	18.4	17.2	453.3
Risk-weighted assets (RWAs) (£bn)		35.0	11.2	71.6	7.7	26.5	11.1	1.6	164.7
RWA equivalent (RWAe) (£bn)		35.0	11.2	71.7	7.7	29.2	11.1	1.7	167.6
Employee numbers (FTEs - thousands)		15.8	1.9	9.5	1.6	2.1	2.7	26.0	59.6
Third party customer asset rate (2)		2.73%	2.36%	2.65%	2.28%	nm	2.28%	nm	nm
Third party customer funding rate (2)		(0.08%)	(0.00%)	(0.01%)	0.05%	nm	0.00%	nm	nm
Average interest earning assets (£bn) (1)		191.2	26.0	169.4	34.1	32.4	25.8	nm	512.2
Bank net interest margin (1)		2.06%	1.79%	1.54%	1.06%	na	1.48%	nm	1.64%

nm = not meaningful, na = not applicable.

For the notes to this table, refer to the following page.

 

Segment performance

		Quarter ended 30 June 2020
					International Banking & Markets			Central	Total
		Retail	Private	Commercial	RBS	NatWest	Ulster	items &	NatWest
		Banking	Banking	Banking	International	Markets	Bank RoI	other	Group
		£m	£m	£m	£m	£m	£m	£m	£m
Income statement
Net interest income		975	124	696	90	6	97	(78)	1,910
Own credit adjustments		-	-	-	-	(102)	-	-	(102)
Other non-interest income		60	67	299	25	369	23	25	868
Total income		1,035	191	995	115	273	120	(53)	2,676
Direct expenses	- staff costs	(133)	(40)	(167)	(33)	(159)	(52)	(293)	(877)
	- other costs	(45)	(9)	(67)	(13)	(37)	(18)	(595)	(784)
Indirect expenses		(399)	(74)	(337)	(15)	(75)	(46)	946	-
Strategic costs	- direct	(1)	-	-	(2)	(86)	(3)	(241)	(333)
	- indirect	(69)	(5)	(34)	(2)	(8)	(4)	122	-
Litigation and conduct costs		101	(1)	(6)	-	-	1	(10)	85
Operating expenses		(546)	(129)	(611)	(65)	(365)	(122)	(71)	(1,909)
Operating profit/(loss) before impairment losses		489	62	384	50	(92)	(2)	(124)	767
Impairment losses		(360)	(27)	(1,355)	(31)	(45)	(216)	(22)	(2,056)
Operating profit/(loss)		129	35	(971)	19	(137)	(218)	(146)	(1,289)
Additional information
Return on tangible equity (1)		na	na	na	na	na	na	na	(12.4%)
Return on equity (1)		5.7%	6.6%	(32.5%)	4.3%	(7.1%)	(44.5%)	nm	na
Cost:income ratio (1)		52.8%	67.5%	59.9%	56.5%	133.7%	101.7%	nm	70.9%
Total assets (£bn)		187.1	23.9	186.0	31.5	303.8	27.6	47.0	806.9
Funded assets (£bn) (1)		187.1	23.9	186.0	31.5	122.9	27.6	44.5	623.5
Net loans to customers - amortised cost (£bn)		164.5	16.0	112.0	12.7	11.4	18.7	17.0	352.3
Loan impairment rate (1)		87bps	67bps	472bps	97bps	nm	441bps	nm	229bps
Impairment provisions (£bn)		(1.9)	(0.1)	(3.0)	-	(0.2)	(0.9)	-	(6.1)
Impairment provisions - Stage 3 (£bn)		(0.9)	-	(1.2)	-	(0.1)	(0.6)	-	(2.8)
Customer deposits (£bn)		161.0	29.8	159.6	29.5	5.5	20.0	2.9	408.3
Risk-weighted assets (RWAs) (£bn)		36.7	10.4	78.3	6.8	35.1	12.8	1.4	181.5
RWA equivalent (RWAe) (£bn)		36.7	10.4	78.4	6.9	37.2	12.8	1.5	183.9
Employee numbers (FTEs - thousands)		17.1	1.8	9.6	1.8	5.0	2.8	24.6	62.7
Third party customer asset rate (2)		2.88%	2.53%	2.88%	2.58%	nm	2.27%	nm	nm
Third party customer funding rate (2)		(0.20%)	(0.12%)	(0.13%)	(0.01%)	nm	(0.07%)	nm	nm
Average interest earning assets (£bn) (1)		179.8	23.3	164.6	31.5	39.9	26.4	nm	497.4
Bank net interest margin (1)		2.18%	2.14%	1.70%	1.15%	na	1.48%	nm	1.67%

nm = not meaningful, na = not applicable.

Notes:

(1)

Refer to Non-IFRS financial measures Appendix for details of basis of preparation and reconciliation of non-IFRS financial measures and performance metrics where relevant.

(2)

Third party customer asset rate is calculated as annualised interest receivable on third-party loans to customers as a percentage of third-party loans to customers only. Third party customer funding rate reflects interest payable or receivable on third-party customer deposits, including interest bearing and non-interest bearing customer deposits. This excludes intragroup items, loans to banks and liquid asset portfolios. Intragroup items, bank deposits, debt securities in issue and subordinated liabilities are excluded for customer funding rate calculation. Comparatives have been restated. Net interest margin is calculated as net interest income as a percentage of the average interest-earning assets without these exclusions.

 

Risk and capital management

	Page
Credit risk
Economic loss drivers	20
UK economic uncertainty	22
Measurement uncertainty and ECL sensitivity analysis	26
Measurement uncertainty and ECL adequacy	28
Credit risk - Banking activities
Segment analysis	30
Sector analysis	35
Wholesale forbearance	41
Personal portfolio	43
Commercial real estate	46
Flow statements	48
Stage 2 decomposition by a significant increase in credit risk trigger	57
Asset quality	59
Credit risk - Trading activities	63
Capital, liquidity and funding risk	66
Market risk
Non-traded	76
Traded	80
Other risks	81

Certain disclosures in the Risk and capital management section are within the scope of EY's review report and are marked accordingly by a bracket in the right-hand margin.

 

Risk and capital management

Credit risk

Economic loss drivers Introduction The portfolio segmentation and selection of economic loss drivers for IFRS 9 follow closely the approach used in stress testing. To enable robust modelling the forecasting models for each portfolio segment (defined by product or asset class and where relevant, industry sector and region) are based on a selected, small number of economic factors, (typically three to four) that best explain the temporal variations in portfolio loss rates. The process to select economic loss drivers involves empirical analysis and expert judgement. The most material economic loss drivers are shown in the table below. Portfolio Economic loss drivers UK retail mortgages UK unemployment rate, sterling swap rate, UK house price index, UK household debt to income UK retail unsecured UK unemployment rate, sterling swap rate, UK household debt to income UK large corporates World GDP, UK unemployment rate, sterling swap rate, stock price index UK commercial UK GDP, UK unemployment rate, sterling swap rate UK commercial real estate UK GDP, UK property price indices, sterling swap rate RoI retail mortgages RoI unemployment rate, European Central Bank base rate, RoI house price index Note: (1)  This is not an exhaustive list of economic loss drivers but shows the most material drivers for the most material models/portfolios. Economic scenarios There was improvement in the economic outlook for the UK since 31 December 2020, which was reflected in a more optimistic base case scenario as at 30 June 2021. The main drivers of the improvement were as follows: · Rapid roll-out of the COVID-19 vaccination in the UK and in other developed countries, leading to relaxation of restrictions. · The success of various government support measures in containing the fallout from lockdown. · Faster than expected economic recovery, with GDP having made material gains since the lifting of restrictions, and labour and housing markets in particular showing continued signs of resiliency. 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 reflect a range of outcomes for the path of COVID-19 as well as recovery, and the associated effects on labour and asset markets. The four scenarios were deemed appropriate in capturing the uncertainty in economic forecasts and the non-linearity in outcomes under different scenarios. The scenarios were developed to provide sufficient coverage across potential changes in unemployment, asset price and the degree of permanent damage to the economy, around which there are pronounced levels of uncertainty at this stage. The tables below provide details of the key economic parameters under the four scenarios. The main macroeconomic variables for each of the four scenarios used for expected credit loss (ECL) modelling are set out in the table below. The compound annual growth rate (CAGR) for GDP is shown. It also shows the five-year average for unemployment and the Bank of England base rate. The House Price Index and commercial real estate figures show the total change in each asset over five years. Main macroeconomic variables 30 June 2021 31 December 2020 Extreme Extreme Upside Base case Downside downside Upside Base case Downside downside Five-year summary % % % % % % % % UK GDP - CAGR 3.9 3.5 2.9 2.5 3.6 3.1 2.8 1.3 Unemployment - average 4.1 4.6 5.8 8.1 4.4 5.7 7.1 9.7 House price index - total change 23.4 14.2 4.9 (0.8) 12.5 7.6 4.4 (19.0) Bank of England base rate - average 0.9 0.4 - (0.5) 0.2 - (0.1) (0.5) Commercial real estate price - total change 13.6 4.7 0.1 (8.7) 4.3 0.7 (12.0) (31.5) Republic of Ireland GDP - CAGR 3.8 3.2 2.5 1.8 4.2 3.5 3.0 1.6 Unemployment - average 5.1 6.8 9.1 10.9 5.6 7.5 9.3 11.2 House price index - total change 25.4 18.0 11.3 2.6 21.0 13.3 6.8 (7.0) European Central Bank base rate - average 0.2 0.1 - - 0.1 - - - World GDP - CAGR 3.8 3.5 2.7 1.8 3.5 3.4 2.9 2.8 Probability weight 35.0 40.0 20.0 5.0 20.0 40.0 30.0 10.0 Notes: (1)  The five year period starts at Q1 2021 for 30 June 2021 and Q3 2020 for 31 December 2020. (2)  The Republic of Ireland unemployment rate in table above and following tables corresponds to the mid-point of the Irish Central Statistics Office lower and upper bound unemployment rate measures.

 

Risk and capital management

Credit risk continued

Annual figures GDP - annual growth Base Extreme Base Extreme Upside case Downside downside Upside case Downside downside UK % % % % Republic of Ireland % % % % 2021 10.1 7.3 2.7 0.1 2021 9.1 4.8 1.8 (0.3) 2022 5.4 5.8 4.3 - 2022 5.0 4.9 2.2 (3.7) 2023 1.6 1.6 4.4 7.7 2023 3.0 3.6 5.4 7.5 2024 1.6 1.6 2.2 3.7 2024 2.6 3.0 3.2 5.2 2025 1.6 1.6 1.5 1.7 2025 2.7 2.9 2.8 3.1 Unemployment rate - annual average Base Extreme Base Extreme Upside case Downside downside Upside case Downside downside UK % % % % Republic of Ireland % % % % 2021 4.7 5.3 5.4 5.9 2021 9.0 11.7 14.2 14.9 2022 4.3 4.8 7.0 11.8 2022 5.8 7.5 12.7 13.9 2023 4.0 4.5 6.5 10.4 2023 4.7 6.1 7.6 12.4 2024 3.8 4.5 5.4 7.1 2024 4.4 5.7 7.0 9.0 2025 3.8 4.3 4.8 5.2 2025 4.2 5.4 6.3 6.6 House price index - four quarter growth Base Extreme Base Extreme Upside case Downside downside Upside case Downside downside UK % % % % Republic of Ireland % % % % 2021 8.0 2.0 (2.4) (5.4) 2021 10.9 3.6 (4.7) (3.5) 2022 1.7 0.5 (3.0) (27.0) 2022 4.9 3.6 1.3 (21.4) 2023 2.8 1.9 1.3 12.2 2023 2.4 3.3 4.0 10.3 2024 4.8 4.8 4.8 19.5 2024 2.8 3.5 5.8 17.6 2025 4.0 4.0 4.0 6.2 2025 3.2 3.4 5.3 4.7 Commercial real estate price - four quarter growth Base Extreme Upside case Downside downside UK % % % % 2021 7.0 (1.4) (8.4) (13.4) 2022 2.1 2.0 (1.3) (18.2) 2023 1.7 1.7 5.8 15.7 2024 1.3 1.3 2.3 5.4 2025 1.2 1.2 2.3 5.1 Worst points 30 June 2021 31 December 2020 Extreme Extreme Upside Base case Downside downside Upside Base case Downside downside UK % % % % % % % % GDP - - - (10.2) - (1.8) (5.1) (10.4) Unemployment rate (peak) 5.0 5.5 7.0 11.9 5.9 7.0 9.4 13.9 House price index - - (6.1) (33.1) - (3.6) (11.2) (32.0) Commercial real estate price - (2.1) (14.1) (33.1) (3.4) (10.1) (28.9) (40.4) Republic of Ireland GDP - - (5.3) (13.3) (0.6) (3.0) (5.5) (13.8) Unemployment rate (peak) 15.0 15.0 15.0 17.2 16.5 16.5 16.5 18.1 House price index - - (10.1) (26.5) - (4.2) (13.3) (27.0) Note: (1)  For the unemployment rate, the figures show the peak levels between 2021 and 2026 for 30 June 2021, and between 2020 and 2025 for 31 December 2020. For the other parameters, the figures show falls relative to the starting periods mentioned under the five-year summary table above.

 

Risk and capital management

Credit risk continued

Probability weightings of scenarios NatWest Group's approach to IFRS 9 multiple economic scenarios (MES) involves selecting a suitable set of discrete scenarios to characterise the distribution of risks in the economic outlook and assigning appropriate probability weights. The scale of the economic impact of COVID-19 and the range of recovery paths necessitates a change of approach to assigning probability weights from that used in recent updates. Prior to 2020, GDP paths for NatWest Group's scenarios were compared against a set of 1,000 model runs, following which a percentile in the distribution was established that most closely corresponded to the scenario. Instead, NatWest Group has subjectively applied probability weights, reflecting expert views within NatWest Group. The probability weight assignment was judged to present good coverage to the central scenarios and the potential for a robust recovery on the upside and exceptionally challenging outcomes on the downside. A 35% weighting was applied to the upside scenario, a 40% weighting applied to the base case scenario, a 20% weighting applied to the downside scenario and a 5% weighting applied to the extreme downside scenario. NatWest Group assessed the downside risk posed by COVID-19 to be diminishing over the course of 2021, with the vaccination roll-out and positive economic data being observed since the gradual relaxing of lockdown restrictions. NatWest Group therefore judged it was appropriate to apply a higher probability to upside-biased scenarios than at December 2020. Use of the scenarios in Personal lending Personal lending follows a discrete scenario approach. The probability of default (PD) and loss given default (LGD) values for each discrete scenario are calculated using product specific econometric models. Each account has a PD and LGD calculated as probability weighted averages across the suite of economic scenarios. Use of the scenarios in Wholesale lending The Wholesale lending ECL methodology is based on the concept of credit cycle indices (CCIs). The CCIs represent, similar to the exogenous component in Personal, all relevant economic loss drivers for a region/industry segment aggregated into a single index value that describes the loss rate conditions in the respective segment relative to its long-run average. A CCI value of zero corresponds to loss rates at long-run average levels, a positive CCI value corresponds to loss rates below long-run average levels and a negative CCI value corresponds to loss rates above long-run average levels. The four economic scenarios are translated into forward-looking projections of CCIs using a set of econometric models. Subsequently the CCI projections for the individual scenarios are averaged into a single central CCI projection according to the given scenario probabilities. The central CCI projection is then overlaid with an additional mean reversion assumption, i.e. that after one to two years into the forecast horizon the CCIs gradually revert to their long-run average of zero. Finally, ECL is calculated using a Monte Carlo approach by averaging PD and LGD values arising from many CCI paths simulated around the central CCI projection. The rationale for the Wholesale approach is the long-standing observation that loss rates in Wholesale portfolios tend to follow regular cycles. This allows NatWest Group to enrich the range and depth of future economic conditions embedded in the final ECL beyond what would be obtained from using the discrete macro-economic scenarios alone. Business banking, while part of the Wholesale segment, for reporting purposes, utilises the Personal lending rather than the Wholesale lending methodology. UK economic uncertainty Treatment of COVID-19 relief mechanisms Use of COVID-19 relief mechanisms (for example, payment holidays, Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loan Scheme (BBLS)) does not automatically merit identification of significant increase in credit risk (SICR) and trigger a Stage 2 classification in isolation. However, a subset of Personal customers who had accessed payment holiday support, and where their risk profile has been identified as relatively high risk continue to be collectively migrated to Stage 2 (if not already captured by other SICR criteria). For Wholesale customers, NatWest Group continues to provide support, where appropriate, to existing customers. Those who are deemed either (a) to require a prolonged timescale to return to within NatWest Group's risk appetite, (b) not to have been viable pre-COVID-19, or (c) not to be able to sustain their debt once COVID-19 is over, will trigger a SICR and, if concessions are sought, be categorised as forborne, in line with regulatory guidance. Payment holiday extensions beyond an aggregate of 12 months in an 18 month period to cover continuing COVID-19 business interruption are categorised as forbearance, including for customers where no other SICR triggers are present.

 

Risk and capital management

Credit risk continued

In February 2021, the British Business Bank announced details of Pay As You Grow (PAYG) options for borrowers of BBLS. The scheme options include the extension of lending terms, periods of reduced repayments and six month payment holidays. PAYG options are a feature of BBLS rather than a concession granted by NatWest Group. It is therefore not automatically considered significant credit deterioration and a Stage 2 trigger. NatWest Group relies on both customer attestations and existing credit monitoring procedures to identify significant financial difficulty. Should signs of financial stress be identified, a review is performed. If credit deterioration is confirmed, existing problem debt management journeys are followed and forbearance (if a concession is granted) is marked in line with existing processes. This will result in Stage 2 transfer. Model monitoring and enhancement The abrupt and prolonged interruption of a wide range of economic activities due to COVID-19 and the subsequent government interventions to support businesses and individuals, has resulted in patterns in the data of key economic loss drivers and loss outcomes, that are markedly different from those that NatWest Group's models have been built on. To account for these structural changes, model adjustments have been applied and model changes have been implemented. All in-model adjustments described have been applied by correcting the PD and LGD estimates within the core ECL calculation process and therefore consistently and systematically inform SICR identification and ECL measurement. Government support Most notably as a result of various government support measures, model-projected default rates in Wholesale and Personal have been adjusted by introducing lags between 6 to 12 months. These lags are based partly on objective empirical data (i.e. the absence of increases in realised default rates by the reporting date) and partly judgmental, based on remaining government support measures and their expected effectiveness. Extreme GDP movements - Wholesale only Due to the specific nature of COVID-19, GDP year-on-year movements in both directions are extremely sharp, many multiples of their respective extremes observed previously. This creates a risk of overstretched, invalid extrapolations in statistical models. Therefore, all Wholesale econometric models were updated to make them robust against extreme GDP movements by capping projected CCI values at levels corresponding to three times the default rates observed at the peak of the global financial crisis and using quarterly averages rather than spot values for CCI projections.
Scenario sensitivity - Personal only For the Personal lending portfolio, the forward-looking components of the IFRS 9 PD models were modified, leveraging existing econometric models used in stress testing to ensure that PDs appropriately reflect the forecasts for unemployment and house prices in particular. Additionally, post model ECL adjustments were made in Personal to ensure that the ECL was adjusted for known model over and underpredictions pre-dating COVID-19, pending the systematic recalibration of the underlying models.

 

Risk and capital management

Credit risk continued

Governance and post model adjustments The IFRS 9 PD, exposure at default and LGD models are subject to NatWest 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 (PMAs) were applied where management judged they were necessary to ensure an adequate level of overall ECL provision. All PMAs were subject to formal approval through provisioning governance, and were categorised as follows: · Deferred model calibrations - ECL adjustments where PD model monitoring indicated that actual defaults were below estimated levels but where it was judged that an implied ECL release was not supportable, as these were being judged to have been distorted by government support schemes. As a consequence, any potential ECL release was deferred and retained on the balance sheet. · Economic uncertainty - ECL adjustments primarily arising from uncertainties associated with MES and credit outcomes as a result of the effect of COVID-19 and the consequences of government interventions. In both cases, management judged that additional ECL was required until further credit performance data became available on the behavioural and loss consequences of COVID-19. · Other adjustments - ECL adjustments where it was judged that the modelled ECL required to be amended. PMAs will remain a key focus area of NatWest Group's ongoing ECL adequacy assessment process. A holistic framework has been established including reviewing a range of economic data, external benchmark information and portfolio performance trends, particularly with more observable outcomes from the unwinding of COVID-19 support mechanisms during the remainder of 2021. ECL post model adjustments Retail  Commercial Ulster Banking Banking Bank RoI Other Total 30 June 2021 £m £m £m £m £m Deferred model calibrations 103 51 (2) - 152 Economic uncertainty 197 493 114 30 834 Other adjustments 22 19 118 4 163 322 563 230 34 1,149 31 December 2020 Deferred model calibrations 34 13 2 - 49 Economic uncertainty 158 526 176 18 878 Other adjustments 20 19 26 3 68 212 558 204 21 995 Retail Banking - The PMA for deferred model calibrations increased to £103 million from £34 million at 31 December 2020. This reflected management's judgement that the implied ECL decreases that continued to manifest themselves through the standard PD model monitoring process during H1 2021, were not fully supportable as they were viewed as being temporarily distorted by government support mechanisms. Management retained this view on the basis that underlying portfolio performance had been influenced by the various customer support mechanisms and further outcome data is required. The PMA for economic uncertainty increased to £197 million from £158 million at 31 December 2020. This was primarily due to the addition of a further £47 million of post model adjustments to hold back modelled LGD reductions on certain unsecured portfolio segments. The total included an ECL uplift of £55 million (a reduction from £63 million at 31 December 2020 due to PD improvements) on a subset of customers who had accessed payment holiday support where their risk profile was identified as relatively high risk. In addition, NatWest Group continues to retain a holdback of a modelled ECL release of £69 million, again due to the delayed default emergence reflective of the various customer support mechanisms (£15 million related to mortgages and £54 million related to unsecured lending). The H1 2021 overlay also included an ECL uplift on buy-to-let mortgages of £14 million (31 December 2020 - £15 million) to mitigate the risk of a disproportionate credit deterioration in challenging economic circumstances. Other judgmental overlays included £15 million (31 December 2020 - £13 million) in respect of the repayment risk not captured in the models, that a proportion of customers on interest-only mortgages would not be able to repay the capital element of their loan at the end of term, as well as a £7 million overlay for an identified weakness in the mortgage PD model pending remediation.

 

Risk and capital management

Credit risk continued

Commercial Banking - The PMA for economic uncertainty included an overlay of £409 million (£450 million across NatWest Group's Wholesale portfolio) based on a judgemental thesis, reflecting concern that the unprecedented nature of COVID-19 could result in longer debt recovery periods and lower values than history suggested, and also the risk of idiosyncratic credit outcomes. It also included an overlay of £23 million in respect of elevated concerns around borrowers' ability to refinance facilities at the end of the contractual term. Additionally, it included overlays to address the effects of customer support mechanisms. There was also a PMA for deferred model calibrations on the business banking portfolio reflecting management's judgement that the beneficial modelling impact, and implied ECL decrease, was not supportable again while portfolio performance was being under-pinned by the various support mechanisms. Other adjustments included an overlay of £19 million to mitigate the effect of operational timing delays in the identification and flagging of a SICR. Ulster Bank RoI - The PMA for economic uncertainty included an adjustment of £49 million in the mortgage portfolio reflecting concerns that losses arising from defaults during 2021 would be higher than modelled. There was a PMA of £30 million in the Wholesale portfolio, reflecting concern that the unprecedented nature of COVID-19 could result in longer debt recovery periods and lower recovery values than history suggested. It also included PMAs of £9 million in respect of high risk payment break mortgage customers and £23 million in the SME portfolio reflective of the elevated risk for this sector. The increase in other PMAs reflects the judgment that continuing actions on the phased withdrawal of Ulster Bank RoI from the Irish market will lead to higher/earlier crystallisation of losses.    Government guarantees In April 2021, the UK government launched the Recovery Loan Scheme, replacing previous support schemes which are now closed. Consistent with CBILS and the Coronavirus Large Business Interruption Loan Scheme (CLBILS), the government guarantee is 80%. NatWest Group recognises lower LGDs for these lending products as a result, with 0% applied to the government-guaranteed part of the exposure. NatWest Group does not directly adjust the measurement of PD due to the government guarantee and continues to move exposures to Stage 2 and Stage 3 where a significant deterioration in credit risk or a default is identified.

Wholesale support schemes

The table below shows the uptake of BBLS, CBILS and CLBILS by Wholesale customers, by sector, which ended for new applications on 31 March 2021.

	BBLS				CBILS				CLBILS
	Approved	Drawdown	% of BBLS to		Approved	Drawdown	% of CBILS to		Approved	Drawdown	% of CLBILS to
30 June 2021	volume	amount (£m)	sector loans		volume	amount (£m)	sector loans		volume	amount (£m)	sector loans
Wholesale lending by sector
Airlines and aerospace	260	6	0.35%		18	9	0.53%		4	16	0.93%
Automotive	12,839	409	6.78%		578	143	2.37%		26	44	0.73%
Education	2,050	52	3.36%		121	76	4.91%		10	32	2.07%
Health	10,248	302	5.46%		630	101	1.82%		3	19	0.34%
Land transport and logistics	8,996	255	5.35%		399	99	2.08%		1	5	0.10%
Leisure	32,721	982	10.74%		2,182	568	6.21%		39	228	2.49%
Oil and gas	329	9	0.61%		15	7	0.47%		-	-	-
Retail	32,652	1,060	12.29%		1,655	399	4.63%		26	115	1.33%
Property	71,422	1,993	5.55%		2,491	676	1.88%		37	81	0.23%
Other (including Business
Banking)	127,787	3,181	3.49%		8,918	1,844	2.02%		84	328	0.36%
Total	299,304	8,249	4.97%		17,007	3,922	2.36%		230	868	0.52%

Notes:

(1)  The table contains some cases which as at 30 June 2021 were approved but not yet drawn down. Approved limits as at 30 June 2021 were as follows: BBLS £9.2 billion (90% drawn); CBILS - £4.2 billion (93% drawn); and CLBILS - £1.3 billion (66% drawn).

(2)  The Recovery Loan Scheme, a successor to the now closed BBLS, CBILS, and CLBILS was launched on 6 April 2021. Uptake of the new scheme was minimal with 192 customers having drawn down £13.7 million as at 2 July 2021.

 

Risk and capital management

Credit risk continued

Measurement uncertainty and ECL sensitivity analysis 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 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 as at 30 June 2021. Scenario impacts on a SICR should be considered when evaluating the ECL movements of Stage 1 and Stage 2. In all scenarios the total exposure was the same but exposure by stage varied in each scenario. Stage 3 provisions are not subject to the same level of measurement uncertainty - default is an observed event as at the balance sheet date. Stage 3 provisions therefore have not been considered in this analysis. The impact arising from the upside, downside and extreme downside scenarios has been simulated. These scenarios are three of the four discrete scenarios used in the methodology for Personal MES as described in the Economic loss drivers section. In the simulations, NatWest Group has assumed that the economic macro variables associated with these scenarios replace the existing base case economic assumptions, giving them a combined total 100% probability weighting and therefore serving as a single economic scenario. These scenarios have been applied to all modelled portfolios in the analysis below, with the simulation impacting both PDs and LGDs. Modelled PMAs present in the underlying ECL estimates are also sensitised in line with the modelled ECL movements, but those that were judgmental in nature, primarily those for economic uncertainty, were not (refer to the Governance and post model adjustments section). As expected, the scenarios create differing impacts on ECL by portfolio and the impacts are deemed reasonable. In this simulation, it is assumed that existing modelled relationships between key economic variables and loss drivers hold, but in practice other factors would also have an impact, for example, potential customer behaviour changes and policy changes by lenders that might impact on the wider availability of credit. NatWest Group's core criterion to identify a SICR is founded on PD deterioration, as discussed above. Under the simulations, PDs change and result in exposures moving between Stage 1 and Stage 2 contributing to the ECL impact.

 

Risk and capital management Credit riskcontinued Extreme 30 June 2021 Actual Base case Upside Downside downside Stage 1 modelled exposure (£m) Retail Banking  152,428   152,412   152,510   152,128   141,758  Ulster Bank RoI Personal & Business Banking  10,989   10,989   11,022   10,556   10,373  Wholesale  113,315   115,403   116,189   113,405   98,561   276,732   278,804   279,721   276,089   250,692  Stage 1 modelled ECL (£m) Retail Banking 110 112 112 113 113 Ulster Bank RoI Personal & Business Banking 25 24 22 27 27 Wholesale 262 269 269 273 287 397 405 403 413 427 Stage 1 coverage (%) Retail Banking 0.07% 0.07% 0.07% 0.07% 0.08% Ulster Bank RoI Personal & Business Banking 0.22% 0.22% 0.20% 0.26% 0.26% Wholesale 0.23% 0.23% 0.23% 0.24% 0.29% 0.14% 0.15% 0.14% 0.15% 0.17% Stage 2 modelled exposure (£m) Retail Banking  19,435   19,451   19,353   19,735   30,105  Ulster Bank RoI Personal & Business Banking  1,387   1,387   1,354   1,820   2,003  Wholesale  33,405   31,317   30,531   33,315   48,159   54,227   52,155   51,238   54,870   80,267  Stage 2 modelled ECL (£m) Retail Banking  710   722   671   799   1,042  Ulster Bank RoI Personal & Business Banking  76   76   71   93   107  Wholesale  1,479   1,368   1,316   1,485   2,347   2,265   2,166   2,058   2,377   3,496  Stage 2 coverage (%) Retail Banking 3.65% 3.71% 3.46% 4.05% 3.46% Ulster Bank RoI Personal & Business Banking 5.51% 5.49% 5.22% 5.10% 5.32% Wholesale 4.43% 4.37% 4.31% 4.46% 4.87% 4.18% 4.15% 4.01% 4.33% 4.35% Stage 1 and Stage 2 modelled exposure (£m) Retail Banking  171,863   171,863   171,863   171,863   171,863  Ulster Bank RoI Personal & Business Banking  12,376   12,376   12,376   12,376   12,376  Wholesale  146,720   146,720   146,720   146,720   146,720   330,959   330,959   330,959   330,959   330,959  Stage 1 and Stage 2 modelled ECL (£m) Retail Banking  820   834   783   912   1,155  Ulster Bank RoI Personal & Business Banking  101   100   93   120   134  Wholesale  1,741   1,637   1,584   1,758   2,635   2,662   2,571   2,460   2,790   3,924  Stage 1 and Stage 2 coverage (%) Retail Banking 0.48% 0.49% 0.46% 0.53% 0.67% Ulster Bank RoI Personal & Business Banking 0.82% 0.81% 0.75% 0.97% 1.08% Wholesale 1.19% 1.12% 1.08% 1.20% 1.80% 0.80% 0.78% 0.74% 0.84% 1.19% Reconciliation to Stage 1 and Stage 2 ECL (£m) ECL on modelled exposures  2,662   2,571   2,461   2,790   3,923  ECL on non-modelled exposures  70   70   70   70   70  Total Stage 1 and Stage 2 ECL  2,732   2,641   2,530   2,860   3,994  Variance - (lower)/higher to actual total Stage 1 and Stage 2 ECL (91) (202)  128   1,262  Notes: (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 30 June 2021 and therefore does not include variation in future undrawn exposure values. (2)  Reflects ECL for all modelled exposure in scope for IFRS 9. The analysis excludes non-modelled portfolios and exposure relating to bonds and cash. (3)  All simulations are run on a stand-alone basis and are independent of each other, with the potential ECL impact reflecting the simulated impact as at 30 June 2021.The simulations change the composition of Stage 1 and Stage 2 exposure but total exposure is unchanged under each scenario as the loan population is static. (4)  Refer to the Economic loss drivers section for details of economic scenarios. (5)  Refer to the NatWest Group 2020 Annual Report and Accounts for 31 December 2020 comparatives.

 

Risk and capital management

Credit risk continued

Key points · During H1 2021, both the Stage 2 size and overall modelled ECL reduced as a result of the improved economic outlook and scenario weightings, together with stable portfolio performance. Judgemental ECL PMAs continued to reflect residual economic uncertainty with the expectation of increased defaults later in 2021 and beyond, now representing 23% of total ECL (31 December 2020 - 18%). These combined factors, in conjunction with a less severe suite of economics in the H1 2021 extreme downside scenario, contributed to a smaller range of ECL sensitivities at H1 2021 compared to the 2020 year end. · If the economics were as negative as observed in the extreme downside, total Stage 1 and Stage 2 ECL was simulated to increase by £1.3 billion (approximately 45%). 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. · The small ECL uplift in the downside scenario, particularly in Wholesale, reflected the net effect of the MES weightings towards the downside for ECL, observable when comparing to the ECL scenario with 100% weight on the base case. · For the downside scenario, the ECL result was not materially different to actual ECL due to mean reversion of default rates and the recovery trajectory in the downside. Compared to the base case, Wholesale Stage 1 and Stage 2 ECL was over 7% higher in the downside scenario. In Retail Banking, similar scenario shape dynamics led to minimal difference between the base case sensitivity and actual ECL. · In the upside scenario, the simulated ECL reduction (£0.2 billion, 8% of actual) was lower than the uplift observed in the extreme downside, again reflecting the expectation that the non-linearity of losses was skewed to the downside. In Retail Banking this is partly due to the effect of PD persistence, where Stage 2 will not be affected immediately by PD reductions.

Measurement uncertainty and ECL adequacy

The improvement in the economic outlook and scenarios used in the IFRS 9 MES framework at H1 2021 resulted in a release of modelled ECL. Given continued uncertainty remains due to COVID-19 despite the improved economic outlook, NatWest Group utilised a framework of quantitative and qualitative measures to support the directional change and levels of ECL coverage, including economic data, credit performance insights and problem debt trends. This was particularly important for consideration of post model adjustments.

As government support mechanisms continue to conclude during 2021, NatWest Group anticipates further credit deterioration in the portfolios. However, the income statement effect of this will be mitigated by the forward-looking provisions retained on the balance sheet as at 30 June 2021.

There are a number of key factors that could drive further downside to impairments, through deteriorating economic and credit metrics and increased stage migration as credit risk increases for more customers. A key factor would be a more adverse deterioration in GDP and unemployment in the economies in which NatWest Group operates, but also, among others:

· The ongoing trajectory of lockdown restriction relaxation within the UK and the Republic of Ireland, and any future repeated lockdown requirements.

· The progress of the COVID-19 vaccination roll-out and its effectiveness against new variants.

· The efficacy of the various government support initiatives in terms of their ability to defray customer defaults is yet to be proven, notably over an extended period.

· Higher unemployment if companies fail to retain jobs after the UK furlough scheme concludes in Q3 2021.

· The level of revenues lost by corporate clients and pace of recovery of those revenues may affect NatWest Group's clients' ability to service their borrowing, especially in those sectors most exposed to the effects of COVID-19.

Movement in ECL provision

The table below shows the main ECL provision movements during H1 2021.

	ECL provision
	£m
At 1 January 2021	6,186
Changes in economic forecasts	(363)
Changes in risk metrics and exposure: Stage 1 and Stage 2	(483)
Changes in risk metrics and exposure: Stage 3	43
Judgemental changes: changes in post model adjustments for Stage 1, Stage 2 and Stage 3	155
Write-offs and other	(613)
At 30 June 2021	4,925

Risk and capital management

Credit risk - Banking activities

Introduction

This section details the credit risk profile of NatWest Group 's banking activities.

Financial instruments within the scope of the IFRS 9 ECL framework Refer to Note 8 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 30 June 2021 31 December 2020 Gross ECL Net Gross ECL Net £bn £bn £bn £bn £bn £bn Balance sheet total gross amortised cost and FVOCI 586.1 555.0 In scope of IFRS 9 ECL framework 575.9 548.8 % in scope 98% 99% Loans to customers - in scope - amortised cost 367.0 4.7 362.3 365.5 6.0 359.5 Loans to customers - in scope - FVOCI 0.7 - 0.7 - - - Loans to banks - in scope - amortised cost 7.9 - 7.9 6.8 - 6.8 Total loans - in scope 375.6 4.7 370.9 372.3 6.0 366.3   Stage 1 316.7 0.4 316.3 287.1 0.5 286.6   Stage 2 53.2 2.2 51.0 78.9 3.0 75.9   Stage 3 5.7 2.1 3.6 6.3 2.5 3.8 Other financial assets - in scope - amortised cost 159.2 - 159.2 132.1 - 132.1 Other financial assets - in scope - FVOCI 41.1 - 41.1 44.4 - 44.4 Total other financial assets - in scope 200.3 - 200.3 176.5 - 176.5   Stage 1 199.5 - 199.5 175.5 - 175.5   Stage 2 0.8 - 0.8 1.0 - 1.0 Out of scope of IFRS 9 ECL framework 10.2 na 10.2 6.2 na 6.2 Loans to customers - out of scope - amortised cost 0.4 na 0.4 1.0 na 1.0 Loans to banks - out of scope - amortised cost 0.3 na 0.3 0.1 na 0.1 Other financial assets - out of scope - amortised cost 9.2 na 9.2 4.6 na 4.6 Other financial assets - out of scope - FVOCI 0.3 na 0.3 0.5 na 0.5 na = not applicable The assets outside the IFRS 9 ECL framework were as follows: ● Settlement balances, items in the course of collection, cash balances and other non-credit risk assets of £8.5 billion (31 December 2020 - £4.1 billion). These were assessed as having no ECL unless there was evidence that they were credit impaired. ● Equity shares of £0.3 billion (31 December 2020 - £0.3 billion) as not within the IFRS 9 ECL framework by definition.  ● Fair value adjustments on loans hedged by interest rate swaps, where the underlying loan was within the IFRS 9 ECL scope - £1.0 billion (31 December 2020 - £1.4 billion). ● NatWest Group originated securitisations, where ECL was captured on the underlying loans of £0.4 billion (31 December 2020 - £0.4 billion). Contingent liabilities and commitments In addition to contingent liabilities and commitments disclosed in Note 11, reputationally-committed limits, are also included in the scope of the IFRS 9 ECL framework. These are offset by nil (31 December 2020 - £0.2 billion) out of scope balances primarily related to facilities that, if drawn, would not be classified as amortised cost or FVOCI, or undrawn limits relating to financial assets exclusions. Total contingent liabilities (including financial guarantees) and commitments within IFRS 9 ECL scope of £127.6 billion (31 December 2020 - £133.6 billion) comprised Stage 1 £110.6 billion (31 December 2020 - £107.4 billion); Stage 2 £16.2 billion (31 December 2020 - £25.2 billion); and Stage 3 £0.8 billion (31 December 2020 - £1.0 billion). The ECL relating to contingent liabilities is £0.2 billion (31 December 2020 - £0.2 billion). The total ECL in the remainder of the credit risk section of £4.9 billion includes ECL for both balance sheet exposure and contingent liabilities.

 

Risk and capital management

Credit risk - Banking activities continued

Segment analysis- portfolio summary The table below shows gross loans and related credit impairment measures, within the scope of the IFRS 9 ECL framework. International Banking & Markets Retail Private Commercial RBS NatWest Ulster Central items Banking Banking Banking International Markets Bank RoI & other Total 30 June 2021 £m £m £m £m £m £m £m £m Loans - amortised cost and FVOCI Stage 1 158,989 16,728 75,713 15,027 7,019 13,732 29,493 316,701 Stage 2 18,866 1,444 27,895 1,342 721 2,821 99 53,188 Stage 3 1,921 307 2,226 206 108 935 - 5,703 Of which: individual - 307 1,202 206 98 38 - 1,851 Of which: collective 1,921 - 1,024 - 10 897 - 3,852 179,776 18,479 105,834 16,575 7,848 17,488 29,592 375,592 ECL provisions (1) Stage 1 120 21 208 15 10 44 15 433 Stage 2 709 49 1,222 46 36 225 13 2,300 Stage 3 811 36 812 47 88 398 - 2,192 Of which: individual - 36 386 47 79 12 - 560 Of which: collective 811 - 426 - 9 386 - 1,632 1,640 106 2,242 108 134 667 28 4,925 ECL provisions coverage (2,3) Stage 1 (%) 0.08 0.13 0.27 0.10 0.14 0.32 0.05 0.14 Stage 2 (%) 3.76 3.39 4.38 3.43 4.99 7.98 13.13 4.32 Stage 3 (%) 42.22 11.73 36.48 22.82 81.48 42.57 - 38.44 0.91 0.57 2.12 0.65 1.71 3.81 0.09 1.31 Half year ended 30 June 2021 Impairment losses ECL (release)/charge (4) (57) (27) (568) (29) (16) (11) 1 (707) Stage 1 (195) (27) (405) (23) (8) (43) - (701) Stage 2 45 (4) (141) (4) (5) 8 1 (100) Stage 3 93 4 (22) (2) (3) 24 - 94 Of which: individual - 4 (29) (2) 1 1 - (25) Of which: collective 93 - 7 - (4) 23 - 119 ECL loss rate - annualised  (basis points) (3) (6) (29) (107) (35) (41) (13) 1 (38) Amounts written-off 138 5 257 1 40 76 - 517 Of which: individual - 5 210 1 40 - - 256 Of which: collective 138 - 47 - - 76 - 261 For the notes to this table refer to the following page.

 

Risk and capital management

Credit risk - Banking activities continued

Segment analysis - portfolio summary International Banking & Markets Retail Private Commercial RBS NatWest Ulster Central items Banking Banking Banking International Markets Bank RoI & other Total 31 December 2020 £m £m £m £m £m £m £m £m Loans - amortised cost and FVOCI Stage 1 139,956 15,321 70,685 12,143 7,780 14,380 26,859 287,124 Stage 2 32,414 1,939 37,344 2,242 1,566 3,302 110 78,917 Stage 3 1,891 298 2,551 211 171 1,236 - 6,358 Of which: individual - 298 1,578 211 162 43 - 2,292 Of which: collective 1,891 - 973 - 9 1,193 - 4,066 174,261 17,558 110,580 14,596 9,517 18,918 26,969 372,399 ECL provisions (1) Stage 1 134 31 270 14 12 45 13 519 Stage 2 897 68 1,713 74 49 265 15 3,081 Stage 3 806 39 1,069 48 132 492 - 2,586 Of which: individual - 39 607 48 124 13 - 831 Of which: collective 806 - 462 - 8 479 - 1,755 1,837 138 3,052 136 193 802 28 6,186 ECL provisions coverage (2,3) Stage 1 (%) 0.10 0.20 0.38 0.12 0.15 0.31 0.05 0.18 Stage 2 (%) 2.77 3.51 4.59 3.30 3.13 8.03 13.64 3.90 Stage 3 (%) 42.62 13.09 41.91 22.75 77.19 39.81 - 40.67 1.05 0.79 2.76 0.93 2.03 4.24 0.10 1.66 Half year ended 30 June 2020 Impairment losses ECL charge (4) 657 56 1,790 46 40 243 26 2,858 Stage 1 24 16 231 4 10 12 11 308 Stage 2 524 39 1,323 20 43 186 15 2,150 Stage 3 109 1 236 22 (13) 45 - 400 Of which: individual - 1 114 22 (4) (2) - 131 Of which: collective 109 - 122 - (9) 47 - 269 ECL loss rate - annualised  (basis points) (3) 79 69 312 63 63 197 25 154 Amounts written-off 117 1 120 2 4 164 - 408 Of which: individual - 1 34 2 4  -  - 41 Of which: collective 117 - 86 - - 164 - 367 Notes: (1)  Includes £6 million (31 December 2020 - £6 million) related to assets classified as FVOCI. (2)  ECL provisions coverage is calculated as ECL provisions divided by loans - amortised cost and FVOCI. (3)  ECL provisions coverage and ECL loss rates are calculated on third party loans and related ECL provisions and charge respectively. ECL loss rate is calculated as annualised third party ECL charge divided by loans - amortised cost and FVOCI. The half year ECL charge is annualised by multiplying by two. (4)  Includes a £4 million charge (30 June 2020 - £5 million) related to other financial assets, of which nil (30 June 2020 - £4 million) related to assets classified as FVOCI; and £2 million (30 June 2020 - £8 million) 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 page 29 for Financial instruments within the scope of the IFRS 9 ECL framework for further details. Other financial assets within the scope of the IFRS 9 ECL framework were cash and balances at central banks totalling £150.5 billion (31 December 2020 - £122.7 billion) and debt securities of £49.8 billion (31 December 2020 - £53.8 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. Key points ● ECL reduced significantly on Stage 1 and Stage 2 exposures, reflecting a more positive economic outlook, commensurate with reduced levels of uncertainty due to vaccination progress and economic rebound as lockdown eases. ● The various customer support mechanisms which continue to be available mitigate against flows to default in the short-term. Hence, there was a limited effect on Stage 3 ECL requirements during H1 2021. ● Reflecting the improved economic environment and resultant ECL releases across all key businesses, the annualised loss rate has reduced to negative 38bps.

 

Risk and capital management

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Segment 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 1-30 >30 Not past 1-30 >30 Stage 1 due DPD DPD Total Stage 3 Total Stage 1 due DPD DPD Total Stage 3 Total 30 June 2021 £m £m £m £m £m £m £m £m £m £m £m £m £m £m Retail Banking 158,989 17,478 895 493 18,866 1,921 179,776 120 626 44 39 709 811 1,640 Private Banking 16,728 1,376 38 30 1,444 307 18,479 21 49 - - 49 36 106 Personal 13,783 114 38 27 179 267 14,229 6 2 - - 2 17 25 Wholesale 2,945 1,262 - 3 1,265 40 4,250 15 47 - - 47 19 81 Commercial Banking 75,713 26,569 876 450 27,895 2,226 105,834 208 1,155 49 18 1,222 812 2,242 International Banking  & Markets  RBS International 15,027 1,311 17 14 1,342 206 16,575 15 45 - 1 46 47 108  Personal 2,686 19 14 7 40 68 2,794 2 1 - 1 2 12 16  Wholesale 12,341 1,292 3 7 1,302 138 13,781 13 44 - - 44 35 92  NatWest Markets 7,019 709 - 12 721 108 7,848 10 36 - - 36 88 134 Ulster Bank RoI 13,732 2,636 85 100 2,821 935 17,488 44 205 9 11 225 398 667 Personal  10,798 1,166 78 85 1,329 773 12,900 24 59 6 8 73 301 398 Wholesale 2,934 1,470 7 15 1,492 162 4,588 20 146 3 3 152 97 269 Central items & other 29,493 99 - - 99 - 29,592 15 13 - - 13 - 28 Total loans 316,701 50,178 1,911 1,099 53,188 5,703 375,592 433 2,129 102 69 2,300 2,192 4,925 Of which: Personal 186,256 18,777 1,025 612 20,414 3,029 209,699 152 688 50 48 786 1,141 2,079 Wholesale 130,445 31,401 886 487 32,774 2,674 165,893 281 1,441 52 21 1,514 1,051 2,846 31 December 2020 Retail Banking 139,956 30,714 1,080 620 32,414 1,891 174,261 134 762 70 65 897 806 1,837 Private Banking 15,321 1,908 17 14 1,939 298 17,558 31 67 - 1 68 39 138 Personal 12,799 116 17 11 144 263 13,206 7 2 - - 2 19 28 Wholesale 2,522 1,792 - 3 1,795 35 4,352 24 65 - 1 66 20 110 Commercial Banking 70,685 36,451 589 304 37,344 2,551 110,580 270 1,648 44 21 1,713 1,069 3,052 International Banking  & Markets  RBS International 12,143 2,176 46 20 2,242 211 14,596 14 72 1 1 74 48 136  Personal 2,676 18 17 14 49 70 2,795 3 1 - - 1 11 15  Wholesale 9,467 2,158 29 6 2,193 141 11,801 11 71 1 1 73 37 121  NatWest Markets 7,780 1,457 - 109 1,566 171 9,517 12 49 - - 49 132 193 Ulster Bank RoI 14,380 2,964 144 194 3,302 1,236 18,918 45 227 15 23 265 492 802 Personal  11,117 1,500 115 130 1,745 1,064 13,926 27 74 9 13 96 392 515 Wholesale 3,263 1,464 29 64 1,557 172 4,992 18 153 6 10 169 100 287 Central items & other 26,859 110 - - 110 - 26,969 13 15 - - 15 - 28 Total loans 287,124 75,780 1,876 1,261 78,917 6,358 372,399 519 2,840 130 111 3,081 2,586 6,186 Of which: Personal 166,548 32,348 1,229 775 34,352 3,288 204,188 171 839 79 78 996 1,228 2,395 Wholesale 120,576 43,432 647 486 44,565 3,070 168,211 348 2,001 51 33 2,085 1,358 3,791 For the notes to this table refer to the following page.

 

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Segment 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 Half year ended 30 June 2021 Stage 2 (1,2) ECL Not past Total Amounts Stage 1 due 1-30 DPD >30 DPD Total Stage 3 Total (release)/charge Loss rate written-off 30 June 2021 % % % % % % % £m basis points £m Retail Banking 0.08 3.58 4.92 7.91 3.76 42.22 0.91 (57) (6) 138 Private Banking 0.13 3.56 - - 3.39 11.73 0.57 (27) (29) 5 Personal 0.04 1.75 - - 1.12 6.37 0.18 (4) (6) (1) Wholesale 0.51 3.72 - - 3.72 47.50 1.91 (23) (108) 6 Commercial Banking 0.27 4.35 5.59 4.00 4.38 36.48 2.12 (568) (107) 257 International Banking  & Markets  RBS International 0.10 3.43 - 7.14 3.43 22.82 0.65 (29) (35) 1  Personal 0.07 5.26 - 14.29 5.00 17.65 0.57 - - -  Wholesale 0.11 3.41 - - 3.38 25.36 0.67 (29) (42) 1  NatWest Markets 0.14 5.08 - - 4.99 81.48 1.71 (16) (41) 40 Ulster Bank RoI 0.32 7.78 10.59 11.00 7.98 42.57 3.81 (11) (13) 76 Personal  0.22 5.06 7.69 9.41 5.49 38.94 3.09 (11) (17) 71 Wholesale 0.68 9.93 42.86 20.00 10.19 59.88 5.86 - - 5 Central items & other 0.05 13.13 - - 13.13 - 0.09 1 1 - Total loans 0.14 4.24 5.34 6.28 4.32 38.44 1.31 (707) (38) 517 Of which: Personal 0.08 3.66 4.88 7.84 3.85 37.67 0.99 (72) (7) 208 Wholesale 0.22 4.59 5.87 4.31 4.62 39.30 1.72 (635) (77) 309 ECL provisions coverage Half year ended 30 June 2020 Stage 2 (1,2) ECL Not past Total Amounts Stage 1 due 1-30 DPD >30 DPD Total Stage 3 Total charge/ (release) Loss rate written-off 31 December 2020 % % % % % % % £m basis points £m Retail Banking 0.10 2.48 6.48 10.48 2.77 42.62 1.05 657 79 117 Private Banking 0.20 3.51 - 7.14 3.51 13.09 0.79 56 69 1 Personal 0.05 1.72 - - 1.39 7.22 0.21 3 5 - Wholesale 0.95 3.63 - 33.33 3.68 57.14 2.53 53 273 1 Commercial Banking 0.38 4.52 7.47 6.91 4.59 41.91 2.76 1,790 312 120 International Banking  & Markets  RBS International 0.12 3.31 2.17 5.00 3.30 22.75 0.93 46 63 2  Personal 0.11 5.56 - - 2.04 15.71 0.54 (3) (21) 2  Wholesale 0.12 3.29 3.45 16.67 3.33 26.24 1.03 49 83 -  NatWest Markets 0.15 3.36 - - 3.13 77.19 2.03 40 63 4 Ulster Bank RoI 0.31 7.66 10.42 11.86 8.03 39.81 4.24 243 197 164 Personal 0.24 4.93 7.83 10.00 5.50 36.84 3.70 120 168 162 Wholesale 0.55 10.45 20.69 15.63 10.85 58.14 5.75 123 236 2 Central items & other 0.05 13.64 - - 13.64 - 0.10 26 25 - Total loans 0.18 3.75 6.93 8.80 3.90 40.67 1.66 2,858 154 408 Of which: Personal 0.10 2.59 6.43 10.06 2.90 37.35 1.17 777 79 281 Wholesale 0.29 4.61 7.88 6.79 4.68 44.23 2.25 2,081 238 127 Notes: (1)  30 DPD - 30 days past due, the mandatory 30 days past due backstop is prescribed by IFRS 9 for a SICR. (2)  ECL provisions on contingent liabilities and commitments are included within the Financial assets section so as not to distort ECL coverage ratios.

 

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Segment loans and impairment metrics Key points · Retail Banking - Balance sheet growth during H1 2021 was mainly due to mortgages. In line with the market, mortgage demand was strong during the first six months of the year, supported by the extension of the stamp duty holiday and overall improvements in economic conditions. The improved economic outlook captured in the updated MES scenarios, including a more positive forecast on unemployment levels, resulted in reduced account level PDs compared to the year end. Unsecured lending balances reduced over the same period as customer spend and demand for borrowing has been subdued during COVID-19 restrictions, particularly in the first quarter of 2021. Lending criteria were selectively relaxed in H1 2021 to support growing demand for secured and unsecured borrowing, as lockdown restrictions eased. · Portfolio performance remained stable, for further details refer to the Personal portfolio section below. Arrears levels in both the mortgage and unsecured portfolios remained low overall, however, a small number of customers who had utilised their full payment holiday support did migrate into late arrears during H1 2021. With the vast majority of payment holidays now complete, this trend stabilised by the end of H1 2021 and new inflows to arrears were below pre-COVID-19 levels. The improved economic conditions alongside continued benign credit performance in the portfolio, resulted in a smaller proportion of customer accounts triggering SICR and an associated migration of assets from Stage 2 to Stage 1, resulting in reduced ECL. The various COVID-19 related customer support mechanisms (e.g. loan repayment holidays, government job retention scheme) have mitigated actual portfolio deterioration in the short term, with the days past due and flows to Stage 3 yet to be materially affected. Provisions coverage reduced overall mirroring the positive trajectory of the COVID-19 vaccination, labour market trends and portfolio performance. The annualised loss rate for H1 2021 was significantly lower than in 2020. · Commercial Banking - Balance sheet reduction occurred across the key sectors of the portfolio that continue to be affected by COVID-19, including off-balance sheet exposures in the Land Transport & Logistics, Oil and Gas, Automotive and Retail sectors. Sector appetite continued to be regularly reviewed with oversight classifications adjusted based on updated financial performance and economic outlook for the sectors. The improved economic outlook, including positive movement in GDP and commercial real estate valuations, resulted in lower IFRS 9 PDs. Consequently, there was a reduction in exposures exhibiting a SICR which caused a migration of assets from Stage 2 to Stage 1. As a result, the ECL requirement decreased. Reflecting the residual uncertainty arising from COVID-19, management judged it appropriate to maintain certain ECL post model adjustments. The various COVID-19 related customer support mechanisms continued to mitigate against flows into default. The Stage 2 exposure reduced with PMAs dampening the associated ECL reduction. The loss rate was significantly lower in H1 2021 than in the prior year. · Ulster Bank RoI - Balance sheet reductions since the 2020 year end were a result of diminished credit demand caused by COVID-19 disruption and the announcement of the phased withdrawal of Ulster Bank RoI from the Irish market. The weakening of the euro against sterling further contributed to this balance sheet reduction. Decreases in ECL reflected ongoing deleveraging of the non-performing mortgage portfolio through the execution of the final tranche of a 2019 debt sale. The various COVID-19 related customer support mechanisms are mitigating actual portfolio deterioration in the short term, with the days past due and flows to Stage 3 yet to be materially impacted. The annualised loss rate for H1 2021 was significantly lower than in 2020.

 

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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 30 June 2021 £m £m £m £m £m £m £m £m £m £m Loans by geography 196,708 3,727 9,264 209,699 35,941 74,122 50,072 5,758 165,893 375,592  - UK 184,046 3,660 9,093 196,799 33,825 63,855 36,774 4,223 138,677 335,476  - RoI 12,662 67 171 12,900 1,137 3,677 321 27 5,162 18,062  - Other Europe - - - - 621 3,759 4,799 878 10,057 10,057  - RoW - - - - 358 2,831 8,178 630 11,997 11,997 Loans by stage 196,708 3,727 9,264 209,699 35,941 74,122 50,072 5,758 165,893 375,592  - Stage 1 177,630 2,562 6,064 186,256 28,105 49,050 47,694 5,596 130,445 316,701  - Stage 2 16,750 1,083 2,581 20,414 6,782 23,478 2,361 153 32,774 53,188  - Stage 3 2,328 82 619 3,029 1,054 1,594 17 9 2,674 5,703  - Of which: individual 315 - 20 335 706 791 10 9 1,516 1,851  - Of which: collective 2,013 82 599 2,694 348 803 7 - 1,158 3,852 Loans - past due analysis (2,3) 196,708 3,727 9,264 209,699 35,941 74,122 50,072 5,758 165,893 375,592  - Not past due 193,185 3,618 8,457 205,260 34,889 71,810 48,943 5,488 161,130 366,390  - Past due 1-30 days 1,317 25 129 1,471 398 1,495 1,110 269 3,272 4,743  - Past due 30-90 days 697 24 93 814 251 250 13 1 515 1,329  - Past due 90-180 days 433 23 72 528 39 41 - - 80 608  - Past due >180 days 1,076 37 513 1,626 364 526 6 - 896 2,522 Loans - Stage 2 16,750 1,083 2,581 20,414 6,782 23,478 2,361 153 32,774 53,188  - Not past due 15,331 1,053 2,393 18,777 6,330 22,599 2,320 152 31,401 50,178  - Past due 1-30 days 903 14 108 1,025 211 647 28 - 886 1,911  - Past due 30-90 days 516 16 80 612 241 232 13 1 487 1,099 Weighted average life*   - ECL measurement (years) 9 2 5 6 4 6 3 1 5 5 Weighted average 12 months PDs*   - IFRS 9 (%) 0.34 5.94 3.51 0.56 2.31 2.91 0.41 0.13 1.91 1.18   - Basel (%) 0.77 3.33 3.22 0.91 1.23 1.87 0.27 0.14 1.18 1.03 ECL provisions by geography 853 289 937 2,079 797 1,885 143 21 2,846 4,925   - UK 469 287 925 1,681 678 1,482 86 15 2,261 3,942   - RoI 384 2 12 398 73 187 13 2 275 673   - Other Europe - - - - 38 97 38 1 174 174   - RoW - - - - 8 119 6 3 136 136 ECL provisions by stage  853 289 937 2,079 797 1,885 143 21 2,846 4,925   - Stage 1 43 47 62 152 93 149 21 18 281 433   - Stage 2 249 183 354 786 313 1,085 115 1 1,514 2,300   - Stage 3 561 59 521 1,141 391 651 7 2 1,051 2,192   - Of which: individual 19 - 10 29 222 304 3 2 531 560   - Of which: collective 542 59 511 1,112 169 347 4 - 520 1,632 ECL provisions coverage (%) 0.43 7.75 10.11 0.99 2.22 2.54 0.29 0.36 1.72 1.31   - Stage 1 (%) 0.02 1.83 1.02 0.08 0.33 0.30 0.04 0.32 0.22 0.14   - Stage 2 (%) 1.49 16.90 13.72 3.85 4.62 4.62 4.87 0.65 4.62 4.32   - Stage 3 (%) 24.10 71.95 84.17 37.67 37.10 40.84 41.18 22.22 39.30 38.44 ECL (release)/charge (53) (17) (2) (72) (195) (465) 22 3 (635) (707)   - UK (40) (17) (3) (60) (224) (373) 28 2 (567) (627)   - RoI (13) - 1 (12) 40 (49) 9 1 1 (11)   - Other Europe - - - - (20) (10) (8) - (38) (38)   - RoW - - - - 9 (33) (7) - (31) (31) ECL loss rate (%) (0.05) (0.91) (0.04) (0.07) (1.09) (1.25) 0.09 0.10 (0.77) (0.38) Amounts written-off  74 45 89 208 120 187 2 - 309 517 *Not within the scope of EY's review report. For the notes to this table refer to page 38.

 

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Sector analysis - portfolio summary

Personal Wholesale Total Credit Other Mortgages (1) cards personal Total Property Corporate FI Sovereign Total 30 June 2021 £m £m £m £m £m £m £m £m £m £m Loans by residual maturity 196,708 3,727 9,264 209,699 35,941 74,122 50,072 5,758 165,893 375,592  - <1 year  3,761 2,420 3,080 9,261 9,876 22,159 39,865 2,713 74,613 83,874  - 1-5 year 12,075 1,307 5,286 18,668 17,145 35,795 9,147 1,714 63,801 82,469  - 5 year 180,872 - 898 181,770 8,920 16,168 1,060 1,331 27,479 209,249 Other financial assets by asset quality (4) - - - - 93 12 10,764 189,412 200,281 200,281   - AQ1-AQ4 - - - - - 12 10,263 189,375 199,650 199,650   - AQ5-AQ8 - - - - 93 - 501 37 631 631 Off-balance sheet 12,825 14,470 10,251 37,546 17,591 55,538 15,585 1,358 90,072 127,618   - Loan commitments 12,822 14,470 10,212 37,504 17,083 52,626 14,659 1,356 85,724 123,228   - Financial guarantees 3 - 39 42 508 2,912 926 2 4,348 4,390 Off-balance sheet by asset quality (4) 12,825 14,470 10,251 37,546 17,591 55,538 15,585 1,358 90,072 127,618   - AQ1-AQ4 12,021 185 8,514 20,720 13,130 30,984 14,148 1,212 59,474 80,194   - AQ5-AQ8 795 13,991 1,718 16,504 4,368 24,071 1,434 146 30,019 46,523   - AQ9  - 9 7 16 8 38 - - 46 62   - AQ10 9 285 12 306 85 445 3 - 533 839 For the notes to this table refer to page 38.

 

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Sector analysis - portfolio summary

Personal Wholesale Total Credit Other Mortgages (1) cards personal Total Property Corporate FI Sovereign Total 31 December 2020 £m £m £m £m £m £m £m £m £m £m Loans by geography 190,516 3,895 9,777 204,188 38,076 77,533 47,643 4,959 168,211 372,399  - UK 176,866 3,816 9,580 190,262 35,617 65,968 34,847 3,776 140,208 330,470  - RoI 13,650 79 197 13,926 1,241 4,056 348 30 5,675 19,601  - Other Europe - - - - 772 4,132 4,535 538 9,977 9,977  - RoW - - - - 446 3,377 7,913 615 12,351 12,351 Loans by stage 190,516 3,895 9,777 204,188 38,076 77,533 47,643 4,959 168,211 372,399  - Stage 1 158,387 2,411 5,750 166,548 23,733 48,090 44,002 4,751 120,576 287,124  - Stage 2 29,571 1,375 3,406 34,352 13,021 27,716 3,624 204 44,565 78,917  - Stage 3 2,558 109 621 3,288 1,322 1,727 17 4 3,070 6,358  - Of which: individual 308 - 26 334 987 958 9 4 1,958 2,292  - Of which: collective 2,250 109 595 2,954 335 769 8 - 1,112 4,066 Loans - past due analysis (2,3) 190,516 3,895 9,777 204,188 38,076 77,533 47,643 4,959 168,211 372,399  - Not past due 186,592 3,770 8,868 199,230 36,818 75,690 47,195 4,689 164,392 363,622  - Past due 1-30 days 1,482 29 192 1,703 348 990 328 270 1,936 3,639  - Past due 30-90 days 863 26 135 1,024 260 251 113 - 624 1,648  - Past due 90-180 days 456 20 66 542 161 67 - - 228 770  - Past due >180 days 1,123 50 516 1,689 489 535 7 - 1,031 2,720 Loans - Stage 2 29,571 1,375 3,406 34,352 13,021 27,716 3,624 204 44,565 78,917  - Not past due 27,893 1,340 3,115 32,348 12,708 27,036 3,484 204 43,432 75,780  - Past due 1-30 days 1,038 18 173 1,229 160 457 30 - 647 1,876  - Past due 30-90 days 640 17 118 775 153 223 110 - 486 1,261 Weighted average life*   - ECL measurement (years) 9 2 5 6 4 6 4 - 5 5 Weighted average 12 months PDs*   - IFRS 9 (%) 0.72 6.17 4.82 1.03 3.99 3.70 0.51 0.13 2.73 1.81   - Basel (%) 0.85 3.40 3.82 1.03 1.66 2.51 0.32 0.15 1.54 1.25 ECL provisions by geography 1,005 354 1,036 2,395 1,175 2,478 121 17 3,791 6,186   - UK 506 351 1,024 1,881 1,069 1,907 60 12 3,048 4,929   - RoI 499 3 12 514 41 277 3 1 322 836   - Other Europe - - - - 53 125 46 1 225 225   - RoW - - - - 12 169 12 3 196 196 ECL provisions by stage  1,005 354 1,036 2,395 1,175 2,478 121 17 3,791 6,186   - Stage 1 51 53 67 171 123 188 23 14 348 519   - Stage 2 319 225 452 996 507 1,487 90 1 2,085 3,081   - Stage 3 635 76 517 1,228 545 803 8 2 1,358 2,586   - Of which: individual 18 - 12 30 360 436 3 2 801 831   - Of which: collective 617 76 505 1,198 185 367 5 - 557 1,755 ECL provisions coverage (%) 0.53 9.09 10.60 1.17 3.09 3.20 0.25 0.34 2.25 1.66   - Stage 1 (%) 0.03 2.20 1.17 0.10 0.52 0.39 0.05 0.29 0.29 0.18   - Stage 2 (%) 1.08 16.36 13.27 2.90 3.89 5.37 2.48 0.49 4.68 3.90   - Stage 3 (%) 24.82 69.72 83.25 37.35 41.23 46.50 47.06 50.00 44.23 40.67 Half year ended 30 June 2020 ECL charge 243 164 370 777 568 1,439 73 1 2,081 2,858   - UK 136 163 358 657 501 1,238 26 1 1,766 2,423   - RoI 107 1 12 120 47 77 1 - 125 245   - Other Europe - - - - 16 50 36 - 102 102   - RoW - - - - 4 74 10 - 88 88 ECL loss rate (%) 0.27 8.59 7.40 0.79 2.81 3.52 0.34 0.02 2.38 1.54 Amounts written-off  169 49 63 281 21 104 2 - 127 408 *Not within the scope of EY's review report. For the notes to this table refer to the following page.

 

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Sector analysis - portfolio summary

Personal Wholesale Total Credit Other Mortgages (1) cards personal Total Property Corporate FI Sovereign Total 31 December 2020 £m £m £m £m £m £m £m £m £m £m Loans by residual maturity 190,516 3,895 9,777 204,188 38,076 77,533 47,643 4,959 168,211 372,399  - <1 year  3,831 2,557 3,249 9,637 8,669 23,015 38,203 2,196 72,083 81,720  - 1-5 year 12,193 1,338 5,509 19,040 20,029 36,640 8,340 1,590 66,599 85,639  - 5 year 174,492 - 1,019 175,511 9,378 17,878 1,100 1,173 29,529 205,040 Other financial assets by asset quality (4) - - - - 98 116 11,093 165,209 176,516 176,516   - AQ1-AQ4 - - - - - 116 10,734 165,184 176,034 176,034   - AQ5-AQ8 - - - - 98 - 359 25 482 482 Off-balance sheet 14,557 14,262 10,186 39,005 17,397 58,635 17,011 1,587 94,630 133,635   - Loan commitments 14,554 14,262 10,144 38,960 16,829 55,496 15,935 1,585 89,845 128,805   - Financial guarantees 3 - 42 45 568 3,139 1,076 2 4,785 4,830 Off-balance sheet by asset quality (4) 14,557 14,262 10,186 39,005 17,397 58,635 17,011 1,587 94,630 133,635   - AQ1-AQ4 13,610 148 8,008 21,766 12,917 33,939 15,460 1,404 63,720 85,486   - AQ5-AQ8 937 13,809 2,152 16,898 4,372 24,065 1,544 183 30,164 47,062   - AQ9  1 8 9 18 13 76 1 - 90 108   - AQ10 9 297 17 323 95 555 6 - 656 979 Notes: (1) Includes a portion of secured lending in Private Banking, in line with ECL calculation methodology. Private Banking and RBS International mortgages are reported in UK, which includes crown dependencies, reflecting the country of lending origination. (2) 30 DPD - 30 days past due, the mandatory 30 days past due backstop as prescribed by the IFRS 9 guidance for a SICR. (3) Days past due - Personal products: at a high level, for amortising products, the number of days past due is derived from the arrears amount outstanding and the monthly repayment instalment. For credit cards, it is based on payments missed, and for current accounts the number of continual days in excess of borrowing limit. Wholesale products: the number of days past due for all products is the number of continual days in excess of borrowing limit. (4) AQ bandings are based on Basel PDs and the 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 £0.3 billion (31 December 2020 - £0.3 billion) of AQ10 Personal balances primarily relate to loan commitments, the drawdown of which is effectively prohibited. AQ10 includes £0.3 billion (31 December 2020 - £0.4 billion) of RoI mortgages which are not currently considered defaulted for capital calculation purposes for RoI but are included in Stage 3.

 

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Sector analysis - COVID-19 impact The table below shows ECL, by stage, for the Personal portfolio and key sectors of the Wholesale portfolio, that continue to be affected by COVID-19. Off-balance sheet Loans - amortised cost & FVOCI Loan Contingent ECL provisions  Stage 1 Stage 2 Stage 3 Total commitments liabilities Stage 1 Stage 2 Stage 3 Total 30 June 2021 £m £m £m £m £m £m £m £m £m £m Personal 186,256 20,414 3,029 209,699 37,504 42 152 786 1,141 2,079  Mortgages 177,630 16,750 2,328 196,708 12,822 3 43 249 561 853  Credit cards 2,562 1,083 82 3,727 14,470 - 47 183 59 289  Other personal 6,064 2,581 619 9,264 10,212 39 62 354 521 937 Wholesale 130,445 32,774 2,674 165,893 85,724 4,348 281 1,514 1,051 2,846  Property 28,105 6,782 1,054 35,941 17,083 508 93 313 391 797  Financial institutions 47,694 2,361 17 50,072 14,659 926 21 115 7 143  Sovereign 5,596 153 9 5,758 1,356 2 18 1 2 21  Corporate 49,050 23,478 1,594 74,122 52,626 2,912 149 1,085 651 1,885  Of which:  Airlines and aerospace  635 1,017 60 1,712 1,805 209 2 33 27 62  Automotive 4,214 1,617 201 6,032 3,897 98 15 60 14 89  Education 864 616 68 1,548 1,144 17 2 22 18 42  Health 3,136 2,276 123 5,535 650 12 12 116 47 175  Land transport and logistics 3,131 1,578 53 4,762 3,061 170 7 83 30 120  Leisure 3,264 5,578 305 9,147 2,106 123 15 323 142 480  Oil and gas 1,005 415 60 1,480 1,663 339 3 11 31 45  Retail 6,133 2,303 191 8,627 5,339 468 13 112 80 205 Total 316,701 53,188 5,703 375,592 123,228 4,390 433 2,300 2,192 4,925 31 December 2020 Personal 166,548 34,352 3,288 204,188 38,960 45 171 996 1,228 2,395  Mortgages 158,387 29,571 2,558 190,516 14,554 3 51 319 635 1,005  Credit cards 2,411 1,375 109 3,895 14,262 - 53 225 76 354  Other personal 5,750 3,406 621 9,777 10,144 42 67 452 517 1,036 Wholesale 120,576 44,565 3,070 168,211 89,845 4,785 348 2,085 1,358 3,791  Property 23,733 13,021 1,322 38,076 16,829 568 123 507 545 1,175  Financial institutions 44,002 3,624 17 47,643 15,935 1,076 23 90 8 121  Sovereign 4,751 204 4 4,959 1,585 2 14 1 2 17  Corporate 48,090 27,716 1,727 77,533 55,496 3,139 188 1,487 803 2,478  Of which:  Airlines and aerospace 753 1,213 41 2,007 1,888 215 2 42 25 69  Automotive 4,383 1,759 161 6,303 4,205 102 17 63 17 97  Education 821 754 63 1,638 1,016 16 2 41 17 60  Health 2,694 2,984 131 5,809 616 14 13 164 48 225  Land transport and logistics 2,868 1,823 111 4,802 3,782 197 8 98 32 138  Leisure 3,299 6,135 385 9,819 2,199 125 22 439 204 665  Oil and gas 1,178 300 83 1,561 2,225 346 4 20 59 83  Retail 6,702 2,282 187 9,171 5,888 512 18 112 101 231 Total 287,124 78,917 6,358 372,399 128,805 4,830 519 3,081 2,586 6,186

 

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Sector analysis - COVID-19 impact The table below shows ECL, by stage, for the Personal portfolio and key sectors of the Wholesale portfolio, that continue to be affected by COVID-19. It also includes 2019 data to allow a pre-COVID19 comparison. ECL provisions 30 June 2021  31 December 2020  31 December 2019  Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total £m £m £m £m £m £m £m £m £m £m £m £m Personal 152 786 1,141 2,079 171 996 1,228 2,395 130 503 1,449 2,082 Mortgages 43 249 561 853 51 319 635 1,005 25 118 821 964 Cards 47 183 59 289 53 225 76 354 40 132 89 261 Other Personal 62 354 521 937 67 452 517 1,036 65 253 539 857 Wholesale 281 1,514 1,051 2,846 348 2,085 1,358 3,791 192 249 1,269 1,710 Property 93 313 391 797 123 507 545 1,175 45 47 402 494 Financial institutions 21 115 7 143 23 90 8 121 16 4 8 28 Sovereigns 18 1 2 21 14 1 2 17 7 - - 7 Corporate 149 1,085 651 1,885 188 1,487 803 2,478 124 198 859 1,181 Of which: Airlines and aerospace (1) 2 33 27 62 2 42 25 69 2 3 55 60 Automotive 15 60 14 89 17 63 17 97 12 11 15 38 Education 2 22 18 42 2 41 17 60 2 4 1 7 Health 12 116 47 175 13 164 48 225 9 16 52 77 Land transport & logistics 7 83 30 120 8 98 32 138 6 12 21 39 Leisure 15 323 142 480 22 439 204 665 25 27 175 227 Oil and gas 3 11 31 45 4 20 59 83 5 3 55 63 Retail 13 112 80 205 18 112 101 231 13 16 180 209 Total 433 2,300 2,192 4,925 519 3,081 2,586 6,186 322 752 2,718 3,792 The table below shows ECL provisions coverage, by stage, for the Personal portfolio and key sectors of the Wholesale portfolio, that continue to be affected by COVID-19. It also includes 2019 data to allow a pre-COVID19 comparison. ECL provisions coverage 30 June 2021  31 December 2020  31 December 2019  Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total % % % % % % % % % % % % Personal 0.08 3.85 37.67 0.99 0.10 2.90 37.35 1.17 0.08 3.35 35.90 1.10 Mortgages 0.02 1.49 24.10 0.43 0.03 1.08 24.82 0.53 0.02 1.03 25.05 0.55 Cards 1.83 16.90 71.95 7.75 2.20 16.36 69.72 9.09 1.29 10.48 76.72 5.83 Other Personal 1.02 13.72 84.17 10.11 1.17 13.27 83.25 10.60 0.87 10.95 83.83 8.25 Wholesale 0.22 4.62 39.30 1.72 0.29 4.68 44.23 2.25 0.14 1.94 49.53 1.16 Property 0.33 4.62 37.10 2.22 0.52 3.89 41.23 3.09 0.14 1.82 44.92 1.36 Financial institutions 0.04 4.87 41.18 0.29 0.05 2.48 47.06 0.25 0.04 0.73 61.54 0.08 Sovereigns 0.32 0.65 22.22 0.36 0.29 0.49 50.00 0.34 0.16 - - 0.16 Corporate 0.30 4.62 40.84 2.54 0.39 5.37 46.50 3.20 0.21 2.04 52.09 1.66 Of which: Airlines and aerospace 0.31 3.24 45.00 3.62 0.27 3.46 60.98 3.44 0.14 1.15 137.50 3.50 Automotive 0.36 3.71 6.97 1.48 0.39 3.58 10.56 1.54 0.24 0.96 75.00 0.61 Education 0.23 3.57 26.47 2.71 0.24 5.44 26.98 3.66 0.14 2.60 8.33 0.44 Health 0.38 5.10 38.21 3.16 0.48 5.50 36.64 3.87 0.19 1.90 31.14 1.35 Land transport & logistics 0.22 5.26 56.60 2.52 0.28 5.38 28.83 2.87 0.17 3.80 39.62 1.01 Leisure 0.46 5.79 46.56 5.25 0.67 7.16 52.99 6.77 0.40 2.15 46.42 2.85 Oil and gas 0.30 2.65 51.67 3.04 0.34 6.67 71.08 5.32 0.26 2.14 63.95 2.93 Retail 0.21 4.86 41.88 2.38 0.27 4.91 54.01 2.52 0.20 1.25 83.69 2.65 Total 0.14 4.32 38.44 1.31 0.18 3.90 40.67 1.66 0.11 2.70 41.19 1.13 Note: (1)  Airlines and aerospace Stage 3 ECL as at 31 December 2019 included £27 million of ECL related to contingent liabilities.

 

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Wholesale forbearance The table below shows Wholesale forbearance, Heightened Monitoring and Risk of Credit Loss by sector. Personal forbearance is disclosed on page 43. The exposure in this section is based on current exposure gross of provisions but reflecting risk transfer where exposure is guaranteed by a third party. Current exposure is defined as: loans; the amount drawn under a credit facility plus accrued interest; contingent obligations; the issued amount of the guarantee or letter of credit; derivatives - the mark-to-market value; netted where netting agreements exist and net of legally enforceable collateral. Where exposure is guaranteed by a third party not in forbearance, heightened monitoring, or risk of credit loss it will not feature in the table. Property FI Other corporate Total 30 June 2021 £m £m £m £m Forbearance (flow) 974 41 3,290 4,305 Forbearance (stock) 1,466 60 5,868 7,394 Heightened Monitoring and Risk of Credit Loss 1,542 206 5,816 7,564 31 December 2020 Forbearance (flow) 1,597 68 4,201 5,866 Forbearance (stock) 1,744 92 4,983 6,819 Heightened Monitoring and Risk of Credit Loss 1,600 155 5,771 7,526

Key points ● Loans by geography - In Personal, exposures continued to be concentrated in the UK and heavily weighted to mortgages and the vast majority of exposures in the Republic of Ireland remained in mortgages. Balance sheet growth since the 2020 year end was mainly in mortgages. Unsecured lending balances reduced in H1 2021 as noted previously. In Wholesale, exposures were mainly in the UK. Balance sheet reduction was primarily due to lower levels of business activity in the period. ● Loans by asset quality (based on Basel II PD) - In Personal, asset quality improved from the 2020 year end, supported by actions taken at the outset of COVID-19 to maintain credit quality. In Wholesale, Basel II PDs were based on a through-the-cycle approach. The asset quality distribution demonstrated mild improvements across the portfolio consistent with the improvement in the economic outlook for the UK since 31 December 2020. For further details refer to the Asset quality section. ● Loans by stage - In both Wholesale and Personal, the improved economic outlook resulted in reduced IFRS 9 PDs compared to the 2020 year end. This, alongside continued benign credit performance of the portfolio, resulted in a smaller proportion of accounts to exhibit a SICR and thereby an associated migration of exposures from Stage 2 to Stage 1. In the absence of any other forbearance or SICR triggers, customers granted COVID-19 related payment holidays were not considered forborne and did not result in an automatic trigger to Stage 2. However, a subset of Personal customers who had accessed payment holiday support, and where their risk profile was identified as relatively high, continued to be collectively migrated to Stage 2. In Wholesale, BBLS customers granted PAYG options, including the extension of lending terms, periods of reduced repayments and six month payment holidays, were not automatically considered significantly credit deteriorated. PAYG options are a feature of BBLS rather than a concession granted by NatWest Group. ● Loans - past due analysis and Stage 2 - The various COVID-19 related customer support mechanisms (capital repayment holidays, government job retention scheme, government supported lending schemes) are mitigating actual portfolio deterioration in the short term, although there have been some increases in past due exposures. ● Weighted average PDs - In Personal, the Basel II point-in-time PDs improved during H1 2021. The forward-looking IFRS 9 PDs reduced reflecting the improved economics. PD reductions were most evident in Personal mortgages due to benign arrears performance (catalysed by COVID-19 support mechanisms) combined with the improved economic outlook, which is connected to the need for collective SICR migration and judgemental post model adjustments. In Wholesale, the Basel II PDs were based on a through-the-cycle approach and decreased less than the forward-looking IFRS 9 PDs which reduced, reflecting the improved economic outlook. ● ECL provisions by geography - In line with the point relating to loans by geography above, the vast majority of ECL related to exposures in the UK and the Republic of Ireland. ● ECL provisions by stage - Stage 1 and Stage 2 provisions have reduced reflecting the improved economic outlook. As outlined above, Stage 3 provisions have yet to be materially affected, mitigated by the various customer support mechanisms noted previously. In Ulster Bank RoI, the Stage 3 ECL reduction was mainly due to a debt sale where the exposure value also reduced. ● ECL provisions coverage - Overall provisions coverage reduced, mainly due to the improvement in economic outlook and scenario weightings. The base economic scenario improved compared with H2 2020 reflecting the faster than expected vaccination roll-out, better than expected actual economic data and the persisting strong government support. Stage 2 coverage increased during the period for some Wholesale sectors due to the inclusion of the recovery risk overlay and lower Stage 2 balances. ● ECL charge and loss rate - Reflecting the improved economic outlook, the impairment charge was significantly lower, with the annualised loss rate for H1 2021 materially reduced compared with the 2020 year end.

 

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Key points ● Loans by residual maturity - In mortgages, the vast majority of exposures remained greater than five years. In unsecured lending - cards and other - exposures were concentrated in less than five years. In Wholesale, with the exception of financial institutions where new lending was concentrated in less than one year, the majority of new lending was for residual maturity of one to five years, with some greater than five years in line with lending under the government support schemes. ● Other financial assets by asset quality - Consisting almost entirely of cash and balances at central banks and debt securities, held in the course of treasury related management activities, these assets were mainly within the AQ1-AQ4 bands. ● Off-balance sheet by asset quality - In Personal, undrawn exposures were reflective of available credit lines in credit cards and current accounts and they increased slightly as drawn exposures reduced. 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 a reduction in 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 distribution in mortgages remained heavily weighted to the highest quality bands AQ1-AQ4, with credit cards and other Personal concentrated in the AQ5-AQ8 bands.In Wholesale, undrawn exposures declined in line with muted credit demand, with customers repaying revolving credit and working capital facilities to optimise liquidity. In addition, sector appetite adjustments in Land Transport and Logistics, Oil & Gas and Retail reduced off-balance sheet exposures to these sectors. ● Wholesale forbearance - Customers seeking COVID-19 related support, including payment holidays, who were not subject to any wider SICR triggers and who were assessed as having the ability in the medium term post-COVID-19 to be viable and meet credit appetite metrics, were not considered to have been granted forbearance. Customers seeking a payment holiday extension beyond an aggregate of 12 months in an 18 month period are considered to have been granted forbearance and are classed as heightened monitoring. This classification does not apply to customers with Bounce Back Loans taking a PAYG payment holiday option. For Wholesale, forbearance flow increased in the first half of 2021 compared to the second half of 2020. This was mainly related to a small number of large value customers. Volumes of completed forbearance were lower. The Leisure sector represented the largest share of forbearance flow in the half year due to ongoing restrictions, followed by the Property and Land Transport & Logistics sectors. Payment holidays and covenant waivers were the most common forms of forbearance granted. ● Heightened Monitoring and Risk of Credit Loss - Inflows reduced during H1 2021 compared to the first half of 2020. The reduction in value was mainly due to a small number of high value customers as, by volume, inflows and outflows were closely matched. Whilst noting the reduced flows into Heightened Monitoring and Risk of Credit Loss, the volume and value of cases remained significantly higher than pre-COVID-19 levels. The sector breakdown of exposures remained consistent with prior periods.

 

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Personal portfolio Disclosures in the Personal portfolio section include drawn exposure (gross of provisions). 30 June 2021 31 December 2020 Retail Private RBS Ulster Retail Private RBS Ulster Banking Banking International Bank RoI Total Banking Banking International Bank RoI Total Personal lending £m £m £m £m £m £m £m £m £m £m Mortgages 169,300 11,838 2,508 12,688 196,334 163,107 10,910 2,517 13,678 190,212 Of which:  Owner occupied 155,136 10,469 1,645 11,887 179,137 148,614 9,601 1,676 12,781 172,672  Buy-to-let 14,164 1,369 863 801 17,197 14,493 1,309 841 897 17,540  Interest only - variable 4,534 4,575 357 151 9,617 5,135 4,375 347 159 10,016  Interest only - fixed 13,729 5,337 225 10 19,301 13,776 4,758 233 10 18,777  Mixed (1) 8,039 1 18 43 8,101 7,321 1 20 56 7,398  Impairment provisions (2) 445 5 8 384 842 483 5 9 499 996 Other personal lending (3) 10,542 1,722 280 238 12,782 11,116 1,613 279 276 13,284 Impairment provisions (2) 1,188 17 3 14 1,222 1,348 20 1 15 1,384 Total personal lending 179,842 13,560 2,788 12,926 209,116 174,223 12,523 2,796 13,954 203,496 Mortgage LTV ratios  Total portfolio 55% 59% 57% 56% 55% 56% 58% 57% 59% 57%  - Stage 1 55% 59% 56% 55% 55% 55% 58% 57% 57% 55%  - Stage 2 58% 58% 62% 61% 58% 66% 61% 64% 65% 66%  - Stage 3 50% 65% 76% 62% 56% 53% 64% 75% 67% 60%  Buy-to-let 51% 57% 53% 56% 52% 52% 56% 53% 59% 53%  - Stage 1 51% 57% 53% 53% 52% 51% 56% 53% 55% 52%  - Stage 2 54% 56% 50% 65% 55% 60% 59% 53% 69% 61%  - Stage 3 53% 57% 59% 69% 59% 56% 54% 61% 74% 62% Gross new mortgage lending (4) 18,862 1,692 197 338 21,089 30,551 2,148 249 910 33,858 Of which: Owner occupied  18,289 1,528 111 335 20,263 29,608 1,922 167 908 32,605 Weighted average LTV 69% 67% 67% 73% 68% 69% 66% 66% 74% 69% Buy-to-let 573 164 86 3 826 943 227 82 2 1,254 Weighted average LTV 63% 65% 63% 58% 63% 62% 62% 63% 54% 62% Interest only - variable rate 15 551 - - 566 81 1,082 7 - 1,170 Interest only - fixed rate 984 826 45 - 1,855 1,501 695 35 - 2,231 Mixed (1) 1,193 - 1 - 1,194 1,630 - 2 - 1,632 Forbearance flow 284 7 4 40 335 550 50 10 127 737 Forbearance stock 1,273 3 10 1,326 2,612 1,293 18 10 1,627 2,948   Current 651 1 6 939 1,597 648 13 9 1,070 1,740   1-3 months in arrears 292 2 1 70 365 360 3 - 105 468   > 3 months in arrears 330 - 3 317 650 285 2 1 452 740 Notes: (1)  Includes accounts which have an interest only sub-account and a capital and interest sub-account to provide a more comprehensive view of interest only exposures. (2)  Retail Banking excludes a non-material amount of provisions held on relatively small legacy portfolios. (3)  Comprises unsecured lending except for Private Banking, which includes both secured and unsecured lending. It excludes loans that are commercial in nature. (4)  Retail Banking excludes additional lending to existing customers. Key points ● New mortgage lending in H1 2021 reflected a strong demand in lending, particularly in property purchases, following the easing of COVID-19 restrictions and the extension of the stamp duty holiday. The existing mortgage stock and new business were closely monitored against agreed parameters. These included loan-to-value ratios, buy-to-let concentrations, new-build concentrations and credit quality. ● Unsecured balances fell slightly during H1 2021 as COVID-19 restrictions persisted, however, later in H1 2021, the value of new business began to increase as restrictions started to ease.  ● Across both mortgages and unsecured products, NatWest Group responded to COVID-19 with a more cautious approach to new lending, to protect both NatWest Group and customers from potentially unaffordable borrowing. With growing consumer confidence and improved economic conditions, lending criteria have been selectively relaxed during H1 2021 taking into account observed portfolio performance. ● At the end of the half year, the value and volume of customers with an active COVID-19 payment holiday was immaterial across both the mortgages and unsecured portfolios. ● Impairment provisions - as noted previously, the improved economic outlook including a more positive forecast on unemployment and house prices, resulted in reduced ECL. ● Mortgage forbearance stock in Retail Banking remained stable, with inflows to collections and recoveries below pre-COVID-19 levels during H1 2021, as customers who would have been supported through forbearance previously, were able to utilise COVID-19 payment holidays. With new payment holidays no longer available from 31 March 2021, customers are being supported through forbearance where appropriate. ● The reduction in Ulster Bank RoI forbearance stock was mainly due to an asset sale executed during the period as well as forbearance exits and closures outweighing new forbearance flows.

 

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Personal portfolio Mortgage LTV distribution by stage The table below shows gross mortgage lending and related ECL by LTV band. Mortgage lending not within the scope of IFRS 9 ECL reflected portfolios carried at fair value. Mortgages ECL provisions ECL provisions coverage (2) Retail Banking Not within Of which: IFRS 9 gross new Stage 1 Stage 2 Stage 3 ECL scope Total lending Stage 1 Stage 2 Stage 3 Total (1) Stage 1 Stage 2 Stage 3 Total 30 June 2021 £m £m £m £m £m £m £m £m £m £m % % % % ≤50% 54,791 4,808 604 66 60,269 2,493 4 60 129 193  -  1.2 21.4 0.3 >50% and ≤70% 63,017 5,772 509 13 69,311 5,105 6 74 89 169  -  1.3 17.6 0.2 >70% and ≤80% 27,713 2,869 121 1 30,704 7,544 6 31 21 58  -  1.1 17.1 0.2 >80% and ≤90% 6,854 1,581 35 1 8,471 3,565 2 14 6 22  -  0.9 18.0 0.3 >90% and ≤100% 474 22 5 - 501 29 - - 1 1  -  1.5 27.3 0.3 >100% and ≤110% 4 6 1 - 11 - - - - -  -  2.9 32.0 5.0 >110% and ≤130% 4 4 1 - 9 - - - - -  -  4.4 32.0 4.0 >130% and ≤150% 3 2 - - 5 - - - - -  -  2.1 45.2 4.3 Total with LTVs 152,860 15,064 1,276 81 169,281 18,736 18 179 246 443  -  1.2 19.4 0.3 Other 16 2 1 - 19 126 - - 1 1 0.1 8.5 100.0 6.0 Total 152,876 15,066 1,277 81 169,300 18,862 18 179 247 444  -  1.2 19.5 0.3 31 December 2020 ≤50% 50,170 5,009 554 124 55,857 4,207 4 43 107 154 - 0.8 19.4 0.3 >50% and ≤70% 55,263 7,416 488 35 63,202 9,083 7 66 81 154 - 0.9 16.5 0.2 >70% and ≤80% 19,994 9,555 141 8 29,698 11,060 7 56 26 89 - 0.6 18.5 0.3 >80% and ≤90% 8,029 5,552 52 6 13,639 5,175 3 52 11 66 - 0.9 20.3 0.5 >90% and ≤100% 368 137 13 2 520 865 - 5 3 8 0.1 3.4 26.8 1.6 >100% and ≤110% 19 31 6 1 57 - - 2 1 3 0.1 6.2 22.1 5.6 >110% and ≤130% 23 45 6 1 75 - - 3 2 5 0.3 7.6 31.1 7.3 >130% and ≤150% 5 20 5 - 30 - - 1 1 2 - 7.2 23.0 8.5 >150% 1 3 3 - 7 - - - 1 1 0.1 9.4 44.4 22.6 Total with LTVs 133,872 27,768 1,268 177 163,085 30,390 21 228 233 482 - 0.8 18.5 0.3 Other 17 4 1 - 22 161 - - 1 1 0.1 3.6 71.9 3.3 Total 133,889 27,772 1,269 177 163,107 30,551 21 228 234 483 - 0.8 18.5 0.3 For the notes to this table refer to the following page.

 

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Personal portfolio  Mortgages ECL provisions ECL provisions coverage (2) Ulster Bank RoI Of which: gross new Stage 1 Stage 2 Stage 3 Total lending Stage 1 Stage 2 Stage 3 Total (1) Stage 1 Stage 2 Stage 3 Total 30 June 2021 £m £m £m £m £m £m £m £m £m % % % % ≤50% 4,266 429 306 5,001 33 9 22 118 149 0.2 5.0 38.7 3.0 >50% and ≤70% 3,435 375 163 3,973 81 8 20 55 83 0.2 5.3 34.1 2.1 >70% and ≤80% 1,521 172 81 1,774 146 3 9 31 43 0.2 5.5 37.8 2.4 >80% and ≤90% 1,060 131 67 1,258 76 2 8 25 35 0.2 5.6 38.3 2.8 >90% and ≤100% 240 81 58 379 - 1 5 23 29 0.3 6.0 40.0 7.6 >100% and ≤110% 87 50 41 178 1 - 3 18 21 0.3 6.4 43.1 11.8 >110% and ≤130% 37 30 28 95 - - 2 14 16 0.4 7.4 47.1 16.5 >130% and ≤150% 4 3 11 18 - - - 5 5 0.4 7.8 50.1 31.2 >150% 6 2 4 12 1 - - 3 3 0.4 8.0 62.6 23.0 Total 10,656 1,273 759 12,688 338 23 69 292 384 0.2 5.4 38.5 3.0 31 December 2020 ≤50% 4,156 504 354 5,014 78 10 24 105 139 0.2 4.8 29.7 2.8 >50% and ≤70% 3,453 453 230 4,136 194 8 23 66 97 0.2 5.1 28.7 2.3 >70% and ≤80% 1,569 232 114 1,915 346 4 12 40 56 0.3 5.2 35.1 2.9 >80% and ≤90% 1,214 190 105 1,509 286 3 11 40 54 0.2 5.8 38.1 3.6 >90% and ≤100% 372 145 88 605 1 1 9 40 50 0.3 6.2 45.5 8.3 >100% and ≤110% 119 76 74 269 4 1 5 37 43 0.8 6.6 50.0 16.0 >110% and ≤130% 53 63 64 180 1 - 5 35 40 - 7.9 54.7 22.2 >130% and ≤150% 6 8 17 31 - - 1 10 11 - 12.5 58.8 35.5 >150% 5 4 10 19 - - 1 8 9 - 25.0 80.0 47.4 Total with LTVs 10,947 1,675 1,056 13,678 910 27 91 381 499 0.2 5.4 36.1 3.6 Notes: (1) Excludes a non-material amount of provisions held on relatively small legacy portfolios. (2) ECL provisions coverage is ECL provisions divided by mortgages. Key points ● Within the Retail Banking portfolio, LTV distribution improved with strong house price growth in the UK in the first half of the year and the more cautious approach to LTV for new lending, adopted in response to COVID-19, which has seen a reduction in exposure to higher LTV bands. ● ECL coverage rates increased through the LTV bands with both Retail Banking and Ulster Bank RoI having only limited exposures in the highest LTV bands. The relatively high coverage level in the lowest LTV band for Retail Banking included the effect of time-discounting on expected recoveries. Additionally, this also reflected the modelling approach that recognised an element of expected loss on mortgages that are not subject to formal repossession activity.

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Commercial real estate (CRE)

The CRE portfolio comprises exposures to entities involved in the development of, or investment in, commercial and residential properties (including house builders but excluding housing associations, construction and the building materials sub-sector). The sector is reviewed regularly by senior executive committees. Reviews include portfolio credit quality, capital consumption and control frameworks. All disclosures in the CRE section are based on current exposure (gross of provisions and risk transfer). Current exposure is defined as: loans; the amount drawn under a credit facility plus accrued interest; contingent obligations; the issued amount of the guarantee or letter of credit; derivatives - the mark-to-market value; netted where netting agreements exist and net of legally enforceable collateral.

	30 June 2021					31 December 2020
	UK	RoI	Other	Total		UK	RoI	Other	Total
By geography and sub sector  (1)	£m	£m	£m	£m		£m	£m	£m	£m
Investment
Residential  (2)	4,360	372	20	4,752		4,507	360	14	4,881
Office  (3)	3,152	210	35	3,397		3,386	226	28	3,640
Retail  (4)	4,903	78	87	5,068		5,423	68	118	5,609
Industrial  (5)	2,604	14	154	2,772		2,773	18	202	2,993
Mixed/other  (6)	2,101	131	80	2,312		2,688	154	74	2,916
	17,120	805	376	18,301		18,777	826	436	20,039
Development
Residential  (2)	2,151	103	2	2,256		2,685	200	3	2,888
Office  (3)	83	31	-	114		123	30	-	153
Retail  (4)	64	-	-	64		126	-	-	126
Industrial  (5)	100	1	-	101		125	2	-	127
Mixed/other  (6)	24	2	-	26		24	2	-	26
	2,422	137	2	2,561		3,083	234	3	3,320
Total	19,542	942	378	20,862		21,860	1,060	439	23,359

Notes:

(1)	Geographical splits are based on country of collateral risk.
(2)	Properties including houses, flats and student accommodation.
(3)	Properties including offices in central business districts, regional headquarters and business parks.
(4)	Properties including high street retail, shopping centres, restaurants, bars and gyms.
(5)	Properties including distribution centres, manufacturing and warehouses.
(6)	Properties that do not fall within the other categories above. Mixed generally relates to a mixture of retail/office with residential.

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Commercial real estate CRE LTV distribution by stage The table below shows CRE current exposure and related ECL by LTV band. Current exposure (gross of provisions) (1,2) ECL provisions ECL provisions coverage (4) Not within IFRS 9 ECL Stage 1 Stage 2 Stage 3 scope  (3) Total Stage 1 Stage 2 Stage 3 Total  (1) Stage 1 Stage 2 Stage 3 Total 30 June 2021 £m £m £m £m £m £m £m £m £m % % % % ≤50% 7,099 1,230 143  -   8,472 26 46 26 98 0.4 3.7 18.2 1.2 >50% and ≤70% 4,345 1,189 176  -   5,710 21 54 56 131 0.5 4.5 31.8 2.3 >70% and ≤80% 245 309 21  -   575 2 26 3 31 0.8 8.4 14.3 5.4 >80% and ≤90% 30 37 36  -   103 - 3 12 15  -   8.1 33.3 14.6 >90% and ≤100% 71 14 51  -   136 - 2 19 21  -   14.3 37.3 15.4 >100% and ≤110% 10 2 60  -   72 - - 7 7  -    -   11.7 9.7 >110% and ≤130% 24 23 31  -   78 - 1 10 11  -   4.3 32.3 14.1 >130% and ≤150% 7 2 8  -   17 - - 3 3  -    -   37.5 17.6 >150% 75 10 140  -   225 1 2 61 64 1.3 20.0 43.6 28.4 Total with LTVs 11,906 2,816 666 - 15,388 50 134 197 381 0.4 4.8 29.6 2.5 Total portfolio average LTV 45% 49% 101% - 47% Other  (5) 1,771 739 101 302 2,913 6 53 42 101 0.3 7.2 41.6 3.9 Development  (6) 1,699 757 91 14 2,561 16 22 53 91 0.9 2.9 58.2 3.6 Total 15,376 4,312 858 316 20,862 72 209 292 573 0.5 4.8 34.0 2.8 31 December 2020 ≤50% 4,918 4,538 138 - 9,594 46 145 24 215 0.9 3.2 17.4 2.2 >50% and ≤70% 2,815 3,266 226 - 6,307 32 112 63 207 1.1 3.4 27.9 3.3 >70% and ≤80% 39 222 23 - 284 1 17 7 25 2.6 7.7 30.4 8.8 >80% and ≤90% 84 35 36 - 155 2 4 11 17 2.4 11.4 30.6 11 >90% and ≤100% 46 26 65 - 137 - 2 33 35 - 7.7 50.8 25.5 >100% and ≤110% 6 6 63 - 75 - 1 10 11 - 16.7 15.9 14.7 >110% and ≤130% 9 22 117 - 148 - 2 45 47 - 9.1 38.5 31.8 >130% and ≤150% 12 12 10 - 34 - 1 5 6 - 8.3 50.0 17.6 >150% 23 24 105 - 152 - 2 53 55 - 8.3 50.5 36.2 Total with LTVs 7,952 8,151 783 - 16,886 81 286 251 618 1.0 3.5 32.1 3.7 Total portfolio average LTV 45% 47% 93% - 48% Other  (5) 1,776 511 159 707 3,153 6 40 93 139 0.3 7.8 58.5 5.7 Development  (6) 1,362 1,767 161 30 3,320 15 58 70 143 1.1 3.3 43.5 4.3 Total 11,090 10,429 1,103 737 23,359 102 384 414 900 0.9 3.7 37.5 4.0 Notes: (1)  Comprises gross lending, interest rate hedging derivatives and other assets carried at fair value that are managed as part of the overall CRE portfolio. (2)  The exposure in Stage 3 mainly relates to legacy assets. (3)  Includes exposures relating to non-modelled portfolios and other exposures carried at fair value, including derivatives. (4)  ECL provisions coverage is ECL provisions divided by current exposure. (5)  Relates mainly to business banking, rate risk management products and unsecured corporate lending. (6)  Relates to the development of commercial and residential properties. LTV is not a meaningful measure for this type of lending activity. Key points ● Overall - The majority of the CRE portfolio was located and managed in the UK. Business appetite and strategy remained aligned across the segments. ● 2021 trends - The reduction in the size of the portfolio was a consequence of active portfolio management to reduce the size and composition of the CRE portfolio as the economy recovers from the disruption associated with COVID-19. In addition, customer appetite to borrow was muted particularly amongst larger customers. At a sub sector level the Residential market has been resilient; the Retail sector has exhibited mixed performance in line with changing consumer habits; the Industrial market has performed strongly; with uncertainty continuing in the Office sub sector as occupiers move to a more flexible way of working, new business in the Office sub sector has been selective. ● Credit quality - Heightened Monitoring inflows by volume have been muted with overall CRE exposures on the Risk of Credit Loss Framework having reduced since the 2020 year end. NatWest Group entered the COVID-19 period with a conservatively positioned CRE portfolio, which has helped to mitigate the impact of COVID-19. However, in the Retail sub sector, structural change, which was already underway, has been exacerbated by COVID-19, and a number of defaulted loans were seen during 2020, mainly related to shopping centres, this trend has not however continued during H1 2021. Outside of Retail, there has been limited distress as noted, uncertainty still remains, particularly in relation to the Office sub sector and the portfolio continues to be actively reviewed and managed. ● Risk appetite - Lending appetite has been gradually and selectively increased by sub sector during 2021 albeit below pre-COVID-19 levels.

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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 affect. 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 to 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 debt sale activity. · There were small ECL flows from Stage 3 to Stage 1. This does not, however, indicate that accounts returned from Stage 3 to Stage 1 directly. On a similar basis, there were flows from Stage 1 to Stage 3 including transfers due to unexpected default events. The small number of write-offs in Stage 1 and Stage 2 reflect the effect of portfolio debt sales and also staging at the start of the analysis period. · The impact of any change in PMAs during the year is typically reported under changes in risk parameters, as are any impacts 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 NatWest Group total £m £m £m £m £m £m £m £m At 1 January 2021 446,666 519 81,667 3,081 6,524 2,586 534,857 6,186 Currency translation and other adjustments (3,369) (2) (302) (12) 67 (52) (3,604) (66) Transfers from Stage 1 to Stage 2 (21,925) (104) 21,925 104 - - - - Transfers from Stage 2 to Stage 1 36,688 712 (36,688) (712) - - - - Transfers to Stage 3 (256) (1) (1,211) (165) 1,467 166 - - Transfers from Stage 3 155 13 654 107 (809) (120) - - Net re-measurement of ECL on stage transfer (585) 524 154 93 Changes in risk parameters (model inputs) (174) (345) 89 (430) Other changes in net exposure 34,739 55 (10,546) (281) (875) (74) 23,318 (300) Other (P&L only items) 3 2 (75) (70) Income statement (releases)/charges (701) (100) 94 (707) Amounts written-off - - (1) (1) (516) (516) (517) (517) Unwinding of discount - - (41) (41) At 30 June 2021 492,698 433 55,498 2,300 5,858 2,192 554,054 4,925 Net carrying amount 492,265 53,198 3,666 549,129 At 1 January 2020 428,604 322 28,630 752 7,135 2,718 464,369 3,792 2020 movements (16,119) 147 72,132 2,273 257 142 56,270 2,562 At 30 June 2020 412,485 469 100,762 3,025 7,392 2,860 520,639 6,354 Net carrying amount 412,016 97,737 4,532 514,285

 

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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 2021 132,390 23 28,079 227 1,291 236 161,760 486 Currency translation and other adjustments - - - - 7 7 7 7 Transfers from Stage 1 to Stage 2 (6,168) (1) 6,168 1 - - - - Transfers from Stage 2 to Stage 1 16,906 80 (16,906) (80) - - - - Transfers to Stage 3 (9) - (337) (13) 346 13 - - Transfers from Stage 3 6 - 157 11 (163) (11) - - Net re-measurement of ECL on stage transfer (77) 64 4 (9) Changes in risk parameters (model inputs) (6) (16) 27 5 Other changes in net exposure 6,180 - (1,592) (14) (126) (8) 4,462 (22) Other (P&L only items) - - (13) (13) Income statement (releases)/charges (83) 34 10 (39) Amounts written-off - - - - (3) (3) (3) (3) Unwinding of discount - - (15) (15) At 30 June 2021 149,305 19 15,569 180 1,352 250 166,226 449 Net carrying amount 149,286 15,389 1,102 165,777 At 1 January 2020 135,625 12 10,283 86 1,289 215 147,197 313 2020 movements (7,420) 5 13,789 106 52 15 6,421 126 At 30 June 2020 128,205 17 24,072 192 1,341 230 153,618 439 Net carrying amount 128,188 23,880 1,111 153,179 Key points ● Despite the strong portfolio growth during H1 2021, ECL levels for mortgages reduced during the same period. The decrease in ECL was primarily a result of reduced PDs and LGDs reflecting the improved economic outlook and stable portfolio performance, resulting in lower levels of SICR identification and ECL requirement. ● More specifically, the reduced PDs alongside muted portfolio deterioration resulted in a net migration of assets from Stage 2 to Stage 1 with an associated decrease from lifetime ECL to a 12 month ECL. The updated economics at the 2020 year end also contributed to this migration back to Stage 1 once the PD persistence period had expired three months after the 2020 year end. ● With various customer support mechanisms available and the revised economic outlook, Stage 3 ECL remained stable as new inflows remaining subdued. The relatively small ECL cost for net re-measurement on stage transfer included the effect of risk targeted ECL adjustments when previously in Stage 2. Refer to the Governance and post model adjustments section for further details. ● Write-off occurs once the repossessed property has been sold and there is a residual shortfall balance remaining outstanding. This would typically be within five years from default but can be longer. Given the moratorium on repossession activity, write-offs remained at a subdued level.

 

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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 2021 2,250 52 1,384 220 114 75 3,748 347 Currency translation and other adjustments - (1) - 2 (1) (1) (1) - Transfers from Stage 1 to Stage 2 (460) (25) 460 25 - - - - Transfers from Stage 2 to Stage 1 565 70 (565) (70) - - - - Transfers to Stage 3 (8) - (44) (18) 52 18 - - Transfers from Stage 3 - - 4 2 (4) (2) - - Net re-measurement of ECL on stage transfer (43) 89 15 61 Changes in risk parameters (model inputs) (15) (33) 2 (46) Other changes in net exposure (5) 8 (148) (36) (27) (2) (180) (30) Other (P&L only items) - - (2) (2) Income statement (releases)/charges (50) 20 13 (17) Amounts written-off - - - - (45) (45) (45) (45) Unwinding of discount - - (3) (3) At 30 June 2021 2,342 46 1,091 181 89 57 3,522 284 Net carrying amount 2,296 910 32 3,238 At 1 January 2020 2,804 38 1,246 131 127 88 4,177 257 2020 movements (627) 7 74 109 - (3) (553) 113 At 30 June 2020 2,177 45 1,320 240 127 85 3,624 370 Net carrying amount 2,132 1,080 42 3,254 Key points ● The overall decrease in ECL was mainly due to the reduction in Stage 2 ECL reflecting the improved economic outlook and stable portfolio performance, causing both PDs and LGDs to decrease and resulting in reduced levels of SICR identification and ECL requirement. ● More specifically, the reduced PDs alongside muted portfolio deterioration resulted in a net migration of assets from Stage 2 to Stage 1 with an associated decrease from lifetime ECL to a 12 month ECL. The updated economics at the 2020 year end also contributed to this migration back to Stage 1 once the PD persistence period had expired three months after 2020 year end. ● In line with industry trends in the UK, credit card balances reduced further during H1 2021, which has amplified the ECL reductions within the portfolio. This has stabilised as UK lockdown restrictions have eased and borrowing demand increased. ● With various customer support mechanisms available and the improved economic outlook, Stage 3 inflows have remained subdued and therefore Stage 3 ECL movement was minimal during H1 2021. ● Charge-off (analogous to partial write-off) typically occurs after 12 missed payments.

 

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Flow statements Stage 1 Stage 2 Stage 3 Total Financial Financial Financial Financial assets ECL assets ECL assets ECL assets ECL Retail Banking - other personal unsecured £m £m £m £m £m £m £m £m At 1 January 2021 3,385 59 3,487 450 596 495 7,468 1,004 Currency translation and other adjustments - - - (1) - 2 - 1 Transfers from Stage 1 to Stage 2 (876) (21) 876 21 - - - - Transfers from Stage 2 to Stage 1 1,109 75 (1,109) (75) - - - - Transfers to Stage 3 (5) - (194) (73) 199 73 - - Transfers from Stage 3 3 4 57 35 (60) (39) - - Net re-measurement of ECL on stage transfer (58) 74 53 69 Changes in risk parameters (model inputs) (9) (38) 39 (8) Other changes in net exposure 204 5 (593) (45) (52) (21) (441) (61) Other (P&L only items) - - (1) (1) Income statement (releases)/charges (62) (9) 70 (1) Amounts written-off - - - - (90) (90) (90) (90) Unwinding of discount - - (8) (8) At 30 June 2021 3,820 55 2,524 348 593 504 6,937 907 Net carrying amount 3,765 2,176 89 6,030 At 1 January 2020 5,417 63 2,250 252 608 518 8,275 833 2020 movements (1,272) 30 942 217 94 68 (236) 315 At 30 June 2020 4,145 93 3,192 469 702 586 8,039 1,148 Net carrying amount 4,052 2,723 116 6,891 Key points ● The overall reduction in ECL was mainly due to the reduction in Stage 2 ECL reflecting the improved economic outlook and stable portfolio performance, causing both PDs and LGDs to decrease and resulting in reduced levels of SICR identification and ECL requirement. ● More specifically, the reduced PDs alongside muted portfolio deterioration resulted in a net migration of assets from Stage 2 to Stage 1 with an associated decrease from lifetime ECL to a 12 month ECL. The updated economics at the 2020 year end also contributed to this migration back to Stage 1 once the PD persistence period had expired three months after the 2020 year end. ● In line with industry trends in the UK, unsecured balances reduced further during H1 2021, which has amplified the ECL reductions within the portfolio. This has stabilised as UK lockdown restrictions have eased and borrowing demand increased. ● With various customer support mechanisms available and the improved economic outlook, Stage 3 inflows have remained subdued and therefore Stage 3 ECL movement was minimal during H1 2021. ● 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.

 

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Flow statements Stage 1 Stage 2 Stage 3 Total Financial Financial Financial Financial Commercial Banking assets ECL assets ECL assets ECL assets ECL   - commercial real estate £m £m £m £m £m £m £m £m At 1 January 2021 17,269 90 10,380 364 1,118 428 28,767 882 Currency translation and other adjustments (8) - (3) - (1) 3 (12) 3 Inter-group transfers - - - - - - - - Transfers from Stage 1 to Stage 2 (1,832) (15) 1,832 15 - - - - Transfers from Stage 2 to Stage 1 5,366 147 (5,366) (147) - - - - Transfers to Stage 3 (6) - (95) (4) 101 4 - - Transfers from Stage 3 5 - 74 7 (79) (7) - - Net re-measurement of ECL on stage transfer (109) 25 5 (79) Changes in risk parameters (model inputs) (65) - (36) (101) Other changes in net exposure 356 16 (1,654) (45) (175) (1) (1,473) (30) Other (P&L only items) (1) 2 1 2 Income statement releases (159) (18) (31) (208) Amounts written-off - - - - (115) (115) (115) (115) Unwinding of discount - - (2) (2) At 30 June 2021 21,150 64 5,168 215 849 279 27,167 558 Net carrying amount 21,086 4,953 570 26,609 At 1 January 2020 25,556 31 2,218 28 895 306 28,669 365 2020 movements (5,896) 66 8,136 246 181 95 2,421 407 At 30 June 2020 19,660 97 10,354 274 1,076 401 31,090 772 Net carrying amount 19,563 10,080 675 30,318 Key points ● The decrease in ECL in Stage 1 and Stage 2 was primarily due to the improvement in the economic outlook. This resulted in a reduction in IFRS 9 PDs and a flow of exposure from Stage 2 to Stage 1. Total exposure reduced with repayment of existing debt and lower demand for new facilities following significant growth during 2020 driven by government support schemes.  ● The migration of assets from Stage 2 to Stage 1 resulted in more assets attracting a 12 month ECL and release of lifetime ECL in Stage 2. ● Flows to Stage 3 during H1 2021 were low, as government support continued to mitigate against defaults in the Wholesale portfolio. Stage 3 ECL reduced in the period due to the write-off of previously defaulted debt which also resulted in an ECL release in the period.

 

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Flow statements Stage 1 Stage 2 Stage 3 Total Financial Financial Financial Financial assets ECL assets ECL assets ECL assets ECL Commercial Banking - business banking £m £m £m £m £m £m £m £m At 1 January 2021 12,122 41 2,184 145 250 173 14,556 359 Currency translation and other adjustments - - - - (7) (5) (7) (5) Transfers from Stage 1 to Stage 2 (2,250) (9) 2,250 9 - - - - Transfers from Stage 2 to Stage 1 1,200 60 (1,200) (60) - - - - Transfers to Stage 3 (46) - (79) (16) 125 16 - - Transfers from Stage 3 6 1 15 4 (21) (5) - - Net re-measurement of ECL on stage transfer (57) 119 10 72 Changes in risk parameters (model inputs) (4) (46) 3 (47) Other changes in net exposure 710 (3) (199) (13) (19) (2) 492 (18) Other (P&L only items) - 1 (17) (16) Income statement (releases)/charges (64) 61 (6) (9) Amounts written-off - - - - (21) (21) (21) (21) Unwinding of discount - - (3) (3) At 30 June 2021 11,742 29 2,971 142 307 166 15,020 337 Net carrying amount 11,713 2,829 141 14,683 At 1 January 2020 6,338 28 767 45 257 200 7,362 273 2020 movements 2,862 4 832 53 (5) (10) 3,689 47 At 30 June 2020 9,200 32 1,599 98 252 190 11,051 320 Net carrying amount 9,168 1,501 62 10,731 Key points ● Total ECL reduced marginally during H1 2021 primarily due to the improvement in the economic outlook, causing both PDs and LGDs to decrease. The increase in Stage 2 loans was mainly due to an appropriately conservative approach to government support scheme exposure as customers reached the end of the initial payment holiday period. Due to the guarantees in place, related ECL did not see a proportionate increase. ● Flows of defaulted exposure into Stage 3 remained suppressed reflecting the various government customer support mechanisms available, with ECL reducing during H1 2021. ● The portfolio continued to benefit from cash recoveries post write-off, which are reported as other (P&L only items). Write-off occurs once recovery activity with the customer has been concluded or there are no further recoveries expected, but no later than five years after default.

 

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Flow statements Stage 1 Stage 2 Stage 3 Total Financial Financial Financial Financial assets ECL assets ECL assets ECL assets ECL Commercial Banking - other £m £m £m £m £m £m £m £m At 1 January 2021 39,279 139 25,981 1,204 1,249 468 66,509 1,811 Currency translation and other adjustments (257) 1 (88) - 76 3 (269) 4 Inter-group transfers - - - - - - - - Transfers from Stage 1 to Stage 2 (4,447) (21) 4,447 21 - - - - Transfers from Stage 2 to Stage 1 6,076 174 (6,076) (174) - - - - Transfers to Stage 3 (43) - (343) (29) 386 29 - - Transfers from Stage 3 19 5 190 27 (209) (32) - - Net re-measurement of ECL on stage transfer (152) 98 60 6 Changes in risk parameters (model inputs) (51) (173) (15) (239) Other changes in net exposure 300 20 (3,372) (109) (249) (22) (3,321) (111) Other (P&L only items) 1 - (8) (7) Income statement (releases)/charges (182) (184) 15 (351) Amounts written-off - - - - (121) (121) (121) (121) Unwinding of discount - - (3) (3) At 30 June 2021 40,927 115 20,739 865 1,132 367 62,798 1,347 Net carrying amount 40,812 19,874 765 61,451 At 1 January 2020 53,722 94 8,788 143 1,386 516 63,896 753 2020 movements (32,838) (7) 39,333 1,200 202 83 6,697 1,276 At 30 June 2020 20,884 87 48,121 1,343 1,588 599 70,593 2,029 Net carrying amount 20,797 46,778 989 68,564 Key points ● The decrease in ECL in Stage 1 and Stage 2 was primarily due to the improvement in the economic outlook and the change in scenario weightings. Underlying PD's and LGDs improved as a result. The updated economics resulted in the migration of assets from Stage 2 to Stage 1 with a consequential reduction in Stage 2 lifetime ECL. ● Changes in net exposure reduced in Stage 1 and 2 with repayment of existing debt which was not fully replaced by new lending in the period due to muted demand. ● Flows to Stage 3 remained suppressed reflecting the various government customer support mechanisms. Stage 3 assets and ECL reduced in the period due to the write-off of previously defaulted debt.

 

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Flow statements Stage 1 Stage 2 Stage 3 Total Financial Financial Financial Financial assets ECL assets ECL assets ECL assets ECL NatWest Markets (1) £m £m £m £m £m £m £m £m At 1 January 2021 33,327 12 1,671 49 168 132 35,166 193 Currency translation and other adjustments (700) - (36) - (3) (1) (739) (1) Inter-group transfers (3) - - - - - (3) - Transfers from Stage 1 to Stage 2 (484) (1) 484 1 - - - - Transfers from Stage 2 to Stage 1 1,150 7 (1,150) (7) - - - - Transfers to Stage 3 - - - - - - - - Net re-measurement of ECL on stage transfer (5) 3 - (2) Changes in risk parameters (model inputs) (3) (8) (1) (12) Other changes in net exposure (1,978) - (226) (2) (23) (2) (2,227) (4) Other (P&L only items) - 2 - 2 Income statement (releases)/charges (8) (5) (3) (16) Amounts written-off - - - - (40) (40) (40) (40) Unwinding of discount - - - - At 30 June 2021 31,312 10 743 36 102 88 32,157 134 Net carrying amount 31,302 707 14 32,023 At 1 January 2020 32,892 10 188 5 183 131 33,263 146 2020 movements 5,355 8 2,609 48 (1) 5 7,963 61 At 30 June 2020 38,247 18 2,797 53 182 136 41,226 207 Net carrying amount 38,229 2,744 46 41,019 Note: (1)  Reflects the NatWest Markets segment and includes NWM N.V.. Key points ● The decrease in Stage 1 and Stage 2 ECL was primarily due to the improvement in economic forecasts. ● The updated economics resulted in the migration of assets from Stage 2 to Stage 1 with a consequential reduction in Stage 2 lifetime ECL. ● Amounts written-off in the period largely related to a small number of legacy defaulted exposures.

 

Risk and capital management

Credit risk - Banking activities   continued

Flow statements   Stage 1 Stage 2 Stage 3 Total Financial Financial Financial Financial assets ECL assets ECL assets ECL assets ECL Ulster Bank RoI - mortgages £m £m £m £m £m £m £m £m At 1 January 2021 10,919 27 1,682 91 1,061 381 13,662 499 Currency translation and other adjustments (489) (1) (71) (4) (44) (37) (604) (42) Transfers from Stage 1 to Stage 2 (473) (1) 473 1 - - - - Transfers from Stage 2 to Stage 1 827 34 (827) (34) - - - - Transfers to Stage 3 (2) - (43) (5) 45 5 - - Transfers from Stage 3 13 - 136 19 (149) (19) - - Net re-measurement of ECL on stage transfer (31) 8 4 (19) Changes in risk parameters (model inputs) (4) (6) 33 23 Other changes in net exposure (147) (1) (73) - (81) (2) (301) (3) Other (P&L only items) - (1) (13) (14) Income statement (releases)/charges (36) 1 22 (13) Amounts written-off - - (1) (1) (68) (68) (69) (69) Unwinding of discount - - (5) (5) At 30 June 2021 10,648 23 1,276 69 764 292 12,688 384 Net carrying amount 10,625 1,207 472 12,304 At 1 January 2020 10,603 11 1,084 30 1,875 581 13,562 622 2020 movements (238) 5 1,134 68 (500) (124) 396 (51) At 30 June 2020 10,365 16 2,218 98 1,375 457 13,958 571 Net carrying amount 10,349 2,120 918 13,387 Key points ● The decrease in ECL reflected ongoing deleveraging of the non-performing mortgage portfolio through the execution of the final tranche of a 2019 debt sale. ● Updated economics resulted in a net migration of assets from Stage 2 to Stage 1. ● Write-off generally occurs once the repossessed property has been sold and there is a residual shortfall balance remaining outstanding or when the loan is sold to a third party.

 

Risk and capital management

Credit risk - Banking activities continued

Stage 2 decomposition by a significant increase in credit risk trigger

			UK mortgages			RoI mortgages			Credit cards			Other			Total
30 June 2021			£m	%		£m	%		£m	%		£m	%		£m	%
Personal trigger (1)
PD movement			3,412	22.0		185	14.6		583	53.8		1,520	58.9		5,700	27.9
PD persistence			6,458	41.8		55	4.3		404	37.3		842	32.6		7,759	38.0
Adverse credit bureau recorded with credit
reference agency			3,449	22.3		-	-		54	5.0		60	2.3		3,563	17.5
Forbearance support provided			147	0.9		12	0.9		1	0.1		22	0.9		182	0.9
Customers in collections			50	0.3		44	3.5		4	0.4		9	0.3		107	0.5
Collective SICR and other reasons (2)			1,877	12.1		970	76.5		37	3.4		121	4.7		3,005	14.7
Days past due >30			89	0.6		2	0.2		-	-		7	0.3		98	0.5
			15,482	100		1,268	100		1,083	100		2,581	100		20,414	100
31 December 2020
Personal trigger (1)
PD movement			13,520	48.4		751	45.0		911	66.2		2,310	67.8		17,492	51.0
PD persistence			9,977	35.8		46	2.8		350	25.5		968	28.4		11,341	33.0
Adverse credit bureau recorded with credit
reference agency			2,936	10.5		-	-		51	3.7		46	1.4		3,033	8.8
Forbearance support provided			138	0.5		7	0.4		1	0.1		9	0.3		155	0.5
Customers in collections			131	0.5		30	1.8		2	0.1		14	0.4		177	0.5
Collective SICR and other reasons (2)			1,165	4.2		832	49.9		60	4.4		55	1.6		2,112	6.1
Days past due >30			36	0.1		2	0.1		-	-		4	0.1		42	0.1
			27,903	100		1,668	100		1,375	100		3,406	100		34,352	100

For the notes to the table refer to the following page.

Key points

●	The improved economic outlook, including a more optimistic forecast for unemployment, resulted in decreased account level IFRS 9 PDs. Consequently, compared to the 2020 year end, a smaller proportion of accounts exhibited PD deterioration at H1 2021.
●	Since the 2020 year end, large populations of Stage 2 have been migrated to Stage 1, reflecting the PD persistence roll-off three months after the PD reductions at the end of 2020. Furthermore, continued reductions in PDs as a result of stable portfolio performance during H1 2021, have supported the Stage 2 reductions.
●	In the absence of PD deterioration or other backstop SICR triggers, the granting of a COVID-19 related payment holiday did not automatically result in a migration to Stage 2.
●	However, a subset of customers who had accessed payment holiday support, and where their risk profile was identified as relatively high risk, were collectively migrated to Stage 2. In Retail Banking (primarily on mortgages), approximately £1.6 billion of exposures were collectively migrated from Stage 1 to Stage 2, and approximately £0.4 million in Ulster Bank RoI mortgages. The effect of collective migrations on unsecured lending was much more limited.
●	PD persistence made up a larger proportion of Stage 2 for UK mortgages than at the 2020 year end, supporting the use of the collective SICR migration approach described above.
●	As expected, ECL coverage was higher in accounts that were more than 30 days past due than those in Stage 2 for other reasons.

 

Risk and capital management

Credit risk - Banking activities continued

Stage 2 decomposition by a significant increase in credit risk trigger

			Property			Corporate			FI			Other			Total
			Loans	ECL		Loans	ECL		Loans	ECL		Loans	ECL		Loans	ECL
30 June 2021			£m	%		£m	%		£m	%		£m	%		£m	%
Wholesale trigger (1)
PD movement			4,619	68.1		17,782	75.8		2,246	95.2		89	58.1		24,736	75.4
PD persistence			278	4.1		1,122	4.8		10	0.4		2	1.3		1,412	4.3
Risk of Credit Loss			651	9.6		2,493	10.6		53	2.2		56	36.6		3,253	9.9
Forbearance support provided			93	1.4		288	1.2		5	0.2		-	-		386	1.2
Customers in collections			20	0.3		63	0.3		-	-		-	-		83	0.3
Collective SICR and other reasons (2)			908	13.4		1,677	7.1		35	1.5		5	3.3		2,625	8.0
Days past due >30			213	3.1		53	0.2		12	0.5		1	0.7		279	0.9
			6,782	100		23,478	100		2,361	100		153	100		32,774	100
31 December 2020
Wholesale trigger (1)
PD movement			11,849	91.1		23,403	84.3		3,183	87.9		97	47.6		38,532	86.6
PD persistence			162	1.2		624	2.3		7	0.2		-	-		793	1.8
Risk of Credit Loss			394	3.0		2,106	7.6		66	1.8		39	19.1		2,605	5.8
Forbearance support provided			73	0.6		133	0.5		27	0.7		-	-		233	0.5
Customers in collections			30	0.2		115	0.4		1	-		-	-		146	0.3
Collective SICR and other reasons (2)			462	3.5		1,262	4.6		231	6.4		68	33.3		2,023	4.5
Days past due >30			51	0.4		73	0.3		109	3.0		-	-		233	0.5
			13,021	100		27,716	100		3,624	100		204	100		44,565	100

Notes:

(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.

Key points

●	The improved economic outlook, including improvement in forecasts of GDP and UK property price indices, resulted in a reduction in IFRS 9 PDs. Consequently, compared to 2020, a smaller proportion of exposures exhibited a SICR which resulted in a reduction in Stage 2 exposures. The decrease in Stage 2 was larger in Property, which saw a relatively higher increase during 2020 following the onset of COVID-19.
●	PD deterioration remained the primary trigger for identifying a SICR and Stage 2 treatment.
●	While noting the reduced flows into Heightened Monitoring and Risk of Credit Loss, there was an increase in Risk of Credit Loss as a SICR trigger at H1 2021. This was due to the reduction in underlying IFRS 9 PDs where exposures did not meet the PD SICR criteria but were captured by the Risk of Credit Loss backstop.
●	Use of COVID-19 relief mechanisms did not automatically merit identification of SICR and trigger a Stage 2 classification in isolation (refer to Treatment of COVID-19 relief mechanisms for further details).
●	In Ulster Bank RoI, £0.4 billion of exposures relating to small and medium size enterprises were collectively migrated from Stage 1 to Stage 2 reflective of the elevated risk for this sector.

 

Risk and capital management

Credit risk - Banking activities continued

Asset quality The table below shows asset quality bands of gross loans and ECL, by stage, for the Personal portfolio. 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 30 June 2021 £m £m £m £m £m £m £m £m % % % % UK mortgages AQ1-AQ4 118,191 6,163 - 124,354 7 64 - 71 0.01 1.04 - 0.06 AQ5-AQ8 48,554 8,543 - 57,097 13 94 - 107 0.03 1.10 - 0.19 AQ9  251 776 - 1,027 - 22 - 22 - 2.84 - 2.14 AQ10  - - 1,568 1,568 - - 269 269 - - 17.16 17.16 166,996 15,482 1,568 184,046 20 180 269 469 0.01 1.16 17.16 0.25 RoI mortgages AQ1-AQ4 8,134 615 - 8,749 17 31 - 48 0.21 5.04 - 0.55 AQ5-AQ8 2,492 371 - 2,863 6 22 - 28 0.24 5.93 - 0.98 AQ9  8 282 - 290 - 16 - 16 - 5.67 - 5.52 AQ10 - - 760 760 - - 292 292 - - 38.42 38.42 10,634 1,268 760 12,662 23 69 292 384 0.22 5.44 38.42 3.03 Credit cards AQ1-AQ4 25 9 - 34 1 2 - 3 4.00 22.22 - 8.82 AQ5-AQ8 2,532 1,040 - 3,572 46 169 - 215 1.82 16.25 - 6.02 AQ9  5 34 - 39 - 12 - 12 - 35.29 - 30.77 AQ10  - - 82 82 - - 59 59 - - 71.95 71.95 2,562 1,083 82 3,727 47 183 59 289 1.83 16.90 71.95 7.75 Other Personal AQ1-AQ4 1,035 105 - 1,140 8 25 - 33 0.77 23.81 - 2.89 AQ5-AQ8 4,997 2,301 - 7,298 53 279 - 332 1.06 12.13 - 4.55 AQ9  32 175 - 207 1 50 - 51 3.13 28.57 - 24.64 AQ10  - - 619 619 - - 521 521 - - 84.17 84.17 6,064 2,581 619 9,264 62 354 521 937 1.02 13.72 84.17 10.11 Total AQ1-AQ4 127,385 6,892 - 134,277 33 122 - 155 0.03 1.77 - 0.12 AQ5-AQ8 58,575 12,255 - 70,830 118 564 - 682 0.20 4.60 - 0.96 AQ9  296 1,267 - 1,563 1 100 - 101 0.34 7.89 - 6.46 AQ10  - - 3,029 3,029 - - 1,141 1,141 - - 37.67 37.67 186,256 20,414 3,029 209,699 152 786 1,141 2,079 0.08 3.85 37.67 0.99

 

Risk and capital management

Credit risk - Banking activities continued

Asset quality 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 31 December 2020 £m £m £m £m £m £m £m £m % % % % UK mortgages AQ1-AQ4 108,869 6,634 - 115,503 10 33 - 43 0.01 0.50 - 0.04 AQ5-AQ8 38,347 20,254 - 58,601 14 146 - 160 0.04 0.72 - 0.27 AQ9  240 1,015 - 1,255 - 49 - 49 - 4.83 - 3.90 AQ10  - - 1,507 1,507 - - 254 254 - - 16.85 16.85 147,456 27,903 1,507 176,866 24 228 254 506 0.02 0.82 16.85 0.29 RoI mortgages AQ1-AQ4 8,247 777 - 9,024 20 38 - 58 0.24 4.89 - 0.64 AQ5-AQ8 2,677 560 - 3,237 7 34 - 41 0.26 6.07 - 1.27 AQ9  7 331 - 338 - 19 - 19 - 5.74 - 5.62 AQ10 - - 1,051 1,051 - - 381 381 - - 36.25 36.25 10,931 1,668 1,051 13,650 27 91 381 499 0.25 5.46 36.25 3.66 Credit cards AQ1-AQ4 23 4 - 27 1 2 - 3 4.35 50.00 - 11.11 AQ5-AQ8 2,384 1,329 - 3,713 52 208 - 260 2.18 15.65 - 7.00 AQ9  4 42 - 46 - 15 - 15 - 35.71 - 32.61 AQ10  - - 109 109 - - 76 76 - - 69.72 69.72 2,411 1,375 109 3,895 53 225 76 354 2.20 16.36 69.72 9.09 Other Personal AQ1-AQ4 1,234 59 - 1,293 8 9 - 17 0.65 15.25 - 1.31 AQ5-AQ8 4,461 3,020 - 7,481 58 336 - 394 1.30 11.13 - 5.27 AQ9  55 327 - 382 1 107 - 108 1.82 32.72 - 28.27 AQ10  - - 621 621 - - 517 517 - - 83.25 83.25 5,750 3,406 621 9,777 67 452 517 1,036 1.17 13.27 83.25 10.6 Total AQ1-AQ4 118,373 7,474 - 125,847 39 82 - 121 0.03 1.1 - 0.10 AQ5-AQ8 47,869 25,163 - 73,032 131 724 - 855 0.27 2.88 - 1.17 AQ9  306 1,715 - 2,021 1 190 - 191 0.33 11.08 - 9.45 AQ10  - - 3,288 3,288 - - 1,228 1,228 - - 37.35 37.35 166,548 34,352 3,288 204,188 171 996 1,228 2,395 0.10 2.90 37.35 1.17 Key points ● In the Personal portfolio, the asset quality distribution overall improved with high quality new business written during H1 2021 and no material deterioration in existing portfolio quality. ● The majority of exposures were in AQ1-AQ4, with a significant proportion in AQ5-AQ8. As expected, mortgage exposures have a higher proportion in AQ1-AQ4 than unsecured borrowing. ● The slight increase in AQ10 exposure in UK mortgages related to a small number of customers who took extended COVID-19 payment holidays and had subsequently moved from arrears to default during the period. Repossession and formal recovery activities were paused to support customers during COVID-19, also contributing to late arrears and therefore an increase in AQ10 balances. ● In other Personal, the relatively high level of exposures in AQ10 reflected that impaired assets can be held on the balance sheet, with commensurate ECL provision for up to six years after default. ● ECL provisions coverage shows the expected trend with increased coverage in the poorer asset quality bands, and also by stage. ● As noted previously, across all asset quality bands, migration from Stage 2 to Stage 1 was observed as the effect of improved economic scenarios enhanced IFRS 9 PDs and therefore reduced Stage 2 exposure.

 

Risk and capital management

Credit risk - Banking activities continued

Asset quality The table below shows asset quality bands of gross loans and ECL, by stage, for the Wholesale portfolio. 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 30 June 2021 £m £m £m £m £m £m £m £m % % % % Property AQ1-AQ4 13,097 721 - 13,818 11 11 - 22 0.08 1.53 - 0.16 AQ5-AQ8 14,966 5,953 - 20,919 82 292 - 374 0.55 4.91 - 1.79 AQ9  42 108 - 150 - 10 - 10 - 9.26 - 6.67 AQ10  - - 1,054 1,054 - - 391 391 - - 37.10 37.10 28,105 6,782 1,054 35,941 93 313 391 797 0.33 4.62 37.10 2.22 Corporate AQ1-AQ4 17,252 1,710 - 18,962 15 34 - 49 0.09 1.99 - 0.26 AQ5-AQ8 31,542 21,388 - 52,930 134 1,014 - 1,148 0.42 4.74 - 2.17 AQ9  256 380 - 636 - 37 - 37 - 9.74 - 5.82 AQ10  - - 1,594 1,594 - - 651 651 - - 40.84 40.84 49,050 23,478 1,594 74,122 149 1,085 651 1,885 0.30 4.62 40.84 2.54 Financial institutions AQ1-AQ4 46,160 1,050 - 47,210 13 9 - 22 0.03 0.86 - 0.05 AQ5-AQ8 1,533 1,146 - 2,679 8 76 - 84 0.52 6.63 - 3.14 AQ9  1 165 - 166 - 30 - 30 - 18.18 - 18.07 AQ10  - - 17 17 - - 7 7 - - 41.18 41.18 47,694 2,361 17 50,072 21 115 7 143 0.04 4.87 41.18 0.29 Sovereign AQ1-AQ4 5,582 58 - 5,640 18 - - 18 0.32 - - 0.32 AQ5-AQ8 14 95 - 109 - 1 - 1 - 1.05 - 0.92 AQ 9 - - - - - - - - - - - - AQ10  - - 9 9 - - 2 2 - - 22.22 22.22 5,596 153 9 5,758 18 1 2 21 0.32 0.65 22.22 0.36 Total AQ1-AQ4 82,091 3,539 - 85,630 57 54 - 111 0.07 1.53 - 0.13 AQ5-AQ8 48,055 28,582 - 76,637 224 1,383 - 1,607 0.47 4.84 - 2.10 AQ9  299 653 - 952 - 77 - 77 - 11.79 - 8.09 AQ10  - - 2,674 2,674 - - 1,051 1,051 - - 39.30 39.30 130,445 32,774 2,674 165,893 281 1,514 1,051 2,846 0.22 4.62 39.30 1.72

 

Risk and capital management

Credit risk - Banking activities continued

Asset quality 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 31 December 2020 £m £m £m £m £m £m £m £m % % % % Property AQ1-AQ4 12,694 2,079 - 14,773 20 40 - 60 0.16 1.92 - 0.41 AQ5-AQ8 10,785 10,780 - 21,565 103 450 - 553 0.96 4.17 - 2.56 AQ9  254 162 - 416 - 17 - 17 - 10.49 - 4.09 AQ10  - - 1,322 1,322 - - 545 545 - - 41.23 41.23 23,733 13,021 1,322 38,076 123 507 545 1,175 0.52 3.89 41.23 3.09 Corporate AQ1-AQ4 17,757 2,726 - 20,483 20 51 - 71 0.11 1.87 - 0.35 AQ5-AQ8 29,405 24,430 - 53,835 167 1,374 - 1,541 0.57 5.62 - 2.86 AQ9  928 560 - 1,488 1 62 - 63 0.11 11.07 - 4.23 AQ10  - - 1,727 1,727 - - 803 803 - - 46.5 46.5 48,090 27,716 1,727 77,533 188 1,487 803 2,478 0.39 5.37 46.5 3.20 Financial institutions AQ1-AQ4 42,222 1,985 - 44,207 13 13 - 26 0.03 0.65 - 0.06 AQ5-AQ8 1,776 1,453 - 3,229 10 39 - 49 0.56 2.68 - 1.52 AQ9  4 186 - 190 - 38 - 38 - 20.43 - 20.00 AQ10  - - 17 17 - - 8 8 - - 47.06 47.06 44,002 3,624 17 47,643 23 90 8 121 0.05 2.48 47.06 0.25 Sovereign AQ1-AQ4 4,731 106 - 4,837 14 1 - 15 0.30 0.94 - 0.31 AQ5-AQ8 17 98 - 115 - - - - - - - - AQ9  3 - - 3 - - - - - - - - AQ10  - - 4 4 - - 2 2 - - 50.00 50.00 4,751 204 4 4,959 14 1 2 17 0.29 0.49 50.00 0.34 Total AQ1-AQ4 77,404 6,896 - 84,300 67 105 - 172 0.09 1.52 - 0.20 AQ5-AQ8 41,983 36,761 - 78,744 280 1,863 - 2,143 0.67 5.07 - 2.72 AQ9  1,189 908 - 2,097 1 117 - 118 0.08 12.89 - 5.63 AQ10  - - 3,070 3,070 - - 1,358 1,358 - - 44.23 44.23 120,576 44,565 3,070 168,211 348 2,085 1,358 3,791 0.29 4.68 44.23 2.25 Key points ● Across the Wholesale portfolio, the asset quality band distribution differed, reflecting the diverse nature of the sectors. However, improvements were observed across the portfolio consistent with the improvement in the economic outlook for the UK since the 2020 year end. ● Increased exposure in the AQ1-AQ4 band in financial institutions was related to repo transactions as part of treasury activities. ● Remaining government support measures in relation to COVID-19 continued to mitigate against flows to default in the short-term. ● Within the Wholesale portfolio, customer credit grades were reassessed as and when a request for financing was made, a scheduled customer credit review was performed or a material event specific to that customer occurred. ● As previously noted, a request for support using one of the government-backed COVID-19 support schemes would prompt credit grades to be reassessed but was not, in itself, a reason for a customer's credit grade to be amended. ● ECL provisions coverage showed the expected trend with increased coverage in the poorer asset quality bands, and also by stage. Overall provisions coverage reduced, mainly due to the improvement in economic outlook and scenario weightings. The base economic scenario improved compared with H2 2020 reflecting the faster than expected vaccination roll-out, better than expected actual economic data and the persisting strong government support. ● The lower provision coverage for Stage 3 loans in the Property sector reflected the secured nature of the exposures.

 

Risk and capital management

Credit risk - Trading activities

This section details the credit risk profile of NatWest Group's trading activities.

Securities financing transactions and collateral The table below shows securities financing transactions in NatWest Markets and Treasury. Balance sheet captions include balances held at all classifications under IFRS 9. Reverse repos Repos Outside Outside Of which: netting Of which: netting Total can be offset arrangements Total can be offset arrangements 30 June 2021 £m £m £m £m £m £m Gross 86,079 85,070 1,009 83,005 81,873 1,132 IFRS offset (38,273) (38,273) - (38,273) (38,273) - Carrying value 47,806 46,797 1,009 44,732 43,600 1,132 Master netting arrangements (2,838) (2,838) - (2,838) (2,838) - Securities collateral (43,440) (43,440) - (40,694) (40,694) - Potential for offset not recognised under IFRS (46,278) (46,278) - (43,532) (43,532) - Net 1,528 519 1,009 1,200 68 1,132 31 December 2020 Gross 80,388 80,025 363 66,493 64,793 1,700 IFRS offset (35,820) (35,820) - (35,820) (35,820) - Carrying value 44,568 44,205 363 30,673 28,973 1,700 Master netting arrangements (929) (929) - (929) (929) - Securities collateral (43,204) (43,204) - (28,044) (28,044) - Potential for offset not recognised under IFRS (44,133) (44,133) - (28,973) (28,973) - Net 435 72 363 1,700 - 1,700 Key points ● Reverse repos and repos increased on both gross and carrying value basis when compared to 2020. These trends are consistent with trading assets and liabilities having been managed within limits at 31 December 2020. ● Reverse repo and repo transactions are primarily backed by highly-rated sovereign, supranational and agency collateral.

 

Risk and capital management

Credit risk - Trading activities continued

Derivatives The table below shows derivatives by type of contract. The master netting agreements and collateral shown do not result in a net presentation on the balance sheet under IFRS. A significant proportion (more than 90%) of the derivatives relate to trading activities in NatWest Markets. The table also includes hedging derivatives in Treasury. 30 June 2021 31 December 2020 Notional GBP USD Euro Other Total Assets Liabilities Notional Assets Liabilities £bn £bn £bn £bn £bn £m £m £bn £m £m Gross exposure 117,434 112,464 177,330 172,245 IFRS offset (7,878) (8,472) (10,807) (11,540) Carrying value 3,835 3,843 4,930 1,413 14,021 109,556 103,992 14,047 166,523 160,705 Of which: Interest rate (1)   Interest rate swaps 60,918 53,667 93,587 85,022   Options purchased 14,664 - 20,527 -   Options written - 14,804 - 20,190   Futures and forwards - - 1 2 Total 3,472 2,304 4,304 425 10,505 75,582 68,471 10,703 114,115 105,214 Exchange rate   Spot, forwards and futures 22,260 22,148 34,924 35,309   Currency swaps 6,931 8,116 10,038 12,136   Options purchased 4,562 - 7,277 -   Options written - 4,825 - 7,662 Total 361 1,535 615 988 3,499 33,753 35,089 3,328 52,239 55,107 Credit 2 4 11 - 17 221 431 15 161 376 Equity and commodity - - - - - - 1 1 8 8 Carrying value 14,021 109,556 103,992 14,047 166,523 160,705 Counterparty mark-to-market netting (87,322) (87,322) (137,086) (137,086) Cash collateral (14,009) (10,368) (19,608) (15,034) Securities collateral (4,170) (3,125) (5,053) (4,921) Net exposure 4,055 3,177 4,776 3,664 Of which outside netting arrangements 999 962 905 631 Banks (2) 311 683 206 557 Other financial institutions (3) 1,647 1,371 1,436 1,931 Corporate (4) 1,993 957 2,985 1,082 Government (5) 104 166 149 94 Net exposure 4,055 3,177 4,776 3,664 UK 2,445 780 2,914 1,627 Europe 822 1,188 1,091 1,118 US 573 945 470 644 RoW 215 264 301 275 Net exposure 4,055 3,177 4,776 3,664 Asset quality of uncollateralised derivative assets AQ1-AQ4 3,150 3,464 AQ5-AQ8 847 1,283 AQ9-AQ10 58 29 Net exposure 4,055 4,776 Notes: (1)  The notional amount of interest rate derivatives included £7,330 billion (31 December 2020 - £7,390 billion) in respect of contracts cleared through central clearing counterparties. (2)  Transactions with certain counterparties with whom NatWest Group has netting arrangements but collateral is not posted on a daily basis; certain transactions with specific terms that may not fall within netting and collateral arrangements; derivative positions in certain jurisdictions, for example China, where the collateral agreements are not deemed to be legally enforceable. (3)  Includes transactions with securitisation vehicles and funds where collateral posting is contingent on NatWest Group's external rating. (4)  Mainly large corporates with whom NatWest Group may have netting arrangements in place, but operational capability does not support collateral posting. (5)  Sovereigns and supranational entities with no collateral arrangements, collateral arrangements that are not considered enforceable, or one-way collateral agreements in their favour.

 

Risk and capital management

Credit risk - Trading activities continued

Debt securities The table below shows debt securities held at mandatory fair value through profit or loss by issuer as well as ratings based on the lowest of Standard & Poor's, Moody's and Fitch. A significant proportion (more than 95%) of these positions are trading securities in NatWest Markets. Central and local government Financial UK US Other institutions Corporate Total 30 June 2021 £m £m £m £m £m £m AAA - - 2,469 1,013 - 3,482 AA to AA+ - 4,088 4,829 1,010 44 9,971 A to AA- 5,121 - 1,781 397 75 7,374 BBB- to A- - - 9,235 386 518 10,139 Non-investment grade - - 33 252 105 390 Unrated - - - 10 4 14 Total 5,121 4,088 18,347 3,068 746 31,370 Short positions (5,487) (2,303) (22,185) (2,030) (106) (32,111) 31 December 2020 AAA - - 3,114 1,113 - 4,227 AA to AA+ - 5,149 3,651 576 49 9,425 A to AA- 4,184 - 1,358 272 81 5,895 BBB- to A- - - 8,277 444 656 9,377 Non-investment grade - - 36 127 53 216 Unrated - - - 150 5 155 Total 4,184 5,149 16,436 2,682 844 29,295 Short positions (5,704) (1,123) (18,135) (1,761) (56) (26,779)

 

Risk and capital management

Capital, liquidity and funding risk  

Introduction

NatWest Group continually ensures a comprehensive approach is taken to the management of Capital, Liquidity and Funding,

underpinned by frameworks, risk appetite and policies, to manage and mitigate Capital, Liquidity and Funding risks. The framework ensures the tools and capability are in place to facilitate the management and mitigation of risk ensuring that

NatWest Group operates within its regulatory requirements and risk appetite.

Within the 2020 Annual Report and Accounts, NatWest Group outlined a number of COVID-19 specific relief measures which

impacted capital and leverage ratios during the year, one of which was a temporary change to the Prudential Valuation Adjustment (PVA). From 1 January 2021 the aggregation factor reverted back to 50% from 66%. This has increased NatWest Group's PVA deduction by c.£120 million.

Key developments  

CET1 (CRR end-point)	In the first half of 2021, the CET1 ratio decreased by 30 basis points to 18.2%. The CET1 decrease is primarily due to the impact of the directed buy back and associated pension contribution of £1.2 billion (72 bps), foreseeable dividend accrual of £0.5 billion (33 bps) and foreseeable charges and pension contributions of £0.9 billion (58 bps). The attributable profit in the period of £1.8 billion has been partially utilised by the foreseeable dividends and charges. There was a £0.5 billion decrease in the IFRS 9 transitional arrangements on expected credit losses however this offset the impact of impairment releases.
LAC (MREL)	LAC (MREL) ratio as percentage of risk weighted assets increased to 38.9% from 37.5% primarily due to the £7.3 billion decrease in RWAs and remains well above the minimum of 23%.
	In the first half of 2021, there were new issuances of $1.5 billion and €1.0 billion Senior debt, AT1 issuances of $0.75 billion and £0.4 billion and Tier 2 issuances of £1.0 billion. These were partially offset by the redemption of $2.1 billion, $0.2 billion and €0.2 billion Tier 2 instruments.
Total RWAs	RWAs reduced by £7.3 billion in H1 2021, primarily reflecting reductions in credit risk RWAs of £7.4 billion due to repayments and expired facilities of c.£4 billion in Commercial Banking, a reduction of c.£0.8 billion due to improved risk metrics in Retail Banking and reduced exposures in Ulster Bank RoI in line with the current exit strategy. The decreases in credit risk also included a £0.8 billion benefit as a result of the CRR COVID-19 amendment for Infrastructure Supporting factor. Operational risk RWAs reduced by £0.9 billion following the annual recalculation in Q1 2021. Counterparty credit risk RWAs reduced by £0.5 billion as a result of lower exposures in NatWest Markets. There were offsetting increases in market risk RWAs of £1.5 billion, mainly reflecting an increase in modelled market risk following the announcement of GBP LIBOR cessation in March 2021 as a result of including modelled GBP LIBOR basis risk post 4 January 2022.  Regulatory approval has been obtained in July 2021 to update the VaR model and this will remove this impact in Q3 2021.
UK leverage ratio	The UK leverage ratio decreased by c.20 basis points from 6.4% to 6.2% predominantly driven by a decrease in Tier 1 capital.
Liquidity portfolio	The liquidity portfolio increased by £15 billion in H1 2021 to £277 billion, with primary liquidity increasing by £17 billion to £187 billion. The increase in primary liquidity was mainly driven by customer deposits, cash proceeds from new issuance and the methodology change to include UBIDAC cash at central banks. This is offset by the TFSME repayment, buyback of shares owned by UK Government, pension fund contributions, liability management exercise and the purchase of additional mortgages. Secondary liquidity is lower due to monthly repayments on underlying assets.

 

Risk and capital management

Capital, liquidity and funding risk continued

Maximum Distributable Amount (MDA) and Minimum Capital Requirements

NatWest Group is subject to minimum capital requirements relative to RWAs. The table below summarises the minimum capital requirements (the sum of Pillar 1 and Pillar 2A), and the additional capital buffers which are held in excess of the regulatory minimum requirements and are usable in stress.

Where the CET1 ratio falls below the sum of the minimum capital and the combined buffer requirement, there is a subsequent automatic restriction on the amount available to service discretionary payments, known as the MDA. Note that different capital requirements apply to individual legal entities or sub-groups and that the table shown does not reflect any incremental PRA buffer requirements, which are not disclosable.

The current capital position provides significant headroom above both our minimum requirements and our MDA threshold requirements.

Type		CET1		Total Tier 1		Total capital
Pillar 1 requirements		4.5%		6.0%		8.0%
Pillar 2A requirements		2.0%		2.7%		3.6%
Minimum Capital Requirements		6.5%		8.7%		11.6%
Capital conservation buffer		2.5%		2.5%		2.5%
Countercyclical capital buffer (1)		-		-		-
MDA threshold (2)		9.0%			n/a		n/a
Subtotal		9.0%		11.2%		14.1%
Capital ratios at 30 June 2021		18.2%		21.8%		24.9%
Headroom (3)		9.2%		10.6%		10.8%

Notes:

(1)  In response to COVID-19 many countries reduced their CCyB rates. Most notably for NatWest Group, the Financial Policy Committee reduced the UK rate from 1% to 0% and the CBI also announced a reduction in the Republic of Ireland rate from 1% to 0%.

(2)  Pillar 2A requirements for NatWest Group are set on a nominal capital basis.

(3)  The headroom does not reflect excess distributable capital and may vary over time.

 

Risk and capital management

Capital, liquidity and funding risk continued

Capital and leverage ratios

The table below sets out the key capital and leverage ratios.

	30 June	31 December
	2021	2020
Capital adequacy ratios (1)	%	%
CET1	18.2	18.5
Tier 1	21.8	21.4
Total	24.9	24.5
Capital	£m	£m
Tangible equity	30,751	31,712
Prudential valuation adjustment	(285)	(286)
Deferred tax assets	(832)	(760)
Own credit adjustments	22	(1)
Pension fund assets	(384)	(579)
Cash flow hedging reserve	77	(229)
Foreseeable ordinary dividends	(500)	(364)
Foreseeable charges	(750)	-
Foreseeable pension contributions	(174)	(266)
Prudential amortisation of software development costs	537	473
Adjustments under IFRS 9 transitional arrangements	1,198	1,747
Total deductions	(1,091)	(265)
CET1 capital	29,660	31,447
AT1 capital	5,916	4,983
Tier 1 capital	35,576	36,430
Tier 2 capital	4,973	5,255
Total regulatory capital	40,549	41,685
Risk-weighted assets
Credit risk	122,475	129,914
Counterparty credit risk	8,619	9,104
Market risk	10,845	9,362
Operational risk	21,031	21,930
Total RWAs	162,970	170,310
Leverage
Cash and balances at central banks	151,511	124,489
Trading assets	70,195	68,990
Derivatives	109,556	166,523
Financial assets	422,356	422,647
Other assets	22,240	16,842
Total assets	775,858	799,491
Derivatives
- netting and variation margin	(112,441)	(172,658)
- potential future exposures	37,468	38,171
Securities financing transactions gross up	1,486	1,179
Other off balance sheet items	43,979	45,853
Regulatory deductions and other adjustments	(13,831)	(8,943)
Claims on central banks	(148,644)	(122,252)
Exclusion of bounce back loans	(8,239)	(8,283)
UK leverage exposure	575,636	572,558
UK leverage ratio % (2)	6.2	6.4

Notes:

(1)

Based on CRR end-point including an IFRS 9 transitional adjustment of £1.2 billion (31 December 2020 - £1.7 billion). Excluding this adjustment, the CET1 ratio would be 17.5% (31 December 2020 - 17.5%). The amended article for the prudential treatment of software assets was implemented in December 2020. Excluding this adjustment the CET1 ratio at 30 June 2021 would be 17.9% (31 December 2020 - 18.2%).

(2)

The UK leverage ratio excludes central bank claims from the leverage exposure where deposits held are denominated in the same currency and of contractual maturity that is equal or longer than that of the central bank claims. Excluding an IFRS 9 transitional adjustment, the UK leverage ratio would be 6.0% (31 December 2020 - 6.1%). The amended article for the prudential treatment of software assets was implemented in December 2020. Excluding this adjustment, the UK leverage ratio at 30 June 2021 would be 6.1% (31 December 2020 - 6.3%).

 

Risk and capital management

Capital, liquidity and funding risk continued

Capital flow statement

The table below analyses the movement in CET1, AT1 and Tier 2 capital for the half year ended 30 June 2021.

	CET1	AT1	Tier 2	Total
	£m	£m	£m	£m
At 1 January 2021	31,447	4,983	5,255	41,685
Attributable profit for the period	1,842	-	-	1,842
Own credit	23	-	-	23
Share capital and reserve movements in respect of employee share schemes	23	-	-	23
Directed buyback	(1,231)	-	-	(1,231)
Foreign exchange reserve	(304)	-	-	(304)
FVOCI reserve	(121)	-	-	(121)
Goodwill and intangibles deduction	25	-	-	25
Deferred tax assets	(72)	-	-	(72)
Prudential valuation adjustments	1	-	-	1
New issues of capital instruments	-	933	996	1,929
Redemption of capital instruments	-	-	(1,456)	(1,456)
Net dated subordinated debt instruments	-	-	292	292
Foreign exchange movements	-	-	(77)	(77)
Foreseeable ordinary dividends	(500)	-	-	(500)
Foreseeable charges	(750)	-	-	(750)
Foreseeable pension contributions	(174)	-	-	(174)
Adjustment under IFRS 9 transitional arrangements	(549)	-	-	(549)
Other movements	-	-	(37)	(37)
At 30 June 2021	29,660	5,916	4,973	40,549

Key points

·	The CET1 decrease is primarily due to the impact of the directed buy back and associated pension contribution of £1.2 billion, foreseeable dividend accrual of £0.5 billion and foreseeable charges and pension contributions of £0.9 billion offset by an increase in attributable profit.
·	AT1 reflects the £400 million 4.5% Reset Perpetual Subordinated Contingent Convertible Notes issued in March 2021 and $750m 4.600% Reset Perpetual Subordinated Contingent Convertible notes in June 2021.
·	The Tier 2 movement is primarily due to the redemption of own debt of £1.5 billion in March 2021 and a £1.0 billion issuance of subordinated Tier 2 notes in May 2021.

Risk and capital management Capital, liquidity and funding riskcontinued Capital resources PRA transitional basis 30 June 31 December 2021 2020 £m £m Shareholders' equity (excluding non-controlling interests) Shareholders' equity 43,875 43,860 Preference shares - equity (494) (494) Other equity instruments (5,936) (4,999) 37,445 38,367 Regulatory adjustments and deductions Own credit 22 (1) Defined benefit pension fund adjustment (384) (579) Cash flow hedging reserve  77 (229) Deferred tax assets (832) (760) Prudential valuation adjustments (285) (286) Goodwill and other intangible assets (6,157) (6,182) Foreseeable ordinary and special dividends (500) (364) Foreseeable charges (750) - Foreseeable pension contributions (174) (266) Adjustment under IFRS 9 transitional arrangements  1,198 1,747 (7,785) (6,920) CET1 capital  29,660 31,447 Additional Tier (AT1) capital Qualifying instruments and related share premium 5,916 4,983 Qualifying instruments and related share premium to phase out 569 690 Qualifying instruments issued by subsidiaries and held by third parties subject to phase out - 140 AT1 capital 6,485 5,813 Tier 1 capital 36,145 37,260 Qualifying Tier 2 capital Qualifying instruments and related share premium 4,570 4,882 Qualifying instruments issued by subsidiaries and held by third parties 581 1,191 Other regulatory adjustments 362 400 Tier 2 capital 5,513 6,473 Total regulatory capital 41,658 43,733

 

Risk and capital management 

Capital, liquidity and funding risk continued

Loss absorbing capital 

The following table illustrates the components of estimated loss absorbing capital (LAC) in NatWest Group plc and operating subsidiaries and includes external issuances only. The table is prepared on a transitional basis, including the benefit of regulatory capital instruments issued from operating companies, to the extent they meet the current MREL criteria.

	30 June 2021					31 December 2020
		Balance					Balance
	Par	sheet	Regulatory	LAC		Par	sheet	Regulatory	LAC
	value (1)	value	value (2)	value (3)		value	value	value	value
	£bn	£bn	£bn	£bn		£bn	£bn	£bn	£bn
CET1 capital (4)	29.7	29.7	29.7	29.7		31.4	31.4	31.4	31.4
Tier 1 capital: end-point CRR compliant AT1
of which: NatWest Group plc (holdco)	6.0	5.9	5.9	5.9		5.0	5.0	5.0	5.0
of which: NatWest Group plc operating
subsidiaries (opcos)	-	-	-	-		-	-	-	-
	6.0	5.9	5.9	5.9		5.0	5.0	5.0	5.0
Tier 1 capital: end-point CRR non-compliant
of which: holdco	0.6	0.6	0.5	0.5		0.7	0.7	0.7	0.5
of which: opcos	0.1	0.1	-	-		0.1	0.1	0.1	0.1
	0.7	0.7	0.5	0.5		0.8	0.8	0.8	0.6
Tier 2 capital: end-point CRR compliant
of which: holdco	6.3	6.5	4.6	5.4		6.9	7.2	4.8	5.7
of which: opcos	0.4	0.4	0.1	-		0.4	0.4	0.1	0.1
	6.7	6.9	4.7	5.4		7.3	7.6	4.9	5.8
Tier 2 capital: end-point CRR non-compliant
of which: holdco	-	-	-	-		0.1	0.1	0.1	0.1
of which: opcos	1.3	1.6	0.4	0.2		1.6	1.9	1.1	1.0
	1.3	1.6	0.4	0.2		1.7	2.0	1.2	1.1
Senior unsecured debt securities
of which: holdco	21.2	22.0	-	21.2		19.6	20.9	-	19.6
of which: opcos	20.7	20.7	-	-		20.9	21.5	-	-
	41.9	42.7	-	21.2		40.5	42.4	-	19.6
Tier 2 capital:
Other regulatory adjustments	-	-	0.4	0.4		-	-	0.4	0.4
	-	-	0.4	0.4		-	-	0.4	0.4
Total	86.3	87.5	41.6	63.3		86.7	89.2	43.7	63.9
RWAs				163.0					170.3
UK leverage exposure				575.6					572.6
LAC as a ratio of RWAs				38.9%					37.5%
LAC as a ratio of UK leverage exposure				11.0%					11.2%

Notes:

(1)  Par value reflects the nominal value of securities issued.

(2)  Regulatory capital instruments issued from operating companies are included in the transitional LAC calculation, to the extent they meet the current MREL criteria.

(3)  LAC value reflects NatWest Group's interpretation of the Bank of England's approach to setting a minimum requirement for own funds and eligible liabilities (MREL), published in June 2018. MREL policy and requirements remain subject to further potential development, as such NatWest Group's estimated position remains subject to potential change. Liabilities excluded from LAC include instruments with less than one year remaining to maturity, structured debt, operating company senior debt, and other instruments that do not meet the MREL criteria. The LAC calculation includes Tier 1 and Tier 2 securities before the application of any regulatory caps or adjustments.

(4)  Corresponding shareholders' equity was £43.9 billion (31 December 2020 - £43.9 billion).

(5)  Regulatory amounts reported for AT1, Tier 1 and Tier 2 instruments are before grandfathering restrictions imposed by CRR.

 

Risk and capital management

Capital, liquidity and funding risk continued

Loss absorbing capital 

The following table illustrates the components of the stock of outstanding issuance in NatWest Group plc and its operating subsidiaries including external and internal issuances.

			NatWest					NatWest	NWM	RBS
		NatWest	Holdings	NWB	RBS	UBI	NWM	Markets	Securities	International
		Group plc	Limited	Plc	plc	DAC	Plc	N.V.	Inc.	Limited
		£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn
Tier 1 (Inclusive of AT1)	Externally issued	6.5	-	0.1	-	-	-	-	-	-
Tier 1 (Inclusive of AT1)	Internally issued	-	3.7	2.4	1.0	-	1.1	0.2	-	0.3
		6.5	3.7	2.5	1.0	-	1.1	0.2	-	0.3
Tier 2	Externally issued	6.5	-	0.9	-	0.1	0.5	0.6	-	-
Tier 2	Internally issued	-	4.7	3.1	1.4	0.5	1.5	0.1	0.3	-
		6.5	4.7	4.0	1.4	0.6	2.0	0.7	0.3	-
Senior unsecured	Externally issued	22.0	-	-	-	-	-	-	-	-
Senior unsecured	Internally issued	-	10.5	5.7	0.4	0.5	3.9	-	-	-
		22.0	10.5	5.7	0.4	0.5	3.9	-	-	-
Total outstanding issuance		35.0	18.9	12.2	2.8	1.1	7.0	0.9	0.3	0.3

Notes:

(1)  The balances are the IFRS balance sheet carrying amounts, which may differ from the amount which the instrument contributes to regulatory capital. Regulatory balances exclude, for example, issuance costs and fair value movements, whilst dated capital is required to be amortised on a straight-line basis over the final five years of maturity.

(2)  Balance sheet amounts reported for AT1, Tier 1 and Tier 2 instruments are before grandfathering restrictions imposed by CRR.

(3)  Internal issuance for NWB Plc, RBS plc and UBIDAC represents AT1, Tier 2 or Senior unsecured issuance to NatWest Holdings Limited and for NWM N.V. and NWM SI to NWM Plc.

(4)  Senior unsecured debt does not include CP, CD and short/medium term notes issued from NatWest Group operating subsidiaries. 

(5)  Tier 1 (inclusive of AT1) does not include CET1 numbers.

 

Risk and capital management

Capital, liquidity and funding risk continued

Risk-weighted assets

The table below analyses the movement in RWAs during the half year, by key drivers.

		Counterparty		Operational
	Credit risk	credit risk	Market risk	risk	Total
	£bn	£bn	£bn	£bn	£bn
At 1 January 2021	129.9	9.1	9.4	21.9	170.3
Foreign exchange movement	(1.0)	(0.2)	-	-	(1.2)
Business movement	(3.4)	(0.2)	1.8	(0.9)	(2.7)
Risk parameter changes (1)	(1.3)	(0.1)	-	-	(1.4)
Model updates	(0.7)	-	(0.3)	-	(1.0)
Other movements (2)	(0.8)	-	-	-	(0.8)
Acquisitions & Disposals (3)	(0.2)	-	-	-	(0.2)
At 30 June 2021	122.5	8.6	10.9	21.0	163.0

The table below analyses segmental RWAs.

				International Banking & Markets			Central
	Retail	Private	Commercial	RBS	NatWest	Ulster	items
	Banking	Banking	Banking	International	Markets	Bank RoI	& other	Total
Total RWAs	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn
At 1 January 2021	36.7	10.9	75.1	7.5	26.9	11.8	1.4	170.3
Foreign exchange movement	-	-	(0.4)	(0.1)	(0.3)	(0.4)	-	(1.2)
Business movement	(0.3)	0.3	(3.6)	0.2	0.8	(0.3)	0.2	(2.7)
Risk parameter changes (1)	(0.8)	-	(0.2)	-	(0.1)	(0.4)	0.1	(1.4)
Model updates	-	-	(0.7)	-	(0.3)	-	-	(1.0)
Other movements (2)	-	-	(0.7)	-	(0.1)	-	-	(0.8)
Acquisitions & Disposals (3)	-	-	-	-	-	(0.2)	-	(0.2)
At 30 June 2021	35.6	11.2	69.5	7.6	26.9	10.5	1.7	163.0
Credit risk	28.2	9.8	60.8	6.6	5.9	9.5	1.7	122.5
Counterparty credit risk	0.2	0.1	0.3	-	8.0	-	-	8.6
Market risk	0.2	-	0.4	-	10.2	0.1	-	10.9
Operational risk	7.0	1.3	8.0	1.0	2.8	0.9	-	21.0
Total RWAs	35.6	11.2	69.5	7.6	26.9	10.5	1.7	163.0

Notes:

(1)	Risk parameter changes relate to changes in credit quality metrics of customers and counterparties (such as probability of default and loss given default) as well as internal ratings based model changes relating to counterparty credit risk in line with European Banking Authority Pillar 3 Guidelines.
(2)	The movements in Other include the following: a.  RWA benefit of £0.8 billion as a result of the CRR COVID-19 amendment for Infrastructure Supporting Factor. b.  Asset transfers from NatWest Markets to Commercial.
(3)	The movement in Acquisitions & Disposals reflected a portfolio sale of non-performing loans in Ulster Bank RoI.

Key points

Total RWAs decreased by £7.3 billion during the period due to the following:

· Credit risk RWAs decreased by £7.4 billion due to repayments and expired facilities of c.£4 billion in Commercial Banking, a reduction of c.£0.8 billion due to improved risk metrics in Retail Banking and reduced exposures in Ulster Bank RoI in line with the current exit strategy. In addition, favourable foreign exchange movements resulted in further reductions.

· Operational risk RWAs reduced by £0.9 billion following the annual recalculation in Q1 2021.

· Counterparty credit risk RWAs reduced by £0.5 billion as a result of lower exposures in NatWest Markets.

· The £1.5 billion increase in market risk RWAs mainly reflected an increase in modelled market risk following the announcement of GBP LIBOR cessation in March 2021 as a result of including modelled GBP LIBOR basis risk post 4 January 2022.  Regulatory approval has been obtained in July 2021 to update the VaR model and this will remove this impact in Q3 2021.

Risk and capital management Capital, liquidity and funding riskcontinued Funding sources The table below shows the carrying values of the principal funding sources based on contractual maturity. Balance sheet captions include balances held at all classifications under IFRS 9. 30 June 2021 31 December 2020 Short-term Long-term Short-term Long-term less than more than less than more than 1 year 1 year Total 1 year 1 year Total £m £m £m £m £m £m Bank deposits Repos 4,261 - 4,261 6,470 - 6,470 Other bank deposits (1) 7,156 2,977 10,133 5,845 8,291 14,136 11,417 2,977 14,394 12,315 8,291 20,606 Customer deposits Repos 16,750 - 16,750 5,167 - 5,167 Non-bank financial institutions 56,430 115 56,545 53,475 147 53,622 Personal 221,480 1,042 222,522 208,046 1,183 209,229 Corporate 171,327 70 171,397 163,595 126 163,721 465,987 1,227 467,214 430,283 1,456 431,739 Trading liabilities (2) Repos (3) 23,720 - 23,720 19,036 - 19,036 Derivative collateral 17,165 - 17,165 23,229 - 23,229 Other bank customer deposits 920 726 1,646 819 985 1,804 Debt securities in issue - Medium term notes 378 827 1,205 527 881 1,408 42,183 1,553 43,736 43,611 1,866 45,477 Other financial liabilities Customer deposits 546 172 718 616 180 796 Debt securities in issue:  Commercial papers and certificates of deposit 7,327 143 7,470 7,086 168 7,254  Medium term notes 6,492 27,605 34,097 4,648 29,078 33,726  Covered bonds 25 2,890 2,915 53 2,967 3,020  Securitisation - 918 918 - 1,015 1,015 14,390 31,728 46,118 12,403 33,408 45,811 Subordinated liabilities 1,106 7,590 8,696 365 9,597 9,962 Total funding 535,083 45,075 580,158 498,977 54,618 553,595 Of which: available in resolution (4) - 28,412 28,412 - 28,823 28,823 Notes: (1)  Includes nil (31 December 2020 - £5.0 billion) relating to Term Funding Scheme with additional incentives for Small and Medium-sized Enterprises participation and £2.6 billion (31 December 2020 - £2.8 billion) relating to NatWest Group's participation in central bank financing operations under the European Central Bank's targeted Long-term financing operations. (2)  Excludes short positions of £32.1 billion (31 December 2020 - £26.8 billion). (3)  Comprises central & other bank repos of £1.3 billion (31 December 2020 - £1.0 billion), other financial institution repos of £20.5 billion (31 December 2020 - £16.0 billion) and other corporate repos of £1.9 billion (31 December 2020 - £2.0 billion). (4)  Eligible liabilities (as defined in the Banking Act 2009 as amended from time to time) that meet the eligibility criteria set out in the regulations, rules, policies, guidelines, or statements of the Bank of England including the Statement of Policy published by the Bank of England in June 2018. The balance consists of £22.0 billion (31 December 2020 - £20.9 billion) under debt securities in issue (senior MREL) and £6.4 billion (31 December 2020 - £7.9 billion) under subordinated liabilities.

 

Risk and capital management

Capital, liquidity and funding risk continued

Liquidity portfolio The table below shows the liquidity portfolio by product, with primary liquidity aligned to internal stressed outflow coverage and regulatory LCR categorisation. Secondary liquidity comprises assets eligible for discount at central banks, which do not form part of the liquid asset portfolio for LCR or internal stressed outflow purposes. Liquidity value 30 June 2021 31 December 2020 NatWest NWH UK DoL NatWest NWH UK DoL Group (1) Group (2) Sub (3) Group  Group  Sub  £m £m £m £m £m £m Cash and balances at central banks 148,904 117,162 111,310 115,820 86,575 86,575  AAA to AA- rated governments 34,639 25,254 24,490 50,901 37,086 35,875  A+ and lower rated governments 38 - - 79 - -  Government guaranteed issuers, Public sector entities and  Government sponsored entities 265 265 140 272 272 141  International organisations and multilateral development   banks 3,175 2,247 1,874 3,140 2,579 2,154 LCR level 1 bonds 38,117 27,766 26,504 54,392 39,937 38,170 LCR level 1 assets 187,021 144,928 137,814 170,212 126,512 124,745 LCR level 2 assets 116 - - 124 - - Non-LCR eligible assets - - - - - - Primary liquidity  187,137 144,928 137,814 170,336 126,512 124,745 Secondary liquidity (4) 89,909 89,685 86,445 91,985 91,761 88,774 Total liquidity value 277,046 234,613 224,259 262,321 218,273 213,519 Notes: (1) NatWest Group includes the UK Domestic Liquidity Sub-Group (UK DoLSub), NatWest Markets Plc and other significant operating subsidiaries that hold liquidity portfolios. These include The Royal Bank of Scotland International Limited, NWM N.V. and Ulster Bank Ireland DAC who hold managed portfolios that comply with local regulations that may differ from PRA rules. (2) NWH Group comprises UK DoLSub & Ulster Bank Ireland DAC who hold managed portfolios that comply with local regulations that may differ from PRA rules. (3) UK DoLSub comprises NatWest Group's four licensed deposit-taking UK banks within the ring-fenced bank: NWB Plc, RBS plc, Coutts & Company and Ulster Bank Limited. (4) Comprises assets eligible for discounting at the Bank of England and other central banks. (5) NatWest Markets Plc liquidity portfolio is reported in the NatWest Markets Plc Company Announcement. (6) Following a change in methodology in our internal stressed outflow coverage metric, cash placed at Central Bank of Ireland within UBIDAC is now reported in the liquidity portfolio.

 

Risk and capital management

Non-traded market risk

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.

Key developments 

● The global economy showed progression towards recovery in H1 2021 as COVID-19 vaccination programmes gathered pace and economies opened up. Market concerns turned to the impact of central bank actions in supporting recovery and managing inflation. Yield curves rose higher in anticipation of earlier rises in central bank policy rates and/or action to reduce quantitative easing. ● The five-year sterling swap rate increased to 0.47% at the end of June 2021 from (0.01)% at the end of December 2020. The ten-year sterling swap rate also increased, to 0.71% from 0.16%.

● The structural hedge notional increased by £21 billion from £169 billion to £190 billion, mainly due to the increase in deposit volumes realised through the pandemic. The structural hedge yield fell over the same period to 0.80% from 1.00% as new hedges were booked at current market rates and maturing hedges were replaced. ● During H1 2021, NatWest Group continued to progress its transition from LIBOR to alternative risk-free rates. Income allocated to sterling product and equity hedges is now almost entirely benchmarked against the SONIA swap rate rather than LIBOR. ● Sterling strengthened against both the US dollar and the euro over the period. Against the dollar, sterling was 1.38 at 30 June 2021 compared to 1.37 at 31 December 2020. Against the euro, it was 0.85 at 30 June 2021 compared to 0.90 at 31 December 2020. Structural foreign currency exposure decreased, in sterling equivalent terms, by £459 million over the period.

Non-traded internal VaR (1-day 99%) The following table shows one-day internal banking book Value-at-Risk (VaR) at a 99% confidence level, split by risk type. Half year ended 30 June 2021 30 June 2020 31 December 2020 Period Period Period Average Maximum Minimum end Average Maximum Minimum end Average Maximum Minimum end £m £m £m £m £m £m £m £m £m £m £m £m Interest rate 11.7 13.0 9.2 12.8 12.8 16.9 8.0 16.9 15.5 17.7 12.3 12.3 Credit spread 103.6 113.5 99.6 99.6 99.6 121.1 63.7 114.7 106.7 111.7 103.1 111.5 Structural foreign   exchange rate 11.0 12.8 9.2 12.8 11.9 14.7 9.8 14.7 9.6 10.5 9.1 8.9 Equity 11.3 11.7 11.1 11.7 30.6 33.5 25.3 31.6 26.3 35.4 24.9 11.6 Pipeline risk (1) 0.3 0.4 0.3 0.4 0.5 0.7 0.3 0.5 0.4 0.7 0.3 0.3 Diversification (2) (3.4) (8.5) (28.6) (25.8) (20.3) 4.2 Total 134.5 147.1 128.8 128.8 126.8 159.9 70.8 152.6 138.2 159.9 70.8 148.8 Notes: (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) NatWest 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.

Key points

● Non-traded VaR was broadly constant over H1 2021 compared to the prior period, reflecting a largely stable portfolio. ● The decrease in equity VaR, on an average basis, reflected the disposal of SABB during Q4 2020.

Risk and capital management

Non-traded market risk   continued

Structural hedging

NatWest Group has a significant pool of stable, non and low interest-bearing liabilities, principally comprising equity and money transmission accounts. These balances are usually hedged, either by investing directly in longer-term fixed-rate assets (such as fixed-rate mortgages or UK Government gilts) or by using interest rate swaps, which are generally booked as cash flow hedges of floating rate assets, in order to provide a consistent and predictable revenue stream.

After hedging the net interest rate exposure externally, NatWest Group allocates income to equity or products in structural hedges by reference to the relevant interest rate swap curve. Over time, this approach has provided a basis for stable income attribution to products and interest rate returns. The programme aims to track a time series of medium-term swap rates, but the yield will be affected by changes in product volumes and NatWest Group's capital composition.

The table below shows the total income and total yield, incremental income relative to short-term cash rates, and the period-end and average notional balances associated with structural hedges in NatWest Group. 

	Half year ended
	30 June 2021						30 June 2020						31 December 2020
			Period						Period						Period
	Incremental	Total	-end	Average	Total		Incremental	Total	-end	Average	Total		Incremental	Total	-end	Average	Total
	income	income	notional	notional	yield		income	income	notional	notional	yield		income	income	notional	notional	yield
	£m	£m	£bn	£bn	%		£m	£m	£bn	£bn	%		£m	£m	£bn	£bn	%
Equity structural
hedging	235	244	23	23	2.13		209	294	24	25	2.39		269	286	23	23	2.46
Product structural
hedging	360	412	146	135	0.61		146	503	114	112	0.90		397	455	125	118	0.77
Other structural
hedging	74	62	21	22	0.56		42	78	20	20	0.78		77	72	21	21	0.69
Total	669	718	190	180	0.80		397	875	158	157	1.12		743	813	169	162	1.00

Equity structural hedges refer to income allocated primarily to equity and reserves. At 30 June 2021, the equity structural hedge notional was allocated between NWH Group and NWM Plc in a ratio of approximately 80/20 respectively.

Product structural hedges refer to income allocated to customer products by NWH Treasury, mainly current accounts and customer deposits in Commercial Banking and UK Retail Banking. Other structural hedges refer to hedges managed by UBIDAC, Private Banking and RBS International. Hedges associated with Ulster Bank Limited were moved from other structural hedges to product hedges in H1 2021 as Ulster Bank Limited products migrated to NatWest Bank Plc.

At 30 June 2021, approximately 93% by notional of total structural hedges were sterling-denominated.

The following table presents the incremental income associated with product structural hedges at segment level.

	Half year ended
	30 June	30 June	31 December
	2021	2020	2020
	£m	£m	£m
Retail Banking	168	66	185
Commercial Banking	192	80	212
Total	360	146	397

Key points

●	Expectations of an economic recovery after the pandemic led to rising yield curves. The five-year sterling swap rate rose to 0.47% at 30 June 2021 from (0.01)% at 31 December 2020. The ten-year sterling swap rate also rose, to 0.71% from 0.16%.
●	The yield of the structural hedge fell in H1 2021. The hedge notional increased, resulting in new hedges being written at current market rates. Maturing hedges were replaced with new hedges at lower rates.
●	Short-term rates fell in 2020 as a result of the COVID-19 pandemic. That led to incremental income increasing in H2 2020, compared to H1 2020, and remaining high in H1 2021.
●	The increase in structural hedge notional mainly resulted from hedging Personal and Commercial deposits, which increased through the pandemic.

 

Risk and capital management

Non-traded market risk continued

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 always match changes in market rates of interest or central bank policy rates.

Earnings sensitivity is derived from a market-implied forward rate curve. A simple scenario is shown that projects forward earnings based on the 30 June 2021 balance sheet, which is assumed to remain constant. A base-case earnings forecast is derived from the market-implied curve, which is then subject to interest rate shocks. The difference between the base-case forecast and the shock gives an indication of underlying sensitivity to interest rate movements.

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.

Three-year 25 basis point sensitivity table

The table below shows the sensitivity of net interest earnings - for both structural hedges and managed rate accounts - on a one, two and three-year forward-looking basis to an upward or downward interest rate shift of 25 basis points.

In the upward rate scenario, yield curves were assumed to move in parallel, at both year-ends.

The downward rate scenarios at both 30 June 2021 and 31 December 2020 allow interest rates to fall to negative rates.

	+25 basis points upward shift				-25 basis points downward shift
	Year 1	Year 2 (1)	Year 3 (1)		Year 1	Year 2 (1)	Year 3 (1)
30 June 2021	£m	£m	£m		£m	£m	£m
Structural hedges	39	127	215		(39)	(127)	(215)
Managed margin	414	365	287		(374)	(420)	(395)
Other	(3)				7
Total	450	492	502		(406)	(547)	(610)
31 December 2020
Structural hedges	37	118	199		(37)	(118)	(199)
Managed margin	319	380	387		(258)	(285)	(292)
Other	15				(20)
Total	371	498	586		(315)	(403)	(491)

Note:

(1)  The projections for Year 2 and Year 3 consider only the main drivers of earnings sensitivity, namely structural hedging and margin management. 

Key points

●	Structural hedge sensitivities are affected by structural hedging volumes. Managed margin sensitivities are affected by loan and deposit volumes and by the level of interest rates.
●	The higher volume of customer deposits and structural hedging at 30 June 2021 compared to 31 December 2020 was a key driver of changes in sensitivities between the two dates.
●	Adverse sensitivity to the 25-basis-point downward scenario was greater at 30 June 2021 than at 31 December 2020. This was mainly because assumptions regarding the extent to which negative rates would be passed through to loans and deposits in this scenario had less impact.
●	At 30 June 2021, the higher level of rates in the base case affected estimates of the extent to which base rate rises are passed through to managed rate deposits in upward rate shift scenarios (notably in year 3 of the 25-basis-point upward shift).

One-year 25 and 100 basis point sensitivity table

The following table analyses the one-year scenarios by currency and, in addition, shows the impact over one year of a 100-basis-point upward shift in all interest rates.

	Shifts in yield curve
	30 June 2021				31 December 2020
	+25 basis	-25 basis	+100 basis		+25 basis	-25 basis	+100 basis
	points	points	points		points	points	points
	£m	£m	£m		£m	£m	£m
Euro	6	(11)	97		7	(6)	99
Sterling	405	(358)	1,253		336	(287)	1,109
US dollar	37	(35)	147		26	(22)	102
Other	2	(2)	14		2	-	7
Total	450	(406)	1,511		371	(315)	1,317

 

Risk and capital management

Non-traded market risk continued

Foreign exchange risk The table below shows structural foreign currency exposures. Structural Net foreign currency Residual investments Net exposures structural in foreign investment pre-economic Economic foreign currency operations hedges hedges hedges (1) exposures 30 June 2021 £m £m £m £m £m US dollar 1,291 - 1,291 (1,291) - Euro 6,286 (1,022) 5,264 - 5,264 Other non-sterling 996 (331) 665 - 665 Total 8,573 (1,353) 7,220 (1,291) 5,929 31 December 2020 US dollar 1,299 (3) 1,296 (1,296) - Euro 6,485 (829) 5,656 - 5,656 Other non-sterling 1,077 (350) 727 - 727 Total 8,861 (1,182) 7,679 (1,296) 6,383 Note: (1) Economic hedges of US dollar net investments in foreign operations represent US dollar equity securities that do not qualify as net investment hedges for accounting purposes. They provide an offset to structural foreign exchange exposures to the extent that there are net assets in overseas operations available. Economic hedges of other currency net investments in foreign operations represent monetary liabilities that are not booked as net investment hedges. Key points  ● Sterling strengthened against the US dollar and the euro over the period. ● The increase in euro hedging related to NatWest Bank's investment in its German branch. ● Changes in foreign currency exchange rates affect equity in proportion to structural foreign currency exposure. For example, a 5% strengthening or weakening in foreign currencies against sterling would result in a gain or loss of £0.4 billion in equity respectively.

 

Risk and capital management

Traded market risk

Traded market risk is the risk arising from changes in fair value on positions, assets, liabilities or commitments in trading portfolios as a result of fluctuations in market prices.

Traded VaR (1-day 99%) The table below shows one-day internal value-at-risk (VaR) for NatWest Group's trading portfolios, split by exposure type. Half year ended 30 June 2021 30 June 2020 31 December 2020 Period Period Period Average Maximum Minimum end Average Maximum Minimum end Average Maximum Minimum end £m £m £m £m £m £m £m £m £m £m £m £m Interest rate 11.3 19.0 4.5 17.4 10.1 20.2 6.1 6.1 7.3 11.4 4.8 6.3 Credit spread 11.0 13.4 9.4 11.2 16.3 27.2 8.7 17.7 14.4 18.8 10.0 10.3 Currency 3.9 9.4 2.0 2.4 4.2 8.4 2.1 3.9 4.1 7.0 2.1 3.0 Equity 0.5 0.8 0.2 0.2 0.8 2.0 0.3 0.3 0.4 0.8 0.2 0.7 Commodity 0.2 0.5 - - 0.1 0.3 - 0.1 0.2 0.6 - 0.2 Diversification (1) (13.5) (15.5) (14.8) (9.6) (10.9) (10.3) Total 13.4 23.9 9.5 15.7 16.7 25.7 10.1 18.5 15.5 22.2 10.2 10.2 Note: (1) NatWest 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.

Key points 

●	The increase in average interest rate VaR, compared to the prior period, reflected a rise in tenor basis risk in sterling flow trading. This related to the transition from LIBOR to alternative risk-free rates. The regulator has approved an update of the VaR model, which will remove this impact during Q3 2021.
●	The decrease in average credit spread VaR mostly reflected a tightening of credit spreads over the period.
●	Traded VaR remained within appetite throughout the period.

 

Risk and capital management

Other risks

Operational risk

· Management attention focused heavily on operational resilience to ensure that planning, controls and operational activities remained robust and appropriate. There was also continuing focus on the potential operational risks arising from changes in working practices. 

· The security threat and the potential for cyber-attacks on NatWest Group and its supply chain is closely monitored. There is continuous enhancement of NatWest Group's defences against the evolving threat and ongoing focus on assuring the security of the supply chain.

Conduct & compliance risk

· The impact of the pandemic on NatWest Group's conduct and regulatory compliance risk profiles remained an important area of focus. This included oversight of NatWest Group's diverse initiatives to support its customers throughout the crisis. While NatWest Group acted to ensure customer needs were met at pace, the associated conduct and compliance risks were carefully assessed and monitored throughout.

· In addition, there was a sustained emphasis on oversight of NatWest Group's pricing, payment and forbearance treatment strategies to support customers in recent months, as well as prioritising the delivery of mandatory and regulatory change programmes.

· NatWest Group remains committed to ensuring its transition from LIBOR to risk-free rates by the end of 2021 is appropriately managed and controlled to ensure the best outcomes for NatWest Group and its customers.

Climate risk

· A qualitative statement of appetite for climate risk was also approved by NatWest Group Board in April 2021. The appetite statement reflects the ambitions of NatWest Group to support customers while managing the carbon impact and risk exposure of the organisation in line with its commitments.

· Throughout the first half of 2021, NatWest Group continued to develop its data and modelling capability to assess the impact of its customers' physical and transition risks, and collaborated with a range of industry initiatives to support the wider development of climate risk scenario analysis. Following this work, NatWest Group will undertake the Bank of England's Climate Biennial Exploratory Scenario during H2 2021.

 

END

 

 

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