FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
For 19
February, 2021
Commission
File Number: 001-10306
NatWest
Group plc
RBS,
Gogarburn, PO Box 1000
Edinburgh
EH12 1HQ
(Address
of principal executive offices)
Indicate
by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40-F.
Form
20-F X Form 40-F
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by check mark if the registrant is submitting the Form 6-K in paper
as permitted by Regulation S-T Rule
101(b)(1):_________
Indicate
by check mark if the registrant is submitting the Form 6-K in paper
as permitted by Regulation S-T Rule
101(b)(7):_________
Indicate
by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information
to the Commission pursuant to Rule 12g3-2(b) under the Securities
Exchange Act of 1934.
Yes ___
No X
If
"Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82-
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The following information was issued as Company announcements
in London, England and is furnished pursuant to General Instruction
B to the General Instructions to Form
6-K:
NatWest Group plc 19 February 2021
Annual Report and Accounts 2020
Pillar 3 Report 2020
A copy of the Annual Report and Accounts 2020 for NatWest Group plc
(NatWest Group) has been submitted to the National Storage
Mechanism and will shortly be available for inspection at:
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
This document is available on our website at https://investors.natwestgroup.com/reports-archive
A printed version will be mailed to shareholders who have opted for
a hard copy ahead of the Annual General Meeting for which formal
Notice will be given in due course.
We have also published the 2020 Pillar 3 report, available on our
website. For further information, please contact:
Media Relations
+44 (0) 131 523 4205
Investors Alexander Holcroft
Investor Relations
+44 (0) 207 672 1982
For the purpose of compliance with the Disclosure Guidance and
Transparency Rules, this announcement also contains risk factors
and details of related party transactions extracted from the Annual
Report and Accounts 2020 in full unedited text. Page references in
the text refer to page numbers in the Annual Report and Accounts
2020.
Principal Risks and Uncertainties
Set out
below are certain risk factors that could adversely affect NatWest
Group’s future results, its financial condition and prospects
and cause them to be materially different from what is forecast or
expected, and directly or indirectly impact the value of its
securities in issue. These risk factors are broadly categorised and
should be read in conjunction with other sections of this annual
report, including the forward-looking statements section, the
strategic report and the risk and capital management section. They
should not be regarded as a complete and comprehensive statement of
all potential risks and uncertainties facing NatWest Group. The current
COVID-19 pandemic may exacerbate any of the risks described
below.
Risks relating to the COVID-19 pandemic
The effects of the COVID-19 pandemic on the UK, global economies
and financial markets, and NatWest Group’s customers, as well
as its competitive environment may continue to have a material
adverse effect on NatWest Group’s business, results of
operations and outlook.
In
March 2020, the World Health Organization declared the spread of
the COVID-19 virus a pandemic. Since then, many countries,
including the UK (NatWest Group’s most significant market)
have at times imposed strict social distancing measures,
restrictions on non-essential activities and travel quarantines, in
an attempt to slow the spread and reduce the impact of the COVID-19
pandemic.
The UK
economy, as well as most countries, went into recession in 2020 as
measures were introduced to reduce the spread of the virus. UK
economic output fell again in November 2020, according to estimates
from the Office for National Statistics, as many restrictions were
re-introduced towards the end of 2020 and at the start of 2021. The
COVID-19 pandemic has caused significant reductions in levels of
personal and commercial activity, reductions
in consumer spending, increased levels of corporate debt and, for
some customers, personal debt, increased unemployment and
significant market volatility in asset prices, interest rates and
foreign exchange rates. It has also caused physical disruption and
slow-down to global supply chains and working practices, all of
which have affected NatWest Group’s customers. NatWest Group
has significant exposures to many of the commercial sectors
economically impacted by the COVID-19 pandemic, including property,
retail, leisure and travel.
Further
waves of infection may result in further restrictions in affected
countries and regions. While vaccine treatment is currently being
deployed, the pace of deployment and ultimate effectiveness is
uncertain, and vaccines may fail to achieve immunisation that is
significant within the population. Therefore, significant
uncertainties remain as to how long the COVID-19 pandemic will
last. Even when restrictions are relaxed, they may be re-imposed,
sometimes at short notice if either immunisation is insufficient or
new strains of the COVID-19 virus or other diseases develop into
new epidemics or pandemics.
Significant
uncertainties continue as to the extent of the economic contraction
and the path and length of time required to achieve economic
recovery.
In
response to the COVID-19 pandemic, central banks, governments,
regulators and legislatures in the UK and elsewhere have announced
historic levels of support and various schemes for impacted
businesses and individuals including forms of financial assistance
and legal and regulatory initiatives, including further reductions
in interest rates. Whether or not these measures effectively
mitigate the negative impacts of the COVID-19 pandemic on NatWest
Group, some of these measures, or further measures, such as
negative interest rates, may also have a material adverse effect on
NatWest Group’s business and performance. It is uncertain as
to how long the above-mentioned financial assistance and legal and
regulatory initiatives may last, how they may evolve in the future
or how consumers and businesses may react to such initiatives.
NatWest Group’s consumer customers and corporate clients may
be negatively impacted when these support schemes and initiatives
are scaled back and ultimately ended, which in turn could expose
NatWest Group to increased credit and counterparty risk. In
addition, the COVID-19 pandemic related uncertainties and the range
of prudential regulatory support has made reliance on analytical
models and planning and forecasting for NatWest Group more complex,
and may result in uncertainty impacting the risk profile of NatWest
Group and/or that of the wider banking industry. The medium and
long-term implications of the COVID-19 pandemic for NatWest Group
customers, the UK housing market, and the UK and global economies
and financial markets remain uncertain, and may continue to have a
material adverse effect on NatWest Group’s business, results
of operations and outlook.
The adverse impact of the COVID-19 pandemic on the credit quality
of NatWest Group’s counterparties and the implementation of
support schemes in response of the COVID-19 pandemic has increased
NatWest Group’s exposure to counterparty risk, which may
adversely affect its business, results of operations and
outlook.
The
effects of the COVID-19 pandemic have adversely affected the credit
quality of many of NatWest Group’s borrowers and other
counterparties. As a result, NatWest Group has experienced (and may
continue to experience) elevated exposure to credit risk and
demands on its funding from, for example, customers and borrowers
drawing down upon committed credit facilities. If borrowers or
other counterparties default or suffer deterioration in credit,
this would increase impairment charges, credit reserves,
write-downs and regulatory expected loss. An increase in drawings
upon committed credit facilities may also increase NatWest
Group’s RWAs. In addition, the level of household
indebtedness in the UK remains high. The ability of households to
service their debts could be worsened by a period of high
unemployment caused by the COVID-19 pandemic, particularly if
prolonged. NatWest Group’s mortgage and wholesale property
loans portfolio may also be subject to higher impairment charges as
a result of the COVID-19 pandemic if volatility in the property
market results in weakened property prices, particularly if default
rates increase. If NatWest Group experiences losses and a reduction
in future profitability, this is likely to affect the recoverable
value of fixed assets, including goodwill and deferred taxes, which
may lead to further write-downs. See also, ‘NatWest Group has
significant exposure to counterparty and borrower
risk’.
NatWest
Group has applied an internal analysis of multiple economic
scenarios (MES) together with the determination of specific overlay
adjustments to inform its IFRS 9 ECL (Expected Credit Loss). The
recognition and measurement of ECL is complex and involves the use
of significant judgement and estimation. This includes the
formulation and incorporation of multiple forward-looking economic
scenarios into ECL to meet the measurement objective of IFRS 9. The
ECL provision is sensitive to the model inputs and economic
assumptions underlying the estimate. Going forward, NatWest Group
anticipates observable credit deterioration of a proportion of
assets resulting in a systematic uplift in defaults, which is
mitigated by those economic assumption scenarios being reflected in
the Stage 2 ECL across portfolios, along with a combination of post
model overlays in both wholesale and retail portfolios reflecting
the uncertainty of credit outcomes. See also, ‘Risk and
capital management’. A credit deterioration would also lead
to RWA increases. Furthermore, the assumptions and judgments used
in the MES and ECL assessment at 31 December 2020 may not prove to
be adequate resulting in incremental ECL provisions for NatWest
Group. As government support schemes reduce, defaults are expected
to rise with more ECLs cases moving from Stage 2 to Stage
3.
In line
with certain mandated COVID-19 pandemic support schemes, NatWest
Group has sought to assist affected customers with a number of
initiatives including NatWest Group’s participation in BBLS,
CBILS and CLBILS products. NatWest Group has sought to manage the
risks of fraud and money laundering against the need for the fast
and efficient release of funds to customers and businesses. NatWest
Group may be exposed to fraud, conduct and litigation risks arising
from inappropriate approval (or denial) of BBLS or the enforcing or
pursuing repayment of CBILS and BBLS (or a failure to exercise
forbearance), which may have a material adverse effect on NatWest
Group’s reputation and results of operations. The
implementation of the initiatives and efforts mentioned above may
result in litigation, regulatory and government actions and
proceedings. These actions may result in judgments, settlements,
penalties or fines. Any of the above could have a material adverse
effect on NatWest Group’s business, results of operations and
outlook.
The COVID-19 pandemic may adversely affect NatWest Group’s
strategy and impair its ability to meet its targets and to achieve
its strategic objectives.
The
COVID-19 pandemic may impact NatWest Group’s ability to meet
the financial, capital and operational targets which it has set as
part of its Purpose-led Strategy, including in relation to capital
distributions and dividends to shareholders by NatWest Group plc.
It is uncertain as to when NatWest Group plc will be able to resume
capital distributions (and any associated distribution-linked
contribution to the NatWest Group Pension Fund), including
dividends to shareholders or share buybacks. It is also uncertain
as to whether the PRA may, in the future, ask banks to reconsider
their approaches to dividend payments and share buybacks, as it did
in March 2020 in response to the COVID-19 pandemic. In addition,
impairments or other losses as well as increases to capital
deductions may result in a decrease to NatWest Group plc’s
capital base. The form and timing of any capital distributions
therefore remains uncertain, and may depend on a variety of
factors, including the interests of various stakeholders (such as
UKGI).
The
COVID-19 pandemic has also caused significant market volatility,
which would have increased NatWest Group’s market risk RWA
significantly in the absence of temporary changes in regulatory
treatment. The risk of further RWA inflation remains and the
duration of such regulatory relief is uncertain. This may impair
NatWest Group’s ability to timely deliver on certain aspects
of its Purpose-led Strategy, including its plans to repurpose the
NatWest Markets franchise (the ‘NWM franchise’), which
may have a material adverse effect on NatWest Group’s
business, results of operations and outlook. See also,
‘NatWest Group is currently implementing its Purpose-led
Strategy, which carries significant execution and operational risks
and may not achieve its stated aims and targeted
outcomes’.
It is
uncertain as to how the broader macroeconomic business environment
and societal norms may be impacted by the COVID-19 pandemic, which
is already resulting in several significant wider societal changes.
For example, one of the most visible effects of the COVID-19
pandemic has been the impact on the most vulnerable groups of
society and concerns about systemic racial biases and social
inequalities.
In
addition, the COVID-19 pandemic has accelerated existing economic
trends that may radically change the way businesses are run and
people live their lives. These trends include digitalisation,
decarbonisation, automation, e-commerce and agile working, each of
which has resulted in significant market volatility in asset
prices. There is also increasing investor, regulatory and customer
scrutiny regarding how businesses address these changes and related
climate, environmental, social, governance and other sustainability
issues, including workplace health, safety and wellbeing, diversity
and inclusion, data privacy, workforce management, human rights and
supply chain management. Any failure or delay by NatWest Group to
adapt its business strategy and to establish and maintain effective
governance, procedures, systems and controls in response to these
changes and to manage emerging climate, environmental, social,
governance and other sustainability-related risks and opportunities
may have a material adverse effect on NatWest Group’s
reputation, business, results of operations and outlook and the
value of NatWest Group’s securities. See also, ‘Any
failure by NatWest Group to implement effective and compliant
climate change resilient systems, controls and procedures could
adversely affect NatWest Group’s ability to manage
climate-related risks’ and ‘A failure to adapt NatWest
Group’s business strategy, governance, procedures, systems
and controls to manage emerging sustainability-related risks and
opportunities may have a material adverse effect on NatWest
Group’s reputation, business, results of operations and
outlook’.
The
COVID-19 pandemic may also result in unexpected developments or
changes in financial markets, the fiscal, tax and regulatory
frameworks and consumer customer and corporate client behaviour,
which could intensify competition in the financial services
industry. If NatWest Group is not able to adapt or compete
effectively, it could experience loss of business, which in turn
could adversely affect its business, results of operations and
outlook.
The COVID-19 pandemic has
heightened NatWest
Group’s operational risks as many of its employees are
working remotely which may also adversely affect NatWest
Group’s ability to maintain effective internal
controls.
Due to
the COVID-19 pandemic, as at 31 January 2021, many of NatWest
Group’s employees continue to work remotely. This has increased reliance on the IT
systems that enable remote working and increased exposure to fraud,
conduct, operational and other risks and may place additional
pressure on NatWest Group’s ability to maintain effective
internal controls and governance frameworks. The IT systems that
enable remote working interface with third-party systems, and
NatWest Group could experience service denials or disruptions if
such systems exceed capacity or if a third-party system fails or
experiences any interruptions, all of which could result in
business and customer interruption and related reputational damage,
significant compensation costs, regulatory sanctions and/or a
breach of applicable regulations. See also, ‘NatWest
Group’s operations are highly dependent on its complex IT
systems (including those that enable remote working) and any IT
failure could adversely affect NatWest Group’.
Sustained
periods of remote working may also negatively affect workforce
morale. While NatWest Group has taken measures seeking to maintain
the health, wellbeing and safety of its employees during the
COVID-19 pandemic, these measures may be ineffective and could
result in increased expenses and widespread illness could
negatively affect staffing within certain functions, businesses or
geographies. Certain areas of NatWest Group also continue to
experience workloads that are heavier than usual as a result of
increased customer requirements, NatWest Group’s
COVID-19-specific product offerings or other related direct and
indirect effects. Resources have been diverted from certain
ordinary course activities, and regulatory and other change
projects, including
the implementation of NatWest Group’s Purpose-led Strategy,
which may have implications for the execution of related
deliverables and meeting regulatory and other deadlines. The
economic impact of the COVID-19 pandemic may also necessitate
changes in the remuneration of NatWest Group employees, in
particular at a senior level. For example, in March 2020 the PRA
requested that bank boards in response to the COVID-19 pandemic
should consider taking appropriate actions with regard to the
accrual, payment and vesting of variable remuneration. Any of the
above could impair NatWest Group’s ability to hire, retain
and engage well-qualified employees, especially at a senior level,
which in turn may adversely impact NatWest Group’s ability to
serve its customers efficiently and impact productivity across
NatWest Group. This could also adversely affect NatWest
Group’s reputation, and competitive position and its ability
to grow its business.
Any of
the above could have a material adverse effect on NatWest
Group’s business, results of operations and
outlook.
The effects of the COVID-19 pandemic could affect NatWest
Group’s ability to access sources of liquidity and funding,
which may result in higher funding costs and failure to comply with
regulatory capital, funding and leverage requirements.
Depending
on the severity and duration of market volatility resulting from
COVID-19 pandemic related uncertainties and the impact on capital
and RWAs, NatWest Group and its subsidiaries may be required to
adapt their funding plans in order to satisfy their respective
capital and funding requirements, which may have a material adverse
effect on NatWest Group. NatWest Group plc may also receive less in
dividends than expected from its subsidiaries. Furthermore,
significant fluctuation in foreign currency exchange rates, may
affect capital deployed in NatWest Group’s foreign
subsidiaries, branches and joint arrangements, securities issued by
NatWest Group in foreign currencies or the value of assets,
liabilities, income, RWAs, capital base and expenses and the
reported earnings of NatWest Group’s UK and non-UK
subsidiaries. In response to the COVID-19 pandemic, there have been
relaxations on certain countercyclical buffer requirements and
stress tests as well as the calculation of RWAs and leverage, which
may be reinstated in the future. Any downgrading to the credit
ratings and/or outlooks assigned to NatWest Group plc, its
subsidiaries and their respective debt securities as a result of
the economic impact of the COVID-19 pandemic could exacerbate
funding and liquidity risk, which could have a material adverse
effect on NatWest Group’s business, results of operations and
outlook.
NatWest Group’s results could be adversely affected if the
effects of the COVID-19 pandemic or other events trigger the
recognition of a goodwill impairment.
NatWest
Group capitalises goodwill, which is calculated as the excess of
the cost of an acquisition over the net fair value of the
identifiable assets, liabilities and contingent liabilities
acquired. Acquired goodwill is recognised at cost less any
accumulated impairment losses. As required by IFRS, NatWest Group
tests goodwill for impairment at least annually, or more frequently
when events or circumstances indicate that it might be
impaired.
An
impairment test compares the recoverable amount (the higher of the
value in use and fair value less cost to sell) of an individual
cash generating unit with its carrying value. At 31 December 2020,
NatWest Group plc carried goodwill of £5.6 billion on its
balance sheet. The value in use and fair value of NatWest
Group’s cash-generating units are affected by market
conditions, the economies in which NatWest Group operates and by
the effects of the COVID-19 pandemic.
The
goodwill held by NatWest Group plc relies on management’s
assumptions on future profitability. Goodwill is particularly
sensitive to changes in assumed future profitability, including as
a result of the effects of the COVID-19 pandemic. If actual
performance were to fall below management’s forecasts, then
there is a risk that an impairment of goodwill would become
necessary.
Where
NatWest Group is required to recognise a goodwill impairment, it is
recorded in NatWest Group’s income statement, but it has no
effect on NatWest Group’s regulatory capital position.
Changes in such assumptions may result in the carrying balance
being impaired, which could have a material adverse effect on
NatWest Group’s business, results of operations and
outlook.
Economic and political risk
Continuing uncertainty regarding the effects of the UK’s
withdrawal from the European Union may continue to adversely affect
NatWest Group and its operating environment.
After
the 2016 EU Referendum, the UK ceased to be a member of the EU and
the European Economic Area (‘EEA’) on 31 January 2020
(‘Brexit’). The 2020 EU-UK Trade and Cooperation
Agreement (‘TCA’) ended the transition period on 31
December 2020 and provides for free trade between the UK and EU
with zero tariffs and quotas on all goods that comply with the
appropriate rules of origin, with minimal coverage, however, for
financial services; UK-incorporated financial services providers no
longer have EU passporting rights and there is no mutual
recognition regime. Financial services may largely be subject to
individual equivalence decisions by relevant regulators. A number
of temporary equivalence decisions have been made that cover all
services offered by NatWest Group. The EU’s equivalence
regime does not cover most lending and deposit taking, and
determinations in respect of third countries have not, to date,
covered the provision of investment services. In addition,
equivalence determinations do not guarantee permanent access rights
and can be withdrawn with short notice. The TCA is accompanied by a
Joint Declaration on financial services which sets out an intention
for the EU and UK to cooperate on matters of financial regulation
and to agree a Memorandum of Understanding by March 2021. There is
no certainty, however, as to the form, scope and timing of any such
Memorandum of Understanding.
NatWest
Group has engaged in significant and costly Brexit planning and
contingency planning. NatWest Group continues to monitor regulatory
developments, and NatWest Group continues to seek advice on any
transitional regimes being introduced by individual EU countries.
It is updating its operating model accordingly. NatWest Group also
continues to assess where NatWest Group companies can obtain
bilateral regulatory permissions to permit business to continue
from its UK entities, transferring what cannot be continued to be
rendered from the UK to an EEA subsidiary. Where such regulatory
permissions are temporary or are withdrawn, a different approach
may need to be taken or may result in a change in operating model
or some business being ceased. Not all NatWest Group entities have
applied for bilateral regulatory permissions and instead intend to
move EEA business to an EEA licenced subsidiary. There is a risk
that such EEA licences may not be granted, and where these
permissions are not obtained, further changes to NatWest
Group’s operating model may be required or some business may
need to be ceased. In addition, failure to obtain regulatory
permissions in one part of NatWest Group may impact other parts of
NatWest Group adversely. Certain permissions are required in order
to maintain the ability to clear euro payments and others will
allow NatWest Group to continue to serve non-UK EEA customers.
Furthermore, transferring business to an EEA based subsidiary is a
complex exercise and involves legal, regulatory and executional
risks, and could result in a loss of business, customers or greater
than expected costs. The changes to NatWest Group’s operating
model have been costly and further changes to its business
operations, product offering and customer engagement could result
in further costs.
The
effects of the UK’s exit from the EU and the EEA are expected
to continue to affect many aspects of NatWest Group’s
business and operating environment, including as described
elsewhere in these risk factors, and may be material and/or cause a
near-term impact on impairments.
The
long-term effects of Brexit on NatWest Group’s operating
environment are difficult to predict. They may be impacted by wider
global macro-economic trends and events, particularly COVID-19
pandemic related uncertainties, which may significantly impact
NatWest Group and its customers and counterparties who are
themselves dependent on trading with the EU or personnel from the
EU. They may exacerbate the economic impacts of the COVID-19
pandemic on the UK, the Republic of Ireland (‘ROI’) and
the rest of EU/EEA.
Significant
uncertainty remains as to the extent to which EU/EEA laws will
diverge from UK law (including bank regulation), whether and what
equivalence determinations will be made by the various regulators
and therefore what the respective legal and regulatory arrangements
will be, under which NatWest Group and its subsidiaries will
operate. The legal and political uncertainty and any actions taken
as a result of this uncertainty, as well as new or amended rules,
could have a significant adverse impact on NatWest Group’s
businesses and non-UK operations and/or legal entity structure,
including attendant operating, compliance and restructuring costs,
level of impairments, capital requirements, regulatory environment
and tax implications and as a result may adversely impact NatWest
Group’s profitability, competitive position, business model
and product offering.
NatWest Group faces increased political and economic risks and
uncertainty in the UK and global markets.
NatWest
Group faces political uncertainty in Scotland, as a result of a
possible second Scottish independence referendum. Independence may
adversely impact NatWest Group with NatWest Group plc and other
NatWest Group entities (including NWM Plc) being incorporated
and/or headquartered in Scotland. Any changes to Scotland’s
relationship with the UK or the EU (as an indirect result of Brexit
or other developments) would impact the environment in which
NatWest Group and its subsidiaries operate, and may require further
changes to NatWest Group’s structure, independently or in
conjunction with other mandatory or strategic structural and
organisational changes which could adversely impact NatWest
Group.
The
outlook for the global economy over the medium-term remains
uncertain due to a number of factors including: the COVID-19
pandemic, resulting societal inequalities and changes, trade
barriers and the increased possibility of and/or continuation of
trade wars, widespread political instability (including as a result
of populism and nationalism, which may lead to protectionist
policies), an extended period of low inflation and low (or
negative) interest rates, climate, environmental, social and other
sustainability-related risks and global regional variations in the
impact and responses to these factors. These conditions could be
worsened by a number of factors including macro-economic
deterioration, increased instability in the global financial system
and concerns relating to further financial shocks or contagion (for
example, due to economic concerns in emerging markets), market
volatility or fluctuations in the value of the pound sterling, new
or extended economic sanctions, volatility in commodity prices or
concerns regarding sovereign debt. This may be compounded by the
ageing demographics of the populations in the markets that NatWest
Group serves, increasing inequalities, or rapid change to the
economic environment due to the adoption of technology and
artificial intelligence. Any of the above developments could
adversely impact NatWest Group directly (for example, as a result
of credit losses) or indirectly (for example, by impacting global
economic growth and financial markets and NatWest Group’s
customers and their banking needs).
In
addition, NatWest Group is exposed to risks arising out of
geopolitical events or political developments, such as, exchange
controls and other measures taken by sovereign governments that may
hinder economic or financial activity levels. Furthermore,
unfavourable political, military or diplomatic events, including
secession movements or the exit of other member states from the EU,
armed conflict, pandemics and widespread public health crises
(including the current COVID-19 pandemic and any future epidemics
or pandemics), state and privately sponsored cyber and terrorist
acts or threats, and the responses to them by governments and
markets, could negatively affect the business and performance of
NatWest Group, including as a result of the indirect effect on
regional or global trade and/or NatWest Group’s
customers.
The
value of NatWest Group’s financial instruments may be
materially affected by market risk, including as a result of market
fluctuations. Market volatility, illiquid market conditions and
disruptions in the credit markets may make it extremely difficult
to value certain of NatWest Group’s financial instruments,
particularly during periods of market displacement. This could
cause a decline in the value of NatWest Group’s financial
instruments, which may have an adverse effect on NatWest
Group’s results of operations in future periods, or
inaccurate carrying values for certain financial
instruments.
In
addition, financial markets are susceptible to severe events
evidenced by rapid depreciation in asset values, which may be
accompanied by a reduction in asset liquidity. Under these
conditions, hedging and other risk management strategies may not be
as effective at mitigating trading losses as they would be under
more normal market conditions. Moreover, under these conditions,
market participants are particularly exposed to trading strategies
employed by many market participants simultaneously and on a large
scale, increasing NatWest Group’s counterparty risk. NatWest
Group’s risk management and monitoring processes seek to
quantify and mitigate NatWest Group’s exposure to more
extreme market moves. However, severe market events have
historically been difficult to predict and NatWest Group could
realise significant losses if extreme market events were to
occur.
Changes in interest rates have significantly affected and will
continue to affect NatWest Group’s business and
results.
Interest
rate risk is significant for NatWest Group. Monetary policy has
been accommodative in recent years including initiatives
implemented by the Bank of England and HM Treasury, such as the
Term Funding Scheme with additional incentives for SMEs
(‘TFSME’), which have helped to support demand at a
time of pronounced fiscal tightening and balance sheet repair.
However, there remains considerable uncertainty as to the future
direction of interest rates and pace of change (as set by the Bank
of England), including as a result of the COVID-19 pandemic and its
effect on the UK economy as well as the general UK political or
economic climate. Further decreases in interest rates and/or
continued sustained low or negative interest rates would be
expected to continue to put further pressure on NatWest
Group’s interest income and profitability. Zero or negative
interest rates will require investment spend to implement a
strategic solution to allow a potential pass-through of those
interest rates in certain systems to relevant customer segments. A
lower or negative interest rate environment is likely to have an
adverse impact on the profitability of NatWest Group.
Conversely,
while increases in interest rates may support NatWest Group’s
interest income, sharp increases in interest rates could have
macroeconomic effects that lead to adverse outcomes for the
business. For example, they could lead to generally weaker than
expected growth, or even contracting GDP, reduced business
confidence, higher default rates on customer loans, higher levels
of unemployment or underemployment, and falling property prices in
the markets in which NatWest Group operates, all of which could
adversely affect the business and performance of NatWest
Group.
HM Treasury (or UKGI on its behalf) could exercise a significant
degree of influence over NatWest Group and further offers or sales
of NatWest Group’s shares held by HM Treasury may affect the
price of securities issued by NatWest Group.
In its
March 2020 Budget, the UK Government announced its intention to
continue the process of privatisation of NatWest Group plc and to
carry out a programme of sales of NatWest Group plc ordinary shares
with the objective of selling all of its remaining shares in
NatWest Group plc by 2025. On 6 February 2019, NatWest Group plc
obtained shareholder authority to make off-market purchases of its
ordinary shares from HM Treasury under the terms of a directed
buyback contract. The authority provided by this contract was
renewed at NatWest Group’s Annual General Meeting on 29 April
2020. As at 31 December 2020, the UK Government held 61.9% of the
issued ordinary share capital of NatWest Group plc. There can be no
certainty as to the continuation of the sell-down process or the
timing or extent of such sell-downs, which could result in a
prolonged period of increased price volatility on NatWest
Group’s ordinary shares.
Any
offers or sales of a substantial number of ordinary shares by HM
Treasury, expectations relating to the timing thereof, or any
associated directed buyback activity by NatWest Group, could affect
the prevailing market price for the outstanding ordinary shares of
NatWest Group plc.
HM
Treasury has indicated that it intends to respect the commercial
decisions of NatWest Group and that NatWest Group will continue to
have its own independent board of directors and management team
determining its own strategy. However, HM Treasury, as majority
shareholder, and UK Government Investments Limited
(‘UKGI’), as manager of HM Treasury’s
shareholding, could exercise a significant degree of influence over
the election of directors and appointment of senior management,
NatWest Group’s capital strategy, dividend policy,
remuneration policy or the conduct of NatWest Group’s
operations, and other things. HM Treasury or UKGI’s approach
depends on government policy, which could change, including as a
result of a general election. The manner in which HM Treasury or
UKGI exercises HM Treasury’s rights as majority shareholder
could give rise to conflicts between the interests of HM Treasury
and the interests of other shareholders, including as a result of a
change in government policy.
Changes in foreign currency exchange rates may affect NatWest
Group’s results and financial position.
Decisions
of major central banks (including the Bank of England, the European
Central Bank and the US Federal Reserve) and political or market
events, which are outside NatWest Group’s control, may lead
to sharp and sudden variations in foreign exchange
rates.
Although
NatWest Group is now principally a UK and ROI-focused banking
group, it is subject to foreign exchange risk from capital deployed
in NatWest Group’s foreign subsidiaries, branches and joint
arrangements and customer transactions denominated in a currency
other than the functional currency of NatWest Group. NatWest Group
also relies on issuing securities in foreign currencies that assist
in meeting NatWest Group’s minimum requirements for own funds
and eligible liabilities (‘MREL’) and NWM Plc deals
foreign exchange instruments. NatWest Group maintains policies and
procedures designed to manage the impact of exposures to
fluctuations in currency rates. Nevertheless, changes in currency
rates, particularly in the sterling-US dollar and euro-sterling
rates, can adversely affect the value of assets, liabilities
(including the total amount MREL eligible instruments), foreign
exchange dealing activity, income and expenses, RWAs and hence the
reported earnings and financial condition of NatWest
Group.
Strategic risk
NatWest Group is currently implementing its Purpose-led Strategy,
which carries significant execution and operational risks and may
not achieve its stated aims and targeted outcomes.
In
February 2020, NatWest Group announced a new strategy, focused on
becoming a Purpose-led business, designed to champion potential and
to help individuals, families and businesses to thrive. This
strategy is intended to reflect the rapidly shifting environment
and backdrop of unprecedented disruption in society driven by
technology and changing customer expectations, as accelerated by
the COVID-19 pandemic. NatWest Group aims to deliver this strategy,
referred to as its ‘Purpose-led Strategy’, through: (i)
four strategic priorities: ‘supporting customers at every
stage of their lives;’ ‘powered by innovation and
partnerships;’ ‘simple to deal with’; and
‘sharpened capital allocation;’ and (ii) three areas of
focus: climate change, enterprise and learning. This strategy
requires an internal cultural shift across NatWest Group as to how
performance is perceived and how NatWest Group conducts its
business. These changes are substantial and will take many years to
fully embed. These changes may not result in the expected outcome
within the timeline and in the manner currently
contemplated.
To
deliver against this purpose and deliver sustainable returns,
NatWest Group has been: focusing on the lifecycles of its customers
using insights about customers to evolve product and service
offerings; re-engineering and simplifying NatWest Group by updating
operational and technological capabilities and strengthening
governance and control frameworks to reduce costs and improve
customer journeys; focusing on innovation and partnership to drive
change and achieve growth in new product areas and customer
segments; and having a sharper focus on capital allocation and
deploying it more effectively for customers, in particular by
refocusing its NWM franchise and through its phased withdrawal from
ROI.
As part
of its Purpose-led Strategy, NatWest Group has set a number of
financial, capital and operational targets and expectations, both
for the short term and throughout the implementation period. These
include targets, amongst others, for: return on tangible equity,
CET1 ratio and dividend pay-out ratio. Achieving these targets
requires further significant reductions to NatWest Group’s
cost base. Realising these cost reductions will result in material
strategic costs, which may be more than currently expected. The
continued focus on meeting cost reduction targets may also mean
limited investment in other areas, which could affect NatWest
Group’s long-term prospects, product offering or competitive
position and its ability to meet its other targets and commitments,
including those related to customer satisfaction and its capacity
to respond to climate -related risks and opportunities in line with
its ambition. Any of the factors above, could jeopardise NatWest
Group’s ability to achieve its associated financial targets
and generate sustainable returns.
Implementing
the Purpose-led Strategy is highly complex as discussed above. More
generally, NatWest Group may seek to adapt its strategy, including
in respect of acquisitions, divestments, restructurings,
reorganisations or partnerships. There remains uncertainty as to
consolidation within the financial industry and the scale and
timing of any further NatWest Group strategic initiatives or
participation in any such consolidation.
NatWest
Group may not be able to successfully (i) implement all aspects of
its strategy; (ii) reach any or all of the related targets or
expectations of its Purpose-led Strategy; (iii) realise the
intended strategic objectives of any other future strategic
initiative, in the time frames contemplated or at all, which may
require additional management actions by NatWest Group. In
addition, NatWest Group’s ability to serve its target
customers, scale certain ventures, deliver growth in new markets,
refocus the NWM franchise and implement a phased withdrawal from
ROI may be impacted and the anticipated revenue, profitability and
cost reduction levels may not be achieved in the timescale
envisaged or at all. Moreover, NatWest Group’s strategy
involves a large number of concurrent and strategic actions and
initiatives, including refocusing of the NWM franchise and the
phased withdrawal from ROI, any of which could fail to be
implemented in the manner and to the extent currently contemplated,
including as a result of operational, legal, execution or other
issues.
The
refocusing of the NWM franchise and NatWest Group’s phased
withdrawal from ROI are two strategic initiatives that may entail
significant commercial, operational, legal and execution risks. For
the risks relating to the refocusing of the NWM franchise, see
‘NatWest Group is in the process of refocusing its NWM
franchise, which entails significant commercial, operational and
execution risks and the intended benefits for NatWest Group may not
be realised within the timeline and in the manner currently
contemplated’. NatWest Group’s phased withdrawal from
ROI, which may involve transfers of business, assets and
liabilities to third parties, entails many risks, the most
significant of which include: (i) anticipated reductions in net
income, total lending and RWAs; (ii) potential trapped or stranded
capital; (iii) the diversion of management resources and attention
away from day-to-day management; (iv) the recognition of disposal
losses as part of the orderly run-down of certain loan portfolios
which may be higher than anticipated; (v) execution risks arising
from the significant uncertainties of a phased withdrawal,
including the additional IT and operational expense and resource
required to mitigate manual and limited customer switching and
handling processes of Ulster Bank, potential counterparties and
other banks; (vi) customer action or inaction, or the inability to
obtain necessary approvals and/or support from governmental
authorities, regulators, trade unions and/or other stakeholders
resulting in additional cost, resource and delays; (vii) potential
loss of customers, resulting in retail and commercial deposit
outflows (or a failure to attract deposit inflows) and reduced
revenues and liquidity; (viii) increased people risk through the
potential loss of key colleagues and institutional knowledge and
increased challenges of attracting and retaining colleagues; (ix)
regulatory risk, including in relation to prudential, conduct and
other regulatory requirements; (x) the potential early repayment of
ECB funding and no or limited access to other Euro system funding
arrangements; (xi) brand and reputational risks due to press
speculation and stakeholder scrutiny about the future of the ROI
business. Any of these risks and uncertainties may cost more, be
more complex or worse than currently estimated and may adversely
affect NatWest Group’s ability to execute a phased withdrawal
from ROI.
In
addition, successful implementation of NatWest Group’s
strategy in part depends on initiatives and growth in ventures that
are new to NatWest Group or to the market. There is a risk,
therefore, that some or all these initiatives will not succeed, or
may be limited in scope or scale, including due to its current
ownership structure.
The
scale and scope of the intended changes present material business,
operational, IT system, internal culture, conduct and people risks
to NatWest Group as the planning and implementation of the
transformation programme are resource-intensive and disruptive, and
will divert management resources. In addition, implementing many
changes concurrently, in particular with respect to any strategic
partnerships, acquisitions or divestments, will require application
of robust governance and controls frameworks and robust IT systems.
There is a risk that NatWest Group may not be successful in doing
so. The implementation of the Purpose-led Strategy and any other
strategic initiatives could result in materially higher costs than
initially contemplated (including due to material uncertainties and
factors outside of NatWest Group’s control) and may not be
completed when planned, or at all, or could be phased or could
progress in a manner other than currently expected.
Changes
in the economic, political and regulatory environment in which
NatWest Group operates or regulatory uncertainty and changes,
strong market competition and industry disruption or economic
volatility, including as a result of the economic impact of the
COVID-19 pandemic, continued uncertainty surrounding the terms of
the UK’s future trading arrangements with the EU or changes in the scale and timing of
policy responses on climate change, may require NatWest Group to
adjust aspects of its strategy or the timeframe for its
implementation including in relation to its financial, capital and
operational targets and expectations. Because certain initiatives
depend on achieving growth in new ventures and opportunities for
NatWest Group, its strategy is vulnerable to an economic downturn.
NatWest Group’s strategy also requires ongoing confidence
from customers and the wider market, without which customer
activity and related income levels may fall or NatWest
Group’s reputation may be adversely affected.
Each of
these risks, and others identified in these Risk Factors,
individually or collectively could jeopardise the implementation
and delivery of the Purpose-led Strategy and other strategic
initiatives, result in higher than expected restructuring costs,
impact NatWest Group’s products and services offering, its
reputation with customers or business model and adversely impact
NatWest Group’s ability to deliver its strategy and meet its
targets and guidance, each of which could have a material adverse
impact on NatWest Group’s business, results of operations and
outlook.
NatWest Group is in the process of refocusing its NWM franchise,
which entails significant commercial, operational and execution
risks and the intended benefits for NatWest Group may not be
realised within the timeline and in the manner currently
contemplated.
As part
of its Purpose-led Strategy, NatWest Group has been seeking to
implement a more strategically congruent and economically
sustainable model
for its NWM franchise. As part of this, NatWest Group has been
refocusing the NWM franchise to principally serve NatWest
Group’s corporate and institutional customer base. This
requires NWM Group to simplify its operating model and technology
platform, as well as reduce its cost base and capital requirements.
A focus of the NWM franchise refocusing is the intended reduction
in its level of RWAs. This is
intended to be achieved by exiting certain exposures and optimising
inefficient capital across the NWM Group, especially in relation to
its Rates products.
The
refocusing of the NWM franchise entails significant execution risks
and is based on management plans, projections and models and is
subject to certain material assumptions and judgments which may
prove to be incorrect such that the go-forward strategy is
re-assessed (for example, if revenues reduce relatively faster than
costs; material execution issues arise or market distress occurs;
RWAs take longer to exit or are more costly to reduce than
anticipated; or the key franchise legal entities, NWM Plc and NWM
N.V., have difficulties accessing the funding market on acceptable
terms or at all).
Implementing
these changes to the NWM franchise entails significant commercial
and operational and risks. These include risks around how it is
perceived by its customers and stakeholders and the ability for NWM
to retain employees required to deliver the transition and whom are
key for its go-forward strategic priorities. Revenues and costs may
be negatively impacted (revenues, for example, may decrease
significantly more quickly than associated costs) and the
implementation may be more difficult or expensive than expected,
including as a result of the COVID-19 pandemic, the UK’s exit
from the EU and regulatory requirements. The orderly run-down of
certain of its portfolios and the reduction of its RWAs may be
accompanied by the recognition of disposal losses which may be
higher than anticipated, including due to a degraded economic
environment (in particular, as a result of the COVID-19 pandemic),
and may not lead to a concurrent and proportionate reduction in
required capital. The NWM Plc and NWM N.V. boards support the
financial plans and budgets, but continued successful
implementation of this strategy within the NWM franchise will
require their continued support, as well as the support of NWM Plc
and NWM N.V. management.
Financial resilience risk
NatWest Group may not meet targets and be in a position to continue
to make discretionary capital distributions (including dividends to
shareholders).
As part
of NatWest Group’s strategy, NatWest Group has become a UK
and ROI-focused banking group and as part of its Purpose-led
Strategy has set a number of financial, capital and operational
targets for NatWest Group including in respect of: CET1 ratio
targets, return on tangible equity (‘ROTE’), leverage
ratio targets, funding plans and requirements, reductions in RWAs
and the timing thereof, employee engagement, diversity and
inclusion as well as environmental, social and customer
satisfaction targets and discretionary capital distributions
(including dividends to shareholders). See also, ‘NatWest Group is
currently implementing its Purpose-led Strategy, which carries
significant execution and operational risks and may not achieve its
stated aims and targeted outcomes’.
NatWest
Group’s ability to meet its targets and to successfully meet
its strategy is subject to various internal and external factors
and risks. These include, but are not limited to, the impact of the
COVID-19 pandemic, market, regulatory, macroeconomic and political
uncertainties, operational risks and risks relating to NatWest
Group’s business model and strategy (including risks
associated with climate, environmental, governance and other
sustainability-related issues) and litigation, governmental
actions, investigations and regulatory matters.
A
number of factors, including the economic and other effects of the
COVID-19 pandemic, may impact NatWest Group’s ability to
maintain its CET1 ratio target and make discretionary capital
distributions. See also, ‘NatWest Group may not meet the
prudential regulatory requirements for capital and MREL, or manage
its capital effectively, which could trigger the execution of
certain management actions or recovery options’.
NatWest
Group’s ability to meet its planned reductions in its annual
underlying costs may vary considerably from year to year.
Furthermore, the focus on meeting cost reduction targets may result
in limited investment in other areas, which could affect NatWest
Group’s long-term product offering or competitive position
and its ability to meet its other targets, including those related
to customer satisfaction.
There
is a risk that NatWest Group may not meet its targets and
expectations or be in a position to continue to distribute capital
when regulatory distribution restrictions are eased, or that
NatWest Group will be a viable, competitive or profitable banking
business.
NatWest Group operates in markets that are highly competitive, with
increasing competitive pressures and technology
disruption.
The
markets within which NatWest Group operates are highly competitive.
NatWest Group expects such competition to continue and intensify in
response to the economic effects of the COVID-19 pandemic and other
changes. These include evolving customer behaviour, technological
changes (including digital currencies and the growth of digital
banking, including from fintech entrants), competitor behaviour,
new entrants to the market (including non-traditional financial
services providers such as large retail or technology
conglomerates, who may have competitive advantages in scale,
technology and customer engagement), competitive foreign-exchange
offerings, industry trends resulting in increased disaggregation or
unbundling of financial services or conversely the
re-intermediation of traditional banking services, and the impact
of regulatory actions and other factors. In particular,
developments in the financial sector resulting from new banking,
lending and payment solutions offered by rapidly evolving
incumbents, challengers and new entrants, notably with respect to
payment services and products, and the introduction of disruptive
technology may impede NatWest Group’s ability to grow or
retain its share and impact its revenues and profitability,
particularly in its key UK retail banking segment. Moreover,
innovations such as biometrics, artificial intelligence, the cloud,
blockchain, and quantum computing may rapidly facilitate industry
transformation. These trends have accelerated during the COVID-19
pandemic and may be catalysed by various regulatory and competition
policy interventions, including the UK initiative on Open Banking
(PSD2), Open Finance and other remedies imposed by the Competition
and Markets Authority (CMA) which are designed to further promote
competition within retail banking, as well as the
competition-enhancing measures under NatWest Group’s
Alternative Remedies Package. See also, ‘The cost of
implementing the Alternative Remedies Package (‘ARP’)
could be more onerous than anticipated’.
Increasingly
many of the products and services offered by NatWest Group are, and
will become, more technology intensive. For example, NatWest Group
recently invested in a number of fintech ventures, including
Mettle, FreeAgent, Tyl, Mentor Digital and Rapid Cash. NatWest
Group’s ability to develop such digital solutions (which also
need to comply with applicable and evolving regulations) has become
increasingly important to retaining and growing NatWest
Group’s customer business in the UK. There can be no
certainty that NatWest Group’s innovation strategy (which
includes investment in its IT capability intended to address the
material increase in customer use of online and mobile technology
for banking as well as selective acquisitions, which carry
associated risks) will be successful or that it will allow NatWest
Group to continue to grow such services in the future. Certain of
NatWest Group’s current or future competitors may be more
successful in implementing innovative technologies for delivering
products or services to their customers. NatWest Group may also
fail to identify future opportunities or derive benefits from
disruptive technologies in the context of rapid technological
innovation, changing customer behaviour and growing regulatory
demands, resulting in increased competition from traditional
banking businesses as well as new providers of financial services,
including technology companies with strong brand recognition, that
may be able to develop financial services at a lower cost
base.
NatWest
Group’s competitors may also be better able to attract and
retain customers and key employees, may have better IT systems, and
may have access to lower cost funding and/or be able to attract
deposits on more favourable terms than NatWest Group. Although
NatWest Group invests in new technologies and participates in
industry and research led initiatives aimed at developing new
technologies, such investments may be insufficient or ineffective,
especially given NatWest Group’s focus on its cost savings
targets. This may limit additional investment in areas such as
financial innovation and could therefore affect NatWest
Group’s offering of innovative products or technologies for
delivering products or services to customers and its competitive
position. Furthermore, the development of innovative products
depends on NatWest Group’s ability to produce underlying
high-quality data, failing which its ability to offer innovative
products may be compromised.
If
NatWest Group is unable to offer competitive, attractive and
innovative products that are also profitable and timely, it will
lose share, incur losses on some or all of its activities and lose
opportunities for growth. In this context, NatWest Group is
investing in the automation of certain solutions and interactions
within its customer-facing businesses, including through artificial
intelligence. Such initiatives may result in operational,
reputational and conduct risks if the technology used is defective,
or is not fully integrated into NatWest Group’s current
solutions. There can be no certainty that such initiatives will
deliver the expected cost savings and investment in automated
processes will likely also result in increased short-term costs for
NatWest Group.
In
addition, the implementation of its Purpose-led Strategy, including
the refocusing of its NWM franchise, NatWest Group’s phased
withdrawal from ROI, acquisitions, divestments, reorganisations and
restructurings and partnerships, and delivery on its climate
ambition, cost-reduction measures, as well as employee remuneration
constraints, may also have an impact on its ability to compete
effectively and intensified competition from incumbents,
challengers and new entrants could affect NatWest Group’s
ability to maintain satisfactory returns. Moreover, activist
investors have increasingly become engaged and interventionist in
recent years, which may pose a threat to NatWest Group’s
strategic initiatives. Furthermore, continued consolidation or
technological or other developments in certain sectors of the
financial services industry could result in NatWest Group’s
remaining competitors gaining greater capital and other resources,
including the ability to offer a broader range of products and
services and geographic diversity, or the emergence of new
competitors, each of which may adversely affect NatWest
Group’s business, results of operations and
outlook.
NatWest Group has significant exposure to counterparty and borrower
risk.
NatWest
Group has exposure to many different industries, customers and
counterparties, and risks arising from actual or perceived changes
in credit quality and the recoverability of monies due from
borrowers and other counterparties are inherent in a wide range of
NatWest Group’s businesses. NatWest Group is exposed to
credit risk if a customer, borrower or counterparty defaults, or
under IFRS 9, suffers a sufficiently significant deterioration of
credit quality such that, under SICR (‘significant increases
in credit risk’) rules, it moves to Stage 2 for impairment
calculation purposes. NatWest Group’s lending strategy and
associated processes may fail to identify or anticipate weaknesses
or risks in a particular sector, market or borrower, or fail to
adequately value physical or financial collateral. This may result
in increased default rates or a higher loss given default for
loans, which may, in turn, impact NatWest Group’s
profitability. See also, ‘Risk and capital management —
Credit Risk’.
The
credit quality of NatWest Group’s borrowers and other
counterparties is impacted by prevailing economic and market
conditions (including those caused by the COVID-19 pandemic) and by
the legal and regulatory landscape in the UK and any deterioration
in such conditions or changes to legal or regulatory landscapes
could worsen borrower and counterparty credit quality and
consequently impact NatWest Group’s ability to enforce
contractual security rights.
NatWest
Group may be affected by volatility in property prices (including
as a result of Brexit, the general UK political or economic climate
or the COVID-19 pandemic) given that NatWest Group’s mortgage
loan and wholesale property loan portfolios as at 31 December 2020,
amounted to £228.6 billion, representing 61.4% of NatWest
Group’s total customer loan exposure. If property prices were
to weaken this could lead to higher impairment charges,
particularly if default rates also increase. In addition, NatWest
Group’s credit risk may be exacerbated if the collateral that
it holds cannot be realised as a result of market conditions or
regulatory intervention or if it is liquidated at prices not
sufficient to recover the net amount after accounting for any IFRS
provisions already made. This is most likely to occur during
periods of illiquidity or depressed asset valuations.
Concerns
about, or a default by, a financial institution could lead to
significant liquidity problems and losses or defaults by other
financial institutions, since the commercial and financial
soundness of many financial institutions is closely related and
inter-dependent as a result of credit, trading, clearing and other
relationships. Any perceived lack of creditworthiness of a
counterparty may lead to market-wide liquidity problems and losses
for NatWest Group. This systemic risk may also adversely affect
financial intermediaries, such as clearing agencies, clearing
houses, banks, securities firms and exchanges with which NatWest
Group interacts on a daily basis. See also, ‘NatWest Group
may not be able to adequately access sources of liquidity and
funding’.
As a
result, changes in borrower and counterparty credit quality may
cause accelerated impairment charges under IFRS 9, increased
repurchase demands, higher costs, additional write-downs and losses
for NatWest Group and an inability to engage in routine funding
transactions.
NatWest
Group is exposed to the financial industry, including sovereign
debt securities, banks, financial intermediation providers
(including providing facilities to financial sponsors and funds,
backed by assets or investor commitments) and securitised products
(typically senior lending to special purpose vehicles backed by
pools of financial assets). Due to NatWest Group’s exposure
to the financial industry, it also has exposure to shadow banking
entities (i.e. entities which carry out banking activities outside
a regulated framework). Recently, there has been increasing
regulatory focus on shadow banking. In particular, the European
Banking Authority (EBA/GL/2015/20) require NatWest Group to
identify and monitor its exposure to shadow banking entities,
implement and maintain an internal framework for the
identification, management, control and mitigation of the risks
associated with exposure to shadow banking entities, and ensure
effective reporting and governance in respect of such exposure. If
NatWest Group is unable to properly identify and monitor its shadow
banking exposure, maintain an adequate framework, or ensure
effective reporting and governance in respect of shadow banking
exposure, this may adversely affect the business, results of
operations and outlook of NatWest Group.
NatWest Group may not meet the prudential regulatory requirements
for capital and MREL, or manage its capital effectively, which
could trigger the execution of certain management actions or
recovery options.
NatWest
Group is required by regulators in the UK, the EU and other
jurisdictions in which it undertakes regulated activities to
maintain adequate financial resources. Adequate capital also gives
NatWest Group financial flexibility in the face of turbulence and
uncertainty in the global economy and specifically in its core UK
and European operations, as well as permitting NatWest Group plc to
make discretionary capital distributions (including dividends to
shareholders).
As at
31 December 2020, NatWest Group plc’s CET1 ratio was 18.5%
and NatWest Group plc currently maintains a CET1 ratio target.
NatWest Group plc’s target capital ratio is based on a
combination of its expected regulatory requirements and internal
modelling, including stress scenarios and management’s and/or
the PRA’s views on appropriate buffers above minimum
operating levels.
NatWest
Group plc’s current capital strategy is based on the expected
accumulation of additional capital through the accrual of profits
over time, planned capital actions (including issuances,
redemptions, and discretionary capital distributions), RWA growth
in the form of regulatory uplifts and lending growth and other
capital management initiatives which focus on improving capital
efficiency.
A
number of factors may impact NatWest Group plc’s ability to
maintain its current CET1 ratio target and achieve its capital
strategy. These include, amongst other things:
●
a depletion of its
capital resources through increased costs or liabilities or reduced
profits;
●
an increase in the
quantum of RWAs in excess of that expected, including due to
regulatory changes;
●
changes in
prudential regulatory requirements including NatWest Group
plc’s Total Capital Requirement set by the PRA, including
Pillar 2 requirements and regulatory buffers as well as any
applicable scalars;
●
reduced dividends
from NatWest Group’s subsidiaries because of changes in their
financial performance and/or the extent to which local capital
requirements exceed NatWest Group plc’s target ratio;
and
●
limitations on the
use of double leverage, i.e. NatWest Group plc’s use of debt
to invest in the equity of its subsidiaries, as a result of the
Bank of England’s and/or NatWest Group’s evolving views
on distribution of capital within groups.
A
shortage of capital could in turn affect NatWest Group plc’s
capital ratio, and/or ability to make capital
distributions.
A
minimum level of capital adequacy is required to be met by NatWest
Group plc for it to be entitled to make certain discretionary
payments, and institutions which fail to meet the combined buffer
requirement are subject to restricted discretionary payments. The
resulting restrictions are scaled according to the extent of the
breach of the combined buffer requirement and calculated as a
percentage of the profits of the institution since the last
distribution of profits or discretionary payment which gives rise
to a maximum distributable amount (MDA) (if any) that the financial
institution can distribute through discretionary payments. In the
event of a breach of the combined buffer requirement, it may be
necessary for NatWest Group plc to reduce or cease discretionary
payments (including payments of dividends to shareholders) to the
extent of the breach.
NatWest
Group is required to maintain a set quantum of MREL set as the
higher of its RWAs or leverage requirement. The Bank of England has
identified single point-of-entry as the preferred resolution
strategy for NatWest Group. As a result, NatWest Group plc is the
only entity that can externally issue securities that count towards
its MREL requirements, the proceeds of which can then be
downstreamed to meet the internal MREL issuance requirements of its
operating entities and intermediate holding companies.
If
NatWest Group plc is unable to raise the requisite amount of
regulatory capital or MREL, downstream the proceeds of MREL to
subsidiaries as required, or to otherwise meet its regulatory
capital, MREL and leverage requirements, it may be exposed to
increased regulatory supervision or sanctions, loss of investor
confidence, constrained or more expensive funding and be unable to
make dividend payments on its ordinary shares or maintain
discretionary payments on capital instruments.
If,
under a stress scenario, the level of capital or MREL falls outside
of risk appetite, there are a range of recovery management actions
(focused on risk reduction and mitigation) that NatWest Group could
take to manage its capital levels, but any such actions may not be
sufficient to restore adequate capital levels. Under the EU Bank
Recovery and Resolution Directives I and II (‘BRRD’),
as implemented in the UK, NatWest Group must maintain a recovery
plan acceptable to its regulator, such that a breach of NatWest
Group’s applicable capital or leverage requirements may
trigger the application of NatWest Group’s recovery plan to
remediate a deficient capital position. NatWest Group’s
regulator may request that NatWest Group carry out certain capital
management actions or, if NatWest Group plc’s CET1 ratio
falls below 7%, certain regulatory capital instruments issued by
NatWest Group will be written-down or converted into equity and
there may be an issue of additional equity by NatWest Group plc,
which could result in the dilution of NatWest Group plc’s
existing shareholders. The success of such issuances will also be
dependent on favourable market conditions and NatWest Group may not
be able to raise the amount of capital required on acceptable terms
or at all. Separately, NatWest Group may address a shortage of
capital by taking action to reduce leverage exposure and/or RWAs
via asset or business disposals. These actions may, in turn,
affect, among other things, NatWest Group’s product offering,
credit ratings, ability to operate its businesses, pursue its
current strategies and pursue strategic opportunities, any of which
may affect the underlying profitability of NatWest Group and future
growth potential. See also, ‘NatWest Group may become subject
to the application of UK statutory stabilisation or resolution
powers which may result in, among other actions, the cancellation,
transfer or dilution of ordinary shares, or the write-down or
conversion of certain other of NatWest Group’s
securities’.
NatWest Group is subject to Bank of England oversight in respect of
resolution, and NatWest Group could be adversely affected should
the Bank of England deem NatWest Group’s preparations to be
inadequate.
NatWest
Group is subject to regulatory oversight by the Bank of England,
and is required (under the PRA rulebook) to carry out an assessment
of its preparations for resolution, submit a report of the
assessment to the PRA, and disclose a summary of this report. The
initial report is due to be submitted to the PRA on 1 October 2021
and the Bank of England’s assessment of NatWest Group’s
preparations is scheduled to be released on 10 June 2022. The form
and substance of the June publication is yet to be
established.
NatWest
Group has dedicated significant resources towards the preparation
of NatWest Group for a potential resolution scenario. However, if
the assessment reveals that NatWest Group is not adequately
prepared to be resolved, or does not have adequate plans in place
to meet resolvability requirements by 1 January 2022, NatWest Group
may be required to take action to enhance its preparations to be
resolvable, resulting in additional costs and the dedication of
additional resources. Such a scenario may result in restrictions on
NatWest Group’s maximum individual and aggregate exposures, a
requirement to dispose of specified assets, a requirement to cease
carrying out certain activities and/or maintaining a specified
amount of MREL, consequently having an adverse effect on the
financial position and/or reputation of NatWest Group or a loss of
investor confidence.
NatWest Group may not be able to adequately access sources of
liquidity and funding.
NatWest
Group is required to access sources of liquidity and funding
through retail and wholesale deposits, as well as through the debt
capital markets. As at 31 December 2020, NatWest Group plc held
£452.3 billion in deposits. The level of deposits may
fluctuate due to factors outside NatWest Group’s control,
such as a loss of investor confidence (including in individual
NatWest Group entities), sustained low or negative interest rates,
increasing competitive pressures for retail and corporate customer
deposits or the reduction or cessation of deposits by wholesale
depositors, which could result in a significant outflow of deposits
within a short period of time. An inability to grow or any material
decrease in NatWest Group’s deposits could, particularly if
accompanied by one of the other factors described above, materially
affect NatWest Group’s ability to satisfy its liquidity or
funding needs. In turn, this could require NatWest Group to adapt
its funding plans.
As at
31 December 2020, NatWest Group plc’s liquidity coverage
ratio was 165%. If its liquidity position were to come under
stress, and if NatWest Group plc were unable to raise funds through
deposits or in the debt capital markets on acceptable terms or at
all, its liquidity position could be adversely affected and it
might be unable to meet deposit withdrawals on demand or at their
contractual maturity, to repay borrowings as they mature, to meet
its obligations under committed financing facilities, to comply
with regulatory funding requirements, to undertake certain capital
and/or debt management activities, or to fund new loans,
investments and businesses. NatWest Group may need to liquidate
unencumbered assets to meet its liabilities, including disposals of
assets not previously identified for disposal to reduce its funding
commitments or trigger the execution of certain management actions
or recovery options. In a time of reduced liquidity, NatWest Group
may be unable to sell some of its assets, or may need to sell
assets at depressed prices, which in either case could negatively
affect NatWest Group’s results.
Any reduction in the credit
rating and/or outlooks assigned
to NatWest Group plc, any of its subsidiaries or any of their
respective debt securities could adversely affect the availability
of funding for NatWest Group, reduce NatWest Group’s
liquidity position and increase the cost of
funding.
Rating
agencies regularly review NatWest Group plc and other NatWest Group
entity credit ratings and outlooks, which could be negatively
affected by a number of factors that can change over time,
including: the credit rating agency’s assessment of NatWest
Group’s strategy and management’s capability; its
financial condition including in respect of profitability, asset
quality, capital, funding and liquidity; the level of political
support for the industries in which NatWest Group operates; the
implementation of structural reform; the legal and regulatory
frameworks applicable to NatWest Group’s legal structure;
business activities and the rights of its creditors; changes in
rating methodologies; changes in the relative size of the
loss-absorbing buffers protecting bondholders and depositors; the
competitive environment, political and economic conditions in
NatWest Group’s key markets (including the impact of the
COVID-19 pandemic, Brexit and any further Scottish independence
referendum); any reduction of the UK’s sovereign credit
rating and market uncertainty.
In
addition, credit ratings agencies are increasingly taking into
account sustainability-related factors, including climate,
environmental, social and governance related risk, as part of the
credit ratings analysis, as are investors in their investment
decisions.
Any
reductions in the credit ratings of NatWest Group plc or of certain
other NatWest Group entities, including, in particular, downgrades
below investment grade, or a deterioration in the capital
markets’ perception of NatWest Group’s financial
resilience could significantly affect NatWest Group’s access
to money markets, reduce the size of its deposit base and trigger
additional collateral or other requirements in derivatives
contracts and other secured funding arrangements or the need to
amend such arrangements, which could adversely affect NatWest
Group’s (and, in particular, NatWest Group plc’s) cost
of funding and its access to capital markets and could limit the
range of counterparties willing to enter into transactions with
NatWest Group (and, in particular, with NatWest Group plc). This
could in turn adversely impact NatWest Group’s competitive
position and threaten its prospects in the short to
medium-term.
NatWest Group may be adversely affected if it fails to meet the
requirements of regulatory stress tests.
NatWest
Group is subject to annual stress tests by its regulator in the UK
and is also subject to stress tests by European regulators with
respect to NatWest Group plc, NWM N.V. and Ulster Bank Ireland DAC.
Stress tests are designed to assess the resilience of banks to
potential adverse economic or financial developments and ensure
that they have robust, forward-looking capital planning processes
that account for the risks associated with their business profile.
If the stress tests reveal that a bank’s existing regulatory
capital buffers are not sufficient to absorb the impact of the
stress, then it is possible that the bank will need to take action
to strengthen its capital position.
Failure
by NatWest Group to meet the quantitative and qualitative
requirements of the stress tests as set forth by its UK regulator
or those elsewhere may result in: NatWest Group’s regulators
requiring NatWest Group to generate additional capital,
reputational damage, increased supervision and/or regulatory
sanctions, restrictions on capital distributions and loss of
investor confidence.
NatWest Group could incur losses or be required to maintain higher
levels of capital as a result of limitations or failure of various
models.
Given
the complexity of NatWest Group’s business, strategy and
capital requirements, NatWest Group relies on analytical models for
a wide range of purposes, including to manage its business, assess
the value of its assets and its risk exposure, as well as to
anticipate capital and funding requirements (including to
facilitate NatWest Group’s mandated stress testing). In
addition, NatWest Group utilises models for valuations, credit
approvals, calculation of loan impairment charges on an IFRS 9
basis, financial reporting and for financial crime and fraud risk
management. NatWest Group’s models, and the parameters and
assumptions on which they are based, are periodically reviewed and
updated to maximise their accuracy.
As
models analyse scenarios based on assumed inputs and a conceptual
approach, model outputs therefore remain uncertain and should not
be relied on. Failure of models (including due to errors in model
design) or new data inputs, including to accurately reflect changes
in the micro and macroeconomic environment in which NatWest Group
operates (for example to account for the impact of the COVID-19
pandemic), to capture risks and exposures at the subsidiary level
and to update for changes to NatWest Group’s current business
model or operations, or for findings of deficiencies by NatWest
Group’s regulators (including as part of NatWest
Group’s mandated stress testing), may result in increased
capital requirements or require management action. NatWest Group
may also face adverse consequences as a result of actions based on
models that are poorly developed, implemented or used, models that
are based on inaccurate or compromised data or as a result of the
modelled outcome being misunderstood, or by such information being
used for purposes for which it was not designed.
NatWest Group’s financial statements are sensitive to the
underlying accounting policies, judgments, estimates and
assumptions.
The
preparation of financial statements requires management to make
judgments, estimates and assumptions that affect the reported
amounts of assets, liabilities, income, expenses, exposures and
RWAs. While estimates, judgments and assumptions take into account
historical experience and other factors, (including market practice
and expectations of future events that are believed to be
reasonable under the circumstances), actual results may differ due
to the inherent uncertainty in making estimates, judgments and
assumptions (particularly those involving the use of complex
models). See also, ‘NatWest Group’s results could be
adversely affected if the effects of the COVID-19 pandemic or other
events trigger the recognition of a goodwill
impairment’.
The
accounting policies deemed critical to NatWest Group’s
results and financial position, based upon materiality and
significant judgments and estimates, which include loan impairment
provisions, are set out in ‘Critical accounting policies and
key sources of estimation uncertainty’ on page 269. New
accounting standards and interpretations that have been issued by
the International Accounting Standards Board but which have not yet
been adopted by NatWest Group are discussed in ‘Accounting
developments’ on page 269.
Changes in accounting standards may materially impact NatWest
Group’s financial results.
Changes
in accounting standards or guidance by accounting bodies or in the
timing of their implementation, whether immediate or foreseeable,
could result in NatWest Group having to recognise additional
liabilities on its balance sheet, or in further write-downs or
impairments to its assets and could also significantly impact the
financial results, condition and prospects of NatWest
Group.
The
valuation of financial instruments, including derivatives, measured
at fair value can be subjective, in particular where models are
used which include unobservable inputs. Generally, to establish the
fair value of these instruments, NatWest Group relies on quoted
market prices or, where the market for a financial instrument is
not sufficiently credible, internal valuation models that utilise
observable market data. In certain circumstances, the data for
individual financial instruments or classes of financial
instruments utilised by such valuation models may not be available
or may become unavailable due to prevailing market conditions. In
these circumstances, NatWest Group’s internal valuation
models require NatWest Group to make assumptions, judgments and
estimates to establish fair value, which are complex and often
relate to matters that are inherently uncertain.
The value or effectiveness of any credit protection that NatWest
Group has purchased depends on the value of the underlying assets
and the financial condition of the insurers and
counterparties.
NatWest
Group has some remaining credit exposure arising from
over-the-counter derivative contracts, mainly credit default swaps
(CDSs), and other credit derivatives, each of which are carried at
fair value. The fair value of these CDSs, as well as NatWest
Group’s exposure to the risk of default by the underlying
counterparties, depends on the valuation and the perceived credit
risk of the instrument against which protection has been bought.
Many market counterparties have been adversely affected by their
exposure to residential mortgage-linked and corporate credit
products, whether synthetic or otherwise, and their actual and
perceived creditworthiness may deteriorate rapidly. If the
financial condition of these counterparties or their actual or
perceived creditworthiness deteriorates, NatWest Group may record
further credit valuation adjustments on the credit protection
bought from these counterparties under the CDSs. NatWest Group also
recognises any fluctuations in the fair value of other credit
derivatives. Any such adjustments or fair value changes may have a
negative impact on NatWest Group’s results.
NatWest Group may become subject to the application of UK statutory
stabilisation or resolution powers which may result in, among other
actions, the cancellation, transfer or dilution of ordinary shares,
or the write-down or conversion of certain other of NatWest
Group’s securities.
HM
Treasury, the Bank of England and the PRA and FCA (together, the
‘Authorities’) are granted substantial powers to
resolve and stabilise UK-incorporated financial institutions. Five
stabilisation options exist: (i) transfer of all of the business of
a relevant entity or the shares of the relevant entity to a private
sector purchaser; (ii) transfer of all or part of the business of
the relevant entity to a ‘bridge bank’ wholly-owned by
the Bank of England; (iii) transfer of part of the assets, rights
or liabilities of the relevant entity to one or more asset
management vehicles for management of the transferor’s
assets, rights or liabilities; (iv) the write-down, conversion,
transfer, modification, or suspension of the relevant
entity’s equity, capital instruments and liabilities; and (v)
temporary public ownership of the relevant entity. These tools may
be applied to NatWest Group plc as the parent company or an
affiliate where certain conditions are met (such as, whether the
firm is failing or likely to fail, or whether it is reasonably
likely that action will be taken (outside of resolution) that will
result in the firm no longer failing or being likely to fail).
Moreover, there are modified insolvency and administration
procedures for relevant entities, and the Authorities have the
power to modify or override certain contractual arrangements in
certain circumstances and amend the law for the purpose of enabling
their powers to be used effectively and may promulgate provisions
with retrospective applicability.
Under
the UK Banking Act, the Authorities are generally required to have
regard to specified objectives in exercising the powers provided
for by the Banking Act. One of the objectives (which is required to
be balanced as appropriate with the other specified objectives)
refers to the protection and enhancement of the stability of the
financial system of the UK. Moreover, the ‘no creditor worse
off’ safeguard contained in the Banking Act may not apply in
relation to an application of the separate write-down and
conversion power relating to capital instruments under the Banking
Act, in circumstances where a stabilisation power is not also used.
Holders of debt instruments which are subject to the power may,
however, have ordinary shares transferred to or issued to them by
way of compensation.
Uncertainty
exists as to how the Authorities may exercise their powers
including the determination of actions undertaken in relation to
the ordinary shares and other securities of NatWest Group, which
may depend on factors outside of NatWest Group’s control.
Moreover, the Banking Act provisions remain untested in
practice.
If
NatWest Group is at or is approaching the point of non-viability
such that regulatory intervention is required, any exercise of the
resolution regime powers by the Authorities may adversely affect
holders of NatWest Group plc’s ordinary shares or other
NatWest Group securities. This may result in various actions being
undertaken in relation to NatWest Group and any securities of
NatWest Group, including cancellation, transfer, dilution,
write-down or conversion (as applicable). There may also be a
corresponding adverse effect on the market price of such
securities.
Climate and sustainability-related risks
NatWest Group and its customers may face significant
climate-related risks, including in transitioning to a low-carbon
economy, which may adversely impact NatWest Group.
Climate-related
risks and uncertainties are receiving increasing prudential and
regulatory, political and societal scrutiny, both in the UK and
internationally.
Financial
risks from climate change arise through two primary channels, or
‘risk factors’: physical and transition.
There
are significant uncertainties as to the extent and timing of the
manifestation of the physical risks of climate change, such as more
extreme and frequent weather events, rising sea levels, flooding,
and subsidence, heat waves and long-lasting wildfires, reductions
in biodiversity and resource scarcity. Damage to the properties and
operations of borrowers could impair asset values, business
activities and the creditworthiness of customers leading to
increased default rates, delinquencies, write-offs and impairment
charges in NatWest Group’s portfolios. In addition, NatWest
Group’s premises and resilience may also suffer physical
damage due to weather events leading to increased costs and
disruption of activity and business continuity for NatWest
Group.
There
are also significant uncertainties regarding the timing and speed
of the transition to a low-carbon economy occurs and whether it
occurs in an earlier, gradual, orderly manner or a delayed, rapid,
disorderly manner. Widespread levels of adjustment to a low-carbon
economy across all sectors of the economy and markets in which
NatWest Group operates will be required by several multilateral
agreements, in particular the 2015 Paris Agreement and the UK and
Scottish Government commitments to achieving net zero carbon
emissions by 2050 and 2045. Some sectors such as property, energy
(including oil and gas), mining, infrastructure, transport
(including automotive and aviation) and agriculture are expected to
be particularly impacted. The nature and timing of the far-reaching
commercial, technological, policy and regulatory changes that this
transition will entail remain uncertain but their impact is
expected to be highly significant and may be disruptive, especially
if these changes do not occur in an orderly or timely manner or are
not effective in reducing emissions sufficiently.
Furthermore,
public and private sector institutions may also face a variety of
climate-related legal risks, both physical and transition, from
potential litigation and contract liability. See also,
‘NatWest Group may be subject to potential climate,
environmental and other sustainability-related litigation,
enforcement proceedings, investigations and conduct
risk’.
If
NatWest Group fails, either to take the extent of action required
or in the timeliness of the action taken, to adapt its business and
operating model to the climate-related risks and opportunities and
changing market expectations, or to appropriately identify,
measure, manage and mitigate climate change related physical and
transition risks and opportunities that NatWest Group and its
customers face, NatWest Group’s reputation, business, results
of operations and outlook may be impacted adversely.
NatWest Group’s Purpose-led Strategy includes one area of
focus on climate change that is likely to require material changes
to the business of NatWest Group which entails significant
execution risk.
In
February 2020, NatWest Group announced its ambition to become the
leading bank on climate in the UK and ROI, helping to address the
climate challenge by setting itself the challenge to at least halve
the climate impact of its financing activity by 2030 and by
intending to do what is necessary to achieve alignment with the
2015 Paris Agreement.
NatWest
Group’s commitment to reduce the climate impact of its
financing activities may materially affect NatWest Group’s
business and operations and will require significant reductions to
its financed emissions and to its exposure to customers that do not
align with a transition to a low-carbon economy or do not have a
credible transition plan. It is anticipated that, these reductions,
together with the active management of climate-related risks and
other regulatory, policy and market changes, are likely to
necessitate material and accelerated changes to NatWest
Group’s business and existing exposures (potentially on
timescales outside of risk appetite) which may have a material
adverse effect on NatWest Group’s ability to achieve its
associated financial targets and generate sustainable
returns.
Furthermore,
the ongoing implementation of NatWest Group’s climate
strategy is increasingly requiring significant resource and
capacity to collect third party, customer and other data and to
develop and apply methodologies to understand and measure the
climate impact of the emissions related to its financing
activities. There is currently no single standard approach or
methodology to measure such emissions and to provide a
scenario-based model for alignment with the objectives of the 2015
Paris Agreement and the data, methodologies and assumptions on
which emissions estimates and targets are based are also subject to
change. Accordingly, NatWest Group must continue to identify,
define and develop its approach to setting and publishing
sector-specific targets and its goal of setting comprehensive
climate impact scenario-based reduction targets and plans by 2022.
It must also be able to adequately define and benchmark current
climate impact from its financing activities to demonstrate its
progress against its ambition to halve this impact by
2030.
NatWest
Group’s ability to meet its climate-related targets and
commitments – including to at least halve the climate impact
of its financing activity - will depend greatly on many factors
beyond NatWest Group’s control. These include the
macroeconomic environment, the extent and pace of climate change,
including the timing and manifestation of physical and transition
risks and the effectiveness of actions of governments, legislators,
regulators, businesses, investors, customers and other stakeholders
to adapt and/or mitigate the impact of climate-related risks. See
also, ‘NatWest Group is currently implementing its
Purpose-led Strategy, which carries significant execution and
operational risks and may not achieve its stated aims and targeted
outcomes’.
Any
delay or failure in setting, making progress against or meeting
NatWest Group’s climate-related targets and commitments may
have a material adverse impact on NatWest Group, its reputation,
business, results of operations, outlook, market and competition
position and may increase the climate-related risks NatWest Group
faces.
Any failure by NatWest Group to implement effective and compliant
climate change resilient systems, controls and procedures could
adversely affect NatWest Group’s ability to manage
climate-related risks.
The
prudential regulation of climate-related risks is an important
driver in how NatWest Group develops its risk appetite for
financing activities or engaging with counterparties that do not
align with a transition to a low-carbon economy or do not have a
credible transition plan.
Legislative
and regulatory authorities in the UK and in the European Union are
publishing expectations as to how banks should prudently manage and
transparently disclose climate-related and environmental risks
under prudential rules. In November 2020, the European Central Bank
published its ‘Guide on climate-related and environmental
risks’ and in April 2019, the PRA published a supervisory
statement ‘Enhancing banks’ and insurers’
approaches to managing the financial risks from climate
change’ (the ‘SS 3/19’).
In the
SS 3/19 the PRA states that regulated entities must:
●
fully embed the
consideration of the financial risks from climate change in their
governance arrangements;
●
incorporate the
financial risks from climate change into existing financial risk
management practice;
●
use (long term)
scenario analysis to inform strategy setting and risk assessment
and identification; and
●
develop an approach
to disclosure on the financial risks from climate
change.
Following
the submission of initial plans by UK banks, in July 2020 the PRA
issued a ‘Dear CEO’ letter requiring firms to embed
fully their approaches to managing climate-related financial risks
by the end of 2021. In response, NatWest Group provided the PRA on
8 October 2020 with an update to its original plan submitted in
October 2019. The updated plan stated that the COVID-19 pandemic
had disrupted some elements of NatWest Group’s original plan
and, as a result, some near term activities have been delayed to
2021; this delay could potentially result in increased execution
risk. Further, the updated plan advised that it will require
additional operating cycles reaching into 2022 and beyond to prove
embedding.
In
December 2019 the Bank of England announced that it will use the
2021 biennial exploratory scenario to stress test the resilience of
the current business models of the largest banks, insurers and the
financial system to the physical and transition risks from climate
change under a number of climate scenarios (the ‘Climate
Biennial Explanatory Scenario’ or ‘CBES’).
Further, in December 2020 the Bank of England published an update
on its approach to the CBES in selected areas and confirmed that
the CBES, which will be exploratory in nature (i.e. not intended to
be used to set capital requirements), will be launched in early
June 2021. There is a risk, however, that in the future years once
the climate analytics have been embedded via the CBES, it may be
concluded by the regulator that financial institutions, including
NatWest Group, may be required to hold additional capital to
enhance their resilience against systemic and/or institution
specific vulnerabilities to climate-related risks, including
potential asset devaluation shocks.
Any
failure of NatWest Group to fully and timely embed climate-related
risks into its risk management practices and framework to
appropriately identify, measure, manage and mitigate the various
climate-related physical and transition risks in line with
applicable legal and regulatory requirements and expectations, may
have a material and adverse impact on NatWest Group’s
regulatory compliance, prudential capital requirements, liquidity
position, reputation, business, results of operations and
outlook.
There are significant uncertainties inherent in accurately
modelling the impact of climate-related risks.
Significant
risks, uncertainties and variables are inherent in the assessment,
measurement and mitigation of climate-related risks. These include
data quality gaps and limitations, the pace at which climate
science, greenhouse gas accounting standards and carbon capture and
other emissions reduction solutions develop. In addition, multiple
climate change scenarios dependent on a range of variable factors
could unfold over the coming two or three decades, which timeframes
are considerably longer than NatWest Group’s historical
strategic, financial, resilience and investment planning horizons
and which will affect how and when climate-related risks
manifest.
As a
result, it is very difficult to predict and model the impact of
climate-related risks into precise financial and economic outcomes
and impacts. Climate-related risks present significant
methodological challenges due to their forward-looking nature, the
lack of historical testing capabilities, the quality, lack of
standardisation and incompleteness of emissions and other climate
and sub-sector related data and the immature nature of risk
measurement and modelling methodologies. The evaluation of
climate-related risk exposure and the development of associated
potential risk mitigation techniques largely depend on the choice
of climate scenario modelling methodology and the assumptions
made.
There
are a number of risks and uncertainties involved in climate
scenario modelling, including that:
●
it requires a
special skill set that banks traditionally do not have and
therefore NatWest Group needs to rely on third party advice,
modelling, and data which is also subject to many limitations and
uncertainties;
●
modelling of and
data on climate-related risks on financial assets is immature in
nature and it is expected that techniques and understanding will
evolve rapidly in the coming years;
●
it is challenging
to benchmark or back test the climate scenarios given their
forward-looking nature and the multiple possible
outcomes;
●
there is
significant uncertainty as to how the climate will evolve over the
coming decades, how and when governments, regulators, businesses,
investors and customers respond and how those responses impact the
economy, asset valuations, land systems, energy systems,
technology, policy and wider society.
Accordingly,
these risks and uncertainties coupled with significantly longer
timeframes make the outputs of climate-related risk modelling,
including emissions reductions targets and pathways, inherently
more unreliable than outputs modelled for traditional financial
planning cycles based on historical financial
information.
Capabilities
within NatWest Group to assess the suitability of the assumptions
required to model and manage climate-related risks appropriately
are developing. Even when those capabilities are developed, the
high level of uncertainty regarding any assumptions modelled, the
highly subjective nature of risk measurement and mitigation
techniques, incorrect or inadequate assumptions and judgments and
data quality gaps and limitations may lead to inadequate risk
management information and frameworks, or ineffective business
adaptation or mitigation strategies, which may have a material
adverse impact on NatWest Group’s regulatory compliance,
reputation, business, results of operations and
outlook.
A failure to adapt NatWest Group’s business strategy,
governance, procedures, systems and controls to manage emerging
sustainability-related risks and opportunities may have a material
adverse effect on NatWest Group’s reputation, business,
results of operations and outlook.
Investors,
customers, international organisations, regulators and other
stakeholders are increasingly focusing on and encouraging
businesses to (i) identify, measure, manage and mitigate
environmental (biodiversity and loss of natural capital); social
(such as tackling inequality, inclusion, human rights and working
conditions); and governance (such as board diversity, ethics,
executive compensation and management structure) related risks and
opportunities – which together are commonly referred to as
‘sustainability-related’ related risks and
opportunities; and (ii) focus on long term sustainable value
creation rather than short-term financial value.
In
addition to climate-related risks, sustainability-related risks
such as environmental degradation may also adversely affect
economic activity, asset pricing and valuations of issuers’
securities and, in turn, the wider financial system. There is also
evidence of an interconnection between climate-related and
sustainability-related risks resulting in combined effects capable
of potentially generating even greater adverse effects.
Sustainability-related risks may impact economic activities
directly (for example through lower corporate profitability or the
devaluation of assets) or indirectly (for example through
macro-financial changes). They may also affect the viability or
resilience of business models over the medium to longer term,
particularly those business models most vulnerable to
sustainability-related risks. In addition, sustainability-related
risks can trigger further losses stemming directly or indirectly
from legal claims (liability risks) and reputational damage as a
result of the public, customers, counterparties and/or investors
associating NatWest Group or its customers with adverse
sustainability-related issues.
Furthermore,
sustainability-related risks may be drivers of several different
risk categories simultaneously and may exacerbate existing risks,
including credit risk, operational risk (business continuity),
market risk (both current market risk positions and future
investments) and liquidity risk (for example, net cash outflows or
depletion of liquidity buffers), as well as migration risk, credit
spread risk in the banking book, real estate risks and strategic
risk.
Accordingly,
any failure to adapt NatWest Group’s business strategy and to
establish and maintain effective governance, procedures, systems
and controls to manage emerging sustainability-related risks and
opportunities may have a material adverse effect on NatWest
Group’s reputation, liquidity position, business, results of
operations and outlook.
Any reduction in the ESG ratings of NatWest Group could have a
negative impact on NatWest Group’s reputation and on
investors’ risk appetite.
Ratings
from ESG rating agencies and data providers that rate on an
unsolicited basis as to how NatWest Group manages environmental,
social and governance risks are increasingly influencing investment
decisions. Any change in such ESG ratings depends on many factors
some of which are beyond NatWest Group’s control (e.g. any
change in rating methodology). Any reduction in the ESG ratings of
NatWest Group could have a negative impact on NatWest Group’s
reputation and could influence investors’ risk appetite for
NatWest Group’s and/or its subsidiaries’ securities,
particularly ESG securities.
Increasing levels of climate, environmental and
sustainability-related laws, regulation and oversight may adversely
affect NatWest Group’s business and expose NatWest Group to
increased costs of compliance, regulatory sanction and reputational
damage.
Governments,
legislative and regulatory authorities in the UK, EU and elsewhere
are increasingly prioritising a wide range of new climate,
environmental and sustainability-related laws and regulations to
address the risks and opportunities associated with climate change
and sustainability and to promote the transition to a more
sustainable low-carbon economy. As a result, an increasing number
of laws, regulations, legislative actions are likely to affect the
financial sector and the real economy, including proposals,
guidance, policy and regulatory initiatives many of which have been
introduced or amended recently and are subject to further
changes.
Many of
these initiatives are focused on disclosure, developing
standardised definitions for green and sustainable criteria of
assets and liabilities, integrating climate change and
sustainability into decision-making and customers access to green
and sustainable financial products and services, which may have a
significant impact on the services provided by NatWest Group and
its subsidiaries, especially mortgage lending, and its associated
credit, market and financial risk profile. They could also impact
NatWest Group’s recognition of its climate financing activity
and may adversely affect NatWest Group’s achieving its
climate strategy and sustainable financing ambitions.
In
addition, NatWest Group’s EU subsidiaries will continue to be
subject to an increasing array of the EU/EEA climate and
sustainability-related legal and regulatory requirements, such as
the EU Taxonomy and EU Green Bond Standards. These requirements may
be used as the basis for UK laws and regulations (such as the
recently announced UK Green Taxonomy) or regarded by investors and
regulators as best practice standards whether or not they apply to
UK businesses. Any divergence between EU/EEA and UK requirements
may result in NatWest Group not meeting investors’
expectations, may increase the cost of doing business and may
restrict access of NatWest Group’s UK business to the EU/EEA
market.
In
addition, NatWest Group and its subsidiaries will be subject to
increasing entity wide climate and other non-financial disclosures
requirements. From February 2022, NatWest Group will be required to
provide enhanced climate-related disclosures consistent with the
Task Force on Climate-related Financial Disclosure
(‘TCFD’) recommendations to comply with the FCA’s
proposed new stock exchange listing rules for premium listed
companies. The FCA will consult on expanding this requirement to a
wider scope of listed issuers in NatWest Group as it moves towards
mandatory TCFD reporting across the UK economy by 2025. NatWest
Group is also participating in various voluntary carbon reporting
and other standard setting initiatives for disclosing climate and
sustainability-related information, many of which have differing
objectives and methodologies and are at different stages of
development in terms of how they apply to financial
institutions.
These
developing and evolving climate and sustainability-related
requirements are likely to require NatWest Group to implement
significant changes to its business models, product and other
governance, internal controls over financial reporting, disclosure
controls and procedures, modelling capability and risk management
systems, which may increase the cost of doing business, entail
additional change risk and compliance costs.
Failure
to implement and comply with these requirements or adopt regulatory
or other best practice expectations may have a material adverse
effect on NatWest Group’s regulatory compliance and may result in
regulatory sanction and investor disapproval.
NatWest Group may be subject to potential climate, environmental
and other sustainability-related litigation, enforcement
proceedings, investigations and conduct risk.
Due the
increasing number of new climate and sustainability-related laws
and regulations, growing demand from investors and customers for
environmentally sustainable products and services, and regulatory
scrutiny, financial institutions, including NatWest Group, may
through their business activities face increasing litigation,
conduct, enforcement and contract liability risks related to
climate change, environmental degradation and other social,
governance and sustainability-related issues.
Furthermore,
there is a risk that shareholders, campaign groups, customers and
special interest groups could seek to take legal action against
NatWest Group for financing or
contributing to climate change and environmental
degradation.
These potential litigation, conduct, enforcement and contract
liability risks may have a material adverse effect on NatWest Group’s ability to achieve
its strategy, including its climate ambition, as well as its
reputation, business, results of operations and
outlook.
Operational and IT resilience risk
Operational risks (including reliance on third party suppliers and
outsourcing of certain activities) are inherent in NatWest
Group’s businesses.
Operational
risk is the risk of loss resulting from inadequate or failed
internal processes, procedures, people or systems, or from external
events, including legal risks. It has come under increasing
regulatory focus in recent years. NatWest Group operates in many
countries, offering a diverse range of products and services
supported by 59,900 employees as at 31 December 2020; it therefore
has complex and diverse operations. As a result, operational risks
or losses can arise from a number of internal or external factors
(including financial crime). These risks are also present when
NatWest Group relies on third-party suppliers or vendors to provide
services to it or its customers, as is increasingly the case as
NatWest Group outsources certain activities, including with respect
to the implementation of new technologies, innovation and
responding to regulatory and market changes.
Operational
risks continue to be heightened as a result of the implementation
of NatWest Group’s Purpose-led Strategy, including the
refocusing of its NWM franchise, NatWest Group’s phased
withdrawal from ROI, NatWest Group’s current cost-reduction
measures and conditions affecting the financial services industry
generally (including the COVID-19 pandemic, Brexit and other
geo-political developments) as well as the legal and regulatory
uncertainty resulting therefrom. It is unclear as to how the future
ways of working may evolve, including in respect of how working
practices may develop, or how NatWest Group will evolve to best
serve its customers. Any of the above may place significant
pressure on NatWest Group’s ability to maintain effective
internal controls and governance frameworks.
The
effective management of operational risks is critical to meeting
customer service expectations and retaining and attracting customer
business. Although NatWest Group has implemented risk controls and
mitigation actions, with resources and planning having been devoted
to mitigate operational risk, such measures may not be effective in
controlling each of the operational risks faced by NatWest Group.
Ineffective management of such risks could adversely affect NatWest
Group.
NatWest Group is subject to increasingly sophisticated and frequent
cyberattacks.
NatWest
Group experiences a constant threat from cyberattacks across the
entire NatWest Group and against NatWest Group’s supply
chain, re-enforcing the importance of due diligence of and close
working relationship with the third parties on which NatWest Group
relies. NatWest Group is reliant on technology, against which there
is a constantly evolving series of attacks that are increasing in
terms of frequency, sophistication, impact and severity. As
cyberattacks evolve and become more sophisticated, NatWest Group is
required to continue to invest in additional capability designed to
defend against the emerging threats. In 2020, NatWest Group was
subjected to a small number of Distributed Denial of Service
(‘DDOS’) attacks, which are a pervasive and significant
threat to the global financial services industry. The focus is to
manage the impact of the attacks and sustain availability of
services for NatWest Group’s customers. NatWest Group
continues to invest significant resources in the development and
evolution of cyber security controls that are designed to minimise
the potential effect of such attacks.
Hostile
attempts are made by third parties to gain access to, introduce
malware (including ransomware) into and exploit vulnerabilities of,
NatWest Group’s IT systems. NatWest Group has information and
cyber security controls in place to minimise the impact of any
attack, which are subject to review on a continuing basis but given
the nature of the threat, there can be no assurance that such
measures will prevent all attacks in the future. See also,
‘NatWest Group’s operations are highly dependent on its
complex IT systems (including those that enable remote working) and
any IT failure could adversely affect NatWest
Group’.
Any
failure in NatWest Group’s cybersecurity policies, procedures
or controls, may result in significant financial losses, major
business disruption, inability to deliver customer services, or
loss of data or other sensitive information (including as a result
of an outage) and may cause associated reputational
damage. Any of these factors could increase costs (including
costs relating to notification of, or compensation for customers,
credit monitoring or card reissuance), result in regulatory
investigations or sanctions being imposed or may affect NatWest
Group’s ability to retain and attract
customers. Regulators in the UK, US, Europe and Asia continue
to recognise cybersecurity as an increasing systemic risk to the
financial sector and have highlighted the need for financial
institutions to improve their monitoring and control of, and
resilience
(particularly
of critical services) to cyberattacks, and to provide timely
notification of them, as appropriate.
Additionally,
third parties may also fraudulently attempt to induce employees,
customers, third party providers or other users who have access to
NatWest Group’s systems to disclose sensitive information in
order to gain access to NatWest Group’s data or that of
NatWest Group’s customers or employees. Cyber security and
information security events can derive from groups or factors such
as: internal or external threat actors, human error, fraud or
malice on the part of NatWest Group’s employees or third
parties, including third party providers, or may result from
accidental technological failure.
NatWest
Group expects greater regulatory engagement, supervision and
enforcement to continue at a high level in relation to its overall
resilience to withstand IT and related disruption, either through a
cyberattack or some other disruptive event. Such increased
regulatory engagement, supervision and enforcement is uncertain in
relation to scope, consequence and pace of change, which could
negatively impact NatWest Group. Due to NatWest Group’s
reliance on technology and the increasing sophistication, frequency
and impact of cyberattacks, it is likely that such attacks could
have a material adverse impact on NatWest Group.
In
accordance with the EU General Data Protection Regulation
(‘GDPR’) and European Banking Authority
(‘EBA’) Guidelines on ICT and Security Risk Management,
NatWest Group is required to ensure it implements timely,
appropriate and effective organisational and technological
safeguards against unauthorised or unlawful access to the data of
NatWest Group, its customers and its employees. In order to meet
this requirement, NatWest Group relies on the effectiveness of its
internal policies, controls and procedures to protect the
confidentiality, integrity and availability of information held on
its IT systems, networks and devices as well as with third parties
with whom NatWest Group interacts. A failure to monitor and manage
data in accordance with the GDPR and EBA requirements of the
applicable legislation may result in financial losses, regulatory
fines and investigations and associated reputational
damage.
NatWest Group operations and strategy are highly dependent on the
accuracy and effective use of data.
NatWest
Group relies on the effective use of accurate data to support,
monitor, evaluate, manage and enhance its operations and deliver
its strategy. The availability of current, detailed, accurate and,
wherever possible, machine-readable customer segment and sub-sector
data is fast becoming a critical strategic asset. Failure to have
current, high-quality data and/or the ineffective use of such data
could result in a failure to manage and report important risks and
opportunities or satisfy customers’ expectations including
the inability to deliver innovative products and services. This
could also result in a failure to deliver NatWest Group’s
strategy and could place the NatWest Group at a competitive
disadvantage by increasing its costs, inhibiting its efforts to
reduce costs or its ability to improve its systems, controls and
processes, which could result in a failure to deliver NatWest
Group’s strategy. These data limitations or the unethical or
inappropriate use of data and/or non-compliance with customer data
and privacy protection laws could give rise to conduct and
litigation risks and may increase the risk of operational events,
losses or other adverse consequences due to inappropriate models,
systems, processes, decisions or other actions.
NatWest Group’s operations are highly dependent on its
complex IT systems (including those that enable remote working) and
any IT failure could adversely affect NatWest Group.
NatWest
Group’s operations are highly dependent on the ability to
process a very large number of transactions efficiently and
accurately while complying with applicable laws and regulations.
The proper functioning of NatWest Group’s payment systems,
financial crime and sanctions controls, risk management, credit
analysis and reporting, accounting, customer service and other IT
systems, as well as the communication networks between its branches
and main data processing centres, is critical to NatWest
Group’s operations.
Individually
or collectively, any critical system failure, material loss of
service availability or material breach of data security could
cause serious damage to NatWest Group’s ability to provide
services to its customers, which could result in reputational
damage, significant compensation costs or regulatory sanctions
(including fines resulting from regulatory investigations) or a
breach of applicable regulations. In particular, such issues could
cause long-term damage to NatWest Group’s reputation and
could affect its regulatory approvals, competitive position,
business and brands, which could undermine its ability to attract
and retain customers. This risk is heightened as most of NatWest
Group’s employees are working remotely as a result of the
COVID-19 pandemic, as it outsources certain functions and as it
continues to innovate and offer new digital solutions to its
customers as a result of the trend towards online and mobile
banking.
In
2020, NatWest Group continued to make considerable investments to
further simplify, upgrade and improve its IT and technology
capabilities (including migration of certain services to cloud
platforms). NatWest Group also continues to develop and enhance
digital services for its customers and seeks to improve its
competitive position through enhancing controls and procedures and
strengthening the resilience of services including cyber security.
Any failure of these investment and rationalisation initiatives to
achieve the expected results, due to cost-challenges or otherwise,
could negatively affect NatWest Group’s operations, its
reputation and ability to retain or grow its customer business or
adversely impact its competitive position, thereby negatively
impacting NatWest Group’s business, results of operations and
outlook.
NatWest Group relies on attracting, retaining and developing senior
management and skilled personnel, and is required to maintain good
employee relations.
NatWest
Group’s success depends on its ability to attract, retain and
develop highly skilled and qualified personnel, including senior
management, directors and key employees especially for
technology-focused roles, in a highly competitive market and under
internal cost reduction pressures. NatWest Group’s ability to
do this may be more difficult due to the cost reduction pressures,
including the refocusing of its NWM franchise and the phased
withdrawal from ROI, heightened regulatory oversight of banks and
the increasing scrutiny of, and (in some cases) restrictions placed
upon, employee compensation arrangements, in particular those of
banks in receipt of government support such as NatWest Group. This
increases the cost of hiring, training and retaining skilled
personnel. In addition, certain economic, market and regulatory
conditions and political developments (including Brexit) may reduce
the pool of candidates for key management and non-executive roles,
including non-executive directors with the right skills, knowledge
and experience, or increase the number of departures of existing
employees.
Any
reduction of compensation, as a result of the PRA’s request
that bank boards consider taking further appropriate action
regarding variable compensation, or negative economic developments,
could have an adverse effect on NatWest Group’s ability to
hire, retain and engage well qualified employees, especially at a
senior level, which may have a material adverse impact on the
financial position and prospects of NatWest Group.
Many of
NatWest Group’s employees in the UK, the ROI and continental
Europe are represented by employee representative bodies, including
trade unions. Engagement with its employees and such bodies is
important to NatWest Group in maintaining good employee relations.
Any failure to do so could impact NatWest Group’s ability to
operate its business effectively.
A failure in NatWest Group’s risk management framework could
adversely affect NatWest Group, including its ability to achieve
its strategic objectives.
Risk
management is an integral part of all of NatWest Group’s
activities and includes the definition and monitoring of NatWest
Group’s risk appetite and reporting on NatWest Group’s
risk exposure and the potential impact thereof on NatWest
Group’s financial condition. Financial risk management is
highly dependent on the use and effectiveness of internal stress
tests and models and ineffective risk management may arise from a
wide variety of factors, including lack of transparency or
incomplete risk reporting, unidentified conflicts or misaligned
incentives, lack of accountability control and governance, lack of
consistency in risk monitoring and management or insufficient
challenges or assurance processes. Failure to manage risks
effectively could adversely impact NatWest Group’s reputation
or its relationship with its regulators, customers, shareholders or
other stakeholders.
NatWest
Group’s operations are inherently exposed to conduct risks,
which include business decisions, actions or reward mechanisms that
are not responsive to or aligned with NatWest Group’s
regulatory obligations, customers’ needs or do not reflect
NatWest Group’s customer-focused strategy, ineffective
product management, unethical or inappropriate use of data,
information asymmetry, implementation and utilisation of new
technologies, outsourcing of customer service and product delivery,
the possibility of mis-selling of financial products and
mishandling of customer complaints. Some of these risks have
materialised in the past and ineffective management and oversight
of conduct risks may lead to further remediation and regulatory
intervention or enforcement. NatWest Group’s businesses are
also exposed to risks from employee misconduct including
non-compliance with policies and regulations, negligence or fraud
(including financial crimes), any of which could result in
regulatory fines or sanctions and serious reputational or financial
harm to NatWest Group. These risks may be exacerbated when most of
NatWest Group’s employees work remotely as a result of the
COVID-19 pandemic, which places additional pressure on NatWest
Group’s ability to maintain effective internal controls and
governance frameworks.
NatWest
Group has been seeking to embed a strong risk culture across the
organisation and has implemented policies and allocated new
resources across all levels of the organisation to manage and
mitigate conduct risk and expects to continue to invest in its risk
management framework. However, such efforts may not insulate
NatWest Group from future instances of misconduct and no assurance
can be given that NatWest Group’s strategy and control
framework will be effective. Any failure in NatWest Group’s
risk management framework could negatively affect NatWest Group and
its financial condition through reputational and financial harm and
may result in the inability to achieve its strategic objectives for
its customers, employees and wider stakeholders.
NatWest Group’s operations are subject to inherent
reputational risk.
Reputational
risk relates to stakeholder and public perceptions of NatWest Group
arising from an actual or perceived failure to meet stakeholder
expectations, including with respect to NatWest Group’s
Purpose-led Strategy and related targets, due to any events,
behaviour, action or inaction by NatWest Group, its employees or
those with whom NatWest Group is associated. This includes brand
damage, which may be detrimental to NatWest Group’s business,
including its ability to build or sustain business relationships
with customers, and may cause low employee morale, regulatory
censure or reduced access to, or an increase in the cost of,
funding. Reputational risk may arise whenever there is a material
lapse in standards of integrity, compliance, customer or operating
efficiency and may adversely affect NatWest Group’s ability
to attract and retain customers. In particular, NatWest
Group’s ability to attract and retain customers
(particularly, corporate and retail depositors) may be adversely
affected by, amongst others: negative public opinion resulting from
the actual or perceived manner in which NatWest Group conducts or
modifies its business activities and operations, media coverage
(whether accurate or otherwise), employee misconduct, NatWest
Group’s financial performance, IT systems failures or
cyberattacks, data breaches, financial crime, the level of direct
and indirect government support, or the actual or perceived
practices in the banking and financial industry in general, or a
wide variety of other factors.
Modern
technologies, in particular online social networks and other
broadcast tools that facilitate communication with large audiences
in short time frames and with minimal costs, may also significantly
increase and accelerate the impact of damaging information and
allegations.
Although
NatWest Group has implemented a Reputational Risk Policy to improve
the identification, assessment and management of customers,
transactions, products and issues, which represent a reputational
risk, NatWest Group cannot be certain that it will be successful in
avoiding damage to its business from reputational
risk.
Legal, regulatory and conduct risk
NatWest Group’s businesses are subject to substantial
regulation and oversight, which are constantly evolving and may
adversely affect NatWest Group.
NatWest
Group is subject to extensive laws, regulations, corporate
governance practice and disclosure requirements, administrative
actions and policies in each jurisdiction in which it operates.
Many of these have been introduced or amended recently and are
subject to further material changes, which may increase compliance
and conduct risks, particularly if EU/EEA and UK laws diverge now
that the Brexit transition period has ended. NatWest Group expects
government and regulatory intervention in the financial services
industry to remain high for the foreseeable future.
In
recent years, regulators and governments have focused on reforming
the prudential regulation of the financial services industry and
the manner in which the business of financial services is
conducted. Amongst others, measures have included: enhanced
capital, liquidity and funding requirements, implementation of the
UK ring-fencing regime, implementation and strengthening of the
recovery and resolution framework applicable to financial
institutions in the UK, the EU and the US, financial industry
reforms (including in respect of MiFID II), corporate governance
requirements, restrictions on the compensation of senior management
and other employees, enhanced data privacy and IT resilience
requirements, financial market infrastructure reforms (including
enhanced data privacy and IT resilience requirements, enhanced
regulations in respect of the provision of ‘investment
services and activities’), and increased regulatory focus in
certain areas, including conduct, consumer protection and disputes
regimes, anti-money laundering, anti-corruption, anti-bribery,
anti-tax evasion, payment systems, sanctions and anti-terrorism
laws and regulations.
Other
areas in which, and examples of where, governmental policies,
regulatory and accounting changes, and increased public and
regulatory scrutiny could have an adverse impact (some of which
could be material) on NatWest Group include, but are not limited
to, the following:
●
general changes in
government, central bank, regulatory or competition policy, or
changes in regulatory regimes that may influence investor decisions
in the jurisdictions in which NatWest Group operates;
●
rules relating to
foreign ownership, expropriation, nationalisation and confiscation
of assets;
●
increased attention
to the protection and resilience of, and competition and innovation
in, UK payment systems and retail banking developments relating to
the UK initiative on Open Banking, Open Finance and the European
directive on payment services;
●
new or increased
regulations relating to customer data and privacy protection as
well as IT controls and resilience, including the GDPR and the
impact of the recent Court of Justice of the EU (CJEU) decision
(known as Schrems II), in which the CJEU ruled that Privacy Shield
(an EU/US data transfer mechanism) is now invalid, leading to more
onerous due diligence requirements for the Group prior to sending
personal data of its EU customers and employees to non-EEA
countries, including the UK and the US; and
●
the introduction
of, and changes to, taxes, levies or fees applicable to NatWest
Group’s operations, such as the imposition of a financial
transaction tax, changes in tax rates, changes in the scope and
administration of the Bank Levy, increases in the bank corporation
tax surcharge in the UK, restrictions on the tax deductibility of
interest payments or further restrictions imposed on the treatment
of carry-forward tax losses that reduce the value of deferred tax
assets and require increased payments of tax.
These
and other recent regulatory changes, proposed or future
developments and heightened levels of public and regulatory
scrutiny in the UK, the EU and the US have resulted in increased
capital, funding and liquidity requirements, changes in the
competitive landscape, changes in other regulatory requirements and
increased operating costs, and have impacted, and will continue to
impact, product offerings and business models. Any of these
developments (including any failure to comply with new rules and
regulations) could also have a significant impact on NatWest
Group’s authorisations and licences, the products and
services that NatWest Group may offer, its reputation and the value
of its assets, NatWest Group’s operations or legal entity
structure, and the manner in which NatWest Group conducts its
business, Material consequences could arise should NatWest Group be
found to be non-compliant with these regulatory requirements.
Regulatory developments may also result in an increased number of
regulatory investigations and proceedings and have increased the
risks relating to NatWest Group’s ability to comply with the
applicable body of rules and regulations in the manner and within
the time frames required.
In
2019, the PRA published an industry-wide ‘Dear CEO’
letter which confirmed the regulator’s ongoing focus on the
integrity of regulatory reporting and its intention to ask a
selection of UK banks to commission reports from Skilled Persons
under section 166 of the Financial Services and Markets Act 2000 to
review the governance, controls and processes around the
preparation of Common Reporting (‘COREP’) regulatory
returns and to provide reasonable assurance opinions on whether the
returns reviewed were properly prepared. NatWest Group was selected
to participate in this review. The PRA delayed the start of this
review in light of the COVID-19 pandemic and the Skilled Persons
are now expected to complete their work in H1 2021.
Changes
in laws, rules or regulations, or in their interpretation or
enforcement, or the implementation of new laws, rules or
regulations, including contradictory or conflicting laws, rules or
regulations by key regulators or policymakers in different
jurisdictions, or failure by NatWest Group to comply with such
laws, rules and regulations, may adversely affect NatWest
Group’s business, results of operations and outlook. In
addition, uncertainty and insufficient international regulatory
coordination as enhanced supervisory standards are developed and
implemented may adversely affect NatWest Group’s ability to
engage in effective business, risk and capital management
planning.
NatWest Group is subject to various litigation matters, regulatory
and governmental actions and investigations as well as remedial
undertakings, including conduct-related reviews, anti-money
laundering and redress projects, the outcomes of which are
inherently difficult to predict, and which could have an adverse
effect on NatWest Group.
NatWest
Group’s operations are diverse and complex and it operates in
legal and regulatory environments that expose it to potentially
significant legal proceedings, and civil and criminal regulatory
and governmental actions. NatWest Group has settled a number of
legal and regulatory actions over the past several years but
continues to be, and may in the future be, involved in such actions
in the US, the UK, Europe and other jurisdictions.
NatWest
Group is currently involved in a number of significant legal and
regulatory actions, including criminal and civil investigations,
proceedings and ongoing reviews (both formal and informal) by
governmental law enforcement and other agencies and litigation
proceedings, relating to, among other matters, the offering of
securities, conduct in the foreign exchange market, the setting of
benchmark rates such as LIBOR and related derivatives trading, the
issuance, underwriting, and sales and trading of fixed-income
securities (including government securities), product mis-selling,
investment advice, customer mistreatment, anti-money laundering,
antitrust, VAT recovery and various other compliance issues. Legal
and regulatory actions are subject to many uncertainties, and their
outcomes, including the timing, amount of fines or settlements or
the form of any settlements, which may be material and in excess of
any related provisions, are often difficult to predict,
particularly in the early stages of a case or investigation.
NatWest Group’s expectation for resolution may change and
substantial additional provisions and costs may be recognised in
respect of any matter.
Significant
legal and regulatory actions to which NatWest Group is currently
exposed include, but are not limited to, the
following:
●
An FCA
investigation into the potential criminal and civil culpability of
NatWest Group under the UK Money Laundering Regulations 2007 in
relation to certain money service businesses and related
parties.
●
Two Skilled Person
reviews under section 166 of the Financial Services and Markets Act
2000 in relation to (i) the governance arrangements with respect to
two financial crime change programmes and (ii) a past business
review of investment advice provided during 2010 to
2015.
●
A review in the ROI
involving Ulster Bank Ireland DAC in relation to the treatment of
customers who were sold mortgages with a tracker interest rate or
with a tracker interest rate entitlement.
●
A criminal
investigation by the United States Attorney for the District of
Connecticut (USAO) and the United States Department of Justice
(DoJ) concerning trading by certain NWM Plc former traders
involving alleged spoofing, which activity occurred during the term
of a non-prosecution agreement (NPA) that NWMSI entered into in
connection with secondary trading in various forms of asset-backed
securities, under which non-prosecution was conditioned on NWMSI
and affiliated companies not engaging in conduct during the NPA
that the USAO determines was a felony under federal or state law or
a violation of the antifraud provisions of the United States
securities law. The duration and outcome of this criminal
investigation, which may include the extension, modification, or
deemed violation of the NPA, remain uncertain.
For
additional information relating to these and other legal and
regulatory proceedings and matters to which NatWest Group is
currently exposed, see ‘Litigation and regulatory
matters’ of Note 26 to the consolidated
accounts.
Adverse
outcomes or resolution of current or future legal or regulatory
actions (in particular, any finding of criminal liability by US
authorities (including as a result of pleading guilty), as to the
alleged spoofing or the conduct underlying the NPA) could have
material collateral consequences for NatWest Group’s business
and result in restrictions or limitations on NatWest Group’s
operations. These may include consequences resulting from the need
to reapply for various important licenses or obtain waivers to
conduct certain existing activities of NatWest Group, particularly
but not solely in the US, which may take a significant period of
time and the results of which are uncertain. Failure to obtain such
licenses or waivers could adversely impact NatWest Group’s
business, in particular in the US, including if it results in
NatWest Group being precluded from carrying out certain activities.
This in turn and/or the fines, settlement payments or penalties
could adversely impact NatWest Group’s capital position or
its ability to meet regulatory capital adequacy
requirements.
Failure
to comply with undertakings made by NatWest Group to its regulators
may result in additional measures or penalties being taken against
NatWest Group. In addition, any failure to administer conduct
redress processes adequately, or to handle individual complaints
fairly or appropriately, could result in further claims as well as
the imposition of additional measures or limitations on NatWest
Group’s operations, additional supervision by NatWest
Group’s regulators, and loss of investor
confidence.
NatWest Group may not effectively manage the transition of LIBOR
and other IBOR rates to alternative risk free rates.
UK and
international regulators are driving the transition from the use of
interbank offer rates (IBORs), including LIBOR, to alternative risk
free rates (RFRs). Interest rate benchmark
reform is a key priority of the Financial Stability Board, and
working groups have
been established in a number of jurisdictions to support the
transition. Major central banks and regulators including the FCA,
the Bank of England, and the Federal Reserve, have strongly
urged market participants to transition to RFRs, given the FCA have indicated that the
availability of LIBOR beyond the end of 2021 cannot be
guaranteed. NatWest Group has a significant exposure to
IBORs, and continues to reference it in certain products, primarily
derivatives and cash products. NatWest Group has started to phase
out its use of IBOR in line with the Bank of England transition
roadmap, and has embedded appropriate fall-back mechanisms in most
new IBOR activities, either through bilateral contract
documentation, or under the ISDA fall-backs protocol. Major NWG
entities including NWB and NWM, along with many group
counterparties, have already adhered to the ISDA IBOR fall-backs
supplement and protocol which establishes a clear, industry
accepted, contractual process to manage the transition from IBORs
to RFRs for derivative products.
NatWest Group is actively engaged with customers and industry
working groups to manage the risks relating to this
exposure,
and explore ways to transition IBOR exposures to RFRs to the extent
possible. Any
economic impacts will be dependent on, inter alia, the
establishment of deep and liquid RFR markets, the establishment of
clear and consistent market conventions for all replacement
products, as well as counterparties’ willingness to accept,
and transition to, these conventions. Furthermore, certain IBOR
obligations may not be able to be changed thus resulting in
fundamentally different economic outcomes than originally
intended. The
uncertainties around the timing and manner of transition to RFRs
expose NatWest Group, its clients and the financial services
industry more widely to risk.
Examples of these risks may include (i) legal risks relating to
documentation for new and the majority of existing transactions
(including, but not limited to, changes, lack of changes, or
unclear contractual provisions); (ii) financial risks from any
changes in valuation of financial instruments linked to impacted
IBORs that may impact NatWest Group’s performance, including
its cost of funds, and its risk management related financial
models; (iii) pricing, interest
rate or settlement risks such as changes to benchmark rates that
could impact pricing, interest rate or settlement mechanisms in or
on certain instruments; (iv) operational risks due to the
requirement to adapt IT systems, trade reporting infrastructure and
operational processes; and (v) conduct and litigation risks arising
from communication regarding the potential impact on customers, and
engagement with customers during the transition period, or
non-acceptance by customers of replacement
rates.
It is therefore difficult to determine to what extent the changes
will affect NatWest Group, or the costs of implementing any
relevant remedial action. Uncertainty as to the nature and extent
of such potential changes, the take up of alternative reference
rates, or other reforms including the potential continuation of the
publication of LIBOR, may adversely affect financial instruments
using LIBOR as benchmarks. The implementation of any alternative
RFRs may be impossible or impracticable under the existing terms of
certain financial instruments and could have an adverse effect on
the value of, return on, and trading market for, certain financial
instruments and on NatWest Group’s profitability. There is
also the risk of an adverse effect to reported performance arising
from the transition rules established by accounting bodies, as the
outcome of certain rules (as approved by the IASB) are still
dependent on how the actual transition process is
implemented.
NatWest Group operates in jurisdictions that are subject to intense
scrutiny by the competition authorities.
There
is significant oversight by competition authorities of the
jurisdictions, which NatWest Group operates in. The competitive
landscape for banks and other financial institutions in the UK, the
EU/EEA and the US is rapidly changing. Recent regulatory and legal
changes have and may continue to result in new market participants
and changed competitive dynamics in certain key areas, such as in
retail and SME banking in the UK where the introduction of new
entrants is being actively encouraged by the government.
Competition authorities, including the CMA, are currently also
looking at and focusing more on how they can support competition
and innovation in digital markets.
The UK
retail banking sector has been, and remains, subjected to intense
scrutiny by the UK competition authorities, government and by other
bodies, including the FCA and the Financial Ombudsman Service, in
recent years, including with a number of reviews/inquiries being
carried out, including market reviews conducted by the CMA and its
predecessor the Office of Fair Trading regarding SME banking and
personal banking products and services, the Independent Commission
on Banking and the Parliamentary Commission on Banking
Standards.
These
reviews raised significant concerns about the effectiveness of
competition in the retail banking sector. The CMA’s Retail
Banking Market Order 2017 imposes remedies primarily intended to
make it easier for consumers and businesses to compare personal
current account (‘PCA’) and SME bank products, increase
the transparency of price comparison between banks and amend PCA
overdraft charging. These remedies impose additional compliance
requirements on NatWest Group and could, in aggregate, adversely
impact NatWest Group’s competitive position, product offering
and revenues.
Adverse
findings resulting from current or future competition
investigations may result in the imposition of reforms or remedies,
which may impact the competitive landscape in which NatWest Group
operates or result in restrictions on mergers and consolidations
within the financial sector.
The cost of implementing the Alternative Remedies Package
(‘ARP’) could be more onerous than
anticipated.
Implementing
the ARP (initially in relation to the business previously described
as Williams & Glyn, since supplemented by an additional
perimeter of 200,000 customers since 25 August 2020) has involved
costs for NatWest Group, including but not limited to funding
commitments of £425 million for the Capability and Innovation
Fund and £350 million for the Incentivised Switching Scheme,
both being administered by the Independent Body. Implementing the
ARP may:
●
involve additional
costs for NatWest Group;
●
divert resources
from NatWest Group’s operations;
●
cause business
disruption and jeopardise the delivery of other significant plans
and initiatives;
●
require NatWest
Group to modify certain aspects of its execution of the
Incentivised Switching Scheme, which could increase implementation
costs; and
●
subject NatWest
Group to penalties of up to £50 million if uptake within the
scheme is insufficient.
As a
direct consequence of the ARP, NatWest Group will lose existing
customers and deposits, which in turn will have adverse impacts on
its business and associated revenues and margins. The ARP could
also result in adverse customer engagement and adverse reputational
implications for NatWest Group.
The ARP
is intended to benefit eligible competitors and negatively impact
NatWest Group’s competitive position.
Upon
request by an eligible bank NatWest Group has agreed to grant
customers which have switched to eligible banks under the scheme
access to its branch network for cash and cheque handling services.
This may impact customer service for NatWest Group’s own
customers with consequent competitive, financial and reputational
implications.
Implementation
of the scheme is also dependent on the engagement of eligible banks
and administration by the Independent Body.
The
COVID-19 pandemic may adversely affect customer switching. The
incentivised transfer of SME customers to third party banks places
reliance on those third parties to achieve satisfactory customer
outcomes, which could give rise to reputational damage to NatWest
Group if these are not forthcoming.
Failure
to comply with the terms of the ARP could result in the imposition
of additional measures or limitations on NatWest Group’s
operations, additional supervision by NatWest Group’s
regulators, and loss of investor confidence.
Changes in tax legislation or failure to generate future taxable
profits may impact the recoverability of certain deferred tax
assets recognised by NatWest Group.
In
accordance with the accounting policies set out on page 267,
NatWest Group has recognised deferred tax assets on losses
available to relieve future profits from tax only to the extent it
is probable that they will be recovered. The deferred tax assets
are quantified on the basis of current tax legislation and
accounting standards and are subject to change in respect of the
future rates of tax or the rules for computing taxable profits and
offsetting allowable losses.
Failure
to generate sufficient future taxable profits or further changes in
tax legislation (including with respect to rates of tax) or
accounting standards may reduce the recoverable amount of the
recognised tax loss deferred tax assets, amounting to £0.9
billion as at 31 December 2020. Changes to the treatment of certain
deferred tax assets may impact NatWest Group’s capital
position. In addition, NatWest Group’s interpretation or
application of relevant tax laws may differ from those of the
relevant tax authorities and provisions are made for potential tax
liabilities that may arise on the basis of the amounts expected to
be paid to tax authorities. The amounts ultimately paid may differ
materially from the amounts provided depending on the ultimate
resolution of such matters.
Legal Entity Identifier: 2138005O9XJIJN4JPN90
Date: 19
February 2021
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NATWEST
GROUP plc (Registrant)
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By: /s/
Jan Cargill
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Name:
Jan Cargill
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Title:
Deputy Secretary
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