Coronavirus Update

NatWest Markets Group- 2020 Annual Results

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Highlights

Income, costs and legacy issues

 

Income was £1,158 million in 2020, compared with £719 million in 2019, driven by increased levels of customer activity as the market reacted to the COVID-19 pandemic, although these levels eased in the second half of the year, and reflecting the impact of the consolidation of the full year results of NatWest Markets N.V. (NWM N.V.) following acquisition on 29 November 2019. In addition, income in 2019 was affected by challenging market conditions, particularly within Fixed Income due to elevated hedging costs caused by reduced liquidity and wider bid-offer spreads as the market experienced sustained curve flattening across global fixed income markets, most notably during Q3 2019.

 

Operating expenses of £1,431 million were higher compared with £997 million in 2019, largely as a result of increased litigation and conduct costs and strategic costs, and the non-repeat of reimbursement under indemnification agreements with third parties and other one-off cost recoveries in Central items & other during 2019.

 

Operating expenses for NatWest Markets segment, excluding litigation and conduct costs and strategic costs, of £1,106 million were £7 million higher than in 2019, reflecting the impact of the consolidation of the full year results of NWM N.V.; offset by cost reductions in the current year.

 

Litigation and conduct costs of £134 million in 2020 relate primarily to historical trading activities of a joint venture subsidiary.

 

Impairment losses were £42 million in 2020, compared with releases of £48 million in the prior year, largely due to the credit deterioration of an individual counterparty during the year, and the impact of expected credit losses recognised following the COVID-19 pandemic.

 

Balance sheet, capital and risk-weighted assets (RWAs)

 

NWM Group's total assets and liabilities increased by £7.0 billion and £7.6 billion to £273.1 billion and £263.8 billion respectively at 31 December 2020, compared with the prior year. The increases primarily reflect higher derivative fair values, driven by downward shifts in interest rate yields and FX rate fluctuation across major currencies during the year.

 

NWM Plc issued £2.5 billion of term senior unsecured debt securities in benchmark and private placement formats during 2020, lower than the initial guidance of £3-5 billion due to ongoing risk reduction following the strategic announcements made in 2020.

 

Total NWM Plc RWAs reduced to £25.6 billion at 31 December 2020 from £35.2 billion at 31 December 2019 reflecting lower levels of credit, counterparty credit and market risk which have trended downwards as the business seeks to reduce RWAs through the execution of capital optimisation actions, including strategic risk reduction transactions and exit activity.

 

On 18th February 2021, the NWM Plc Board approved an interim dividend of £500 million, to be declared and payable to NatWest Group plc on 19 February 2021. There has been no adjustment to the year-end statutory financial statements, however a £500 million foreseeable dividend deduction has been applied to the year-end regulatory capital position.

 

NWM Plc's Common Equity Tier 1 (CET1) ratio increased to 21.7% from 17.3% at 31 December 2019, primarily reflecting reserve movements in the year, the reduction in RWAs and the impact of the foreseeable dividend deduction to regulatory capital. The CRR leverage ratio increased to 5.2% (2019 - 5.1%).

 

The total regulatory capital and CRR-compliant MREL for NWM Plc at 31 December 2020 was £12.7 billion, or 49.6% of RWAs.

 

Progress on strategic change

 

Throughout 2020, NWM Group has made progress on the new strategy announced in February 2020, creating greater alignment with NatWest Group customers as well as refining products and services offered.

 

The front office operating model was reorganised to focus on NatWest Group's customers, and some customer facing roles were transferred to NatWest Holdings Limited. A Capital Management Unit was established in Q3 2020 to safely manage the capital reduction and optimisation.

 

As part of the transformation programme, some support functions including Risk and Treasury were transferred from NWM Group to NatWest Holdings Limited. Following transfer, the services performed by these functions are provided to NWM Group by way of intra-group agreements. NWM Plc's Board has approved key performance indicators by which to monitor delivery of the outsourced services for Risk and Treasury activity, which will be reported to NWM Plc Board at regular intervals in order to ensure proper oversight of service levels.

 

The impact of COVID-19

Business resilience

 

Robust business continuity plans ensured that NWM Group was able to continue to support customers and protect employees, with the vast majority of the workforce working remotely since the onset of the pandemic in Q1 2020. In line with guidance from public health authorities in the various regions where NWM Group operates, a small proportion of employees have returned to the workplace, primarily those in regulated roles and key oversight functions.

 



 

Financial Review continued

Capital, funding and liquidity

 

NWM Plc RWAs decreased to £25.6 billion from £35.2 billion at 31 December 2019, reflecting lower levels of credit, counterparty credit and market risk which have trended downwards as the business seeks to reduce RWAs.

 

Market risk capital requirements - In March 2020, exceptional levels of market volatility due to the pandemic resulted in an increase in VaR model back-testing exceptions across the industry, including in NWM Plc. During the year, NWM Plc utilised a temporary approach offered by the PRA to mitigate the impact on market risk capital requirements. As at 31 December 2020, this temporary approach was no longer in force and NWM Plc instead utilised the provisions of Regulation (EU) 2020/873, which the European Parliament passed in June 2020 as an amended regulation to the CRR in response to the pandemic ("the CRR COVID-19 Amendment"). Under the provisions of this amendment, NWM Plc has been granted permission by the PRA to exclude back-testing exceptions that occurred on five days in March 2020 when calculating its minimum capital requirements for market risk. For more information, refer to the Market risk section in the NatWest Markets Plc 2020 Annual Report and Accounts.

 

During 2020, the European Commission amended the prudent valuation Regulatory Technical Standard such that, due to the exceptional levels of market volatility, the aggregation factor was increased from 50% to 66% until 31 December 2020 inclusive. This has reduced NWM Plc's Prudential Valuation Adjustment (PVA) deduction by c.£115 million.

 

NWM Group was well-capitalised at 31 December 2020, with a NWM Plc CET1 ratio of 21.7%, within guidance of above 15%. The liquidity position was also strong, with NWM Plc's liquidity portfolio of £19.4 billion and LCR of 268%.

 

Capital, funding and liquidity remained closely monitored, with increased tracking and scenario analysis to ensure balance sheet strength.

 

 

Fair value

 

Valuation reserves, comprising credit valuation adjustments (CVA), funding valuation adjustments (FVA), bid-offer and product and deal specific reserves decreased to £803 million at 31 December 2020 from £953 million at 31 December 2019.

 

FVA reserves decreased to £121 million at 31 December 2020 from £193 million at 31 December 2019, driven by a reduction in exposures, partly due to trade novation activity, together with reductions in both the level of initial margin posting requirements (driven by the NWM Plc rating upgrade) and the types of initial margin posting requirements assessed as part of FVA.

 

Product and deal specific reserves decreased to £172 million at 31 December 2020 from £238 million at 31 December 2019, driven by a reduction in IFRS inception P&L reserves (due to time amortisation and trade unwind activity), certain negative exposures increasing (driven by interest rate and FX market moves) and a reallocation of reserves that are now included within modelled derivative trade valuations.

 

CVA reserves increased to £388 million at 31 December 2020 from £384 million at 31 December 2019. CVA reserves increased significantly in Q1 2020 due to credit spreads widening at the outset of the crisis but have since reduced to levels comparable with 2019.

 

Risk

 

Risk management activities have continued to focus on the safety and soundness of the business. There was an additional emphasis on the oversight of initiatives to support customers following the onset of the COVID-19 pandemic in Q1 2020 as well as of the transformation work that was executed throughout 2020.

 

A COVID-19 risk register was established in the early stages of the pandemic to track all key risks and risk acceptance decisions, together with regular analysis of the impact of COVID-19 on NWM Group's risk profile. COVID-19 related risks have since been integrated into standard management and governance processes.

 

In response to the pandemic, a number of macro-economic scenarios were developed at NatWest Group level to assess the range of potential medium-term impacts. These were benchmarked against the Bank of England's illustrative scenario and continually updated throughout the year. The outputs of these analyses were used to develop continuity plans for NWM Group's critical services.

 

The Risk function also provided oversight of adjustments to working practices and processes in some areas to facilitate working from home arrangements. These were introduced to ensure appropriate supervision of colleagues and to maintain service continuity for customers.

 

Operational resilience remained a key focus, but the pandemic highlighted NWM Group's strong ability to respond to a major disruption event.

 

Internal traded VaR for NWM Group was £26 million at peak and £16 million average during the year. Stressed VaR was £196 million at peak and £97 million on an average basis.

 

 

Impairments

 

The unprecedented nature of the COVID-19 crisis prompted a change of approach to formulating multiple economic scenarios (MES). The incorporation of these stresses resulted in a probability of default (PD) deterioration across models and sectors, leading to an increase in IFRS 9 Stage 2 exposures and associated expected credit loss (ECL) provisioning.

 

 

Financial Review continued

The table below sets out the performance key metrics and ratios.

 

 

31 December

31 December

Performance key metrics and ratios (1)

2020

2019

Liquidity coverage ratio (LCR) (%) (2)

268

254

Liquidity portfolio (£bn) (2)

19.4

16.1

Stressed coverage ratio (%) (2)

207

153

Total wholesale funding (£bn)  (3)

20.6

21.9

Total funding including repo (£bn)

75.9

85.0

 

 

 

Common Equity Tier (CET1) ratio (%)

21.7

17.3

CRR leverage ratio (%) (2)

5.2

5.1

Risk-weighted assets (RWAs) (£bn)

25.6

35.2

Total Capital ratio (%)

30.3

24.2

Total CRR-compliant MREL (£bn) (4)

12.7

13.5

Total MREL ratio (%)

49.6

38.4

 

Notes:

(1)

Capital, leverage and RWAs are based on the PRA transitional arrangements for NWM Plc. Regulatory capital is monitored and reported at NWM Plc level.

(2)

These liquidity metrics have been presented for NWM Plc as they are monitored and reported for regulatory purposes.

(3)

Excludes derivative cash collateral received, customer deposits, repo and intra-NatWest Group balances.

(4)

Includes senior internal debt instruments issued to NatWest Group plc with a regulatory value of £4.9 billion (31 December 2019 - £4.9 billion).

 

Outlook

NatWest Markets, like all companies, continues to deal with a range of significant risks and uncertainties in the external economic, political and regulatory environment. We will continue to actively monitor market conditions.

 

NatWest Markets continues to refocus the business in line with the strategy announced in February 2020. We expect NWM Group exit and disposal costs will be around £0.2 billion in 2021. NWM Group expects to achieve the majority of the remaining expected medium term RWA reduction in NWM Plc by the end of 2021.