REG - NatWest Group plc - Annual Financial Report - NatWest Group plc

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17/02/2023 07:00

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RNS Number : 2356Q  NatWest Group plc  17 February 2023

 

 

 

 

 

 

NatWest Group plc 17 February 2023

Annual Report and Accounts 2022

Pillar 3 Report 2022

 

A copy of the Annual Report and Accounts 2022 for Group plc will shortly be
submitted to the National Storage Mechanism and will be available for
inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism) . The document will
be available on NatWest Group plc's website at
https://investors.natwestgroup.com/reports-archive
(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 2022 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 1758

 

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 2022 in full
unedited text. Page references in the text refer to page numbers in the Annual
Report and Accounts 2022.

 

Principal Risks and Uncertainties

Set out below are certain risk factors that could adversely affect NatWest
Group's future results, its financial condition and/or prospects and cause
them to be materially different from what is forecast or expected, and
directly or indirectly impact the value of its securities. These risk factors
are broadly categorised and should be read in conjunction with other 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.

Economic and political risk

NatWest Group, its customers and its counterparties face continued economic
and political risks and uncertainties in the UK and global markets, including
as a result of high inflation and rising interest rates, supply chain
disruption and the Russian invasion of Ukraine.

NatWest Group is affected by global economic and market conditions. Uncertain
and volatile economic conditions can create a challenging operating
environment for financial services companies such as NatWest Group. The
outlook for the global economy has many uncertainties including: falling
economic activity, high inflation, rising interest rates, elevated energy
prices and higher cost-of-living, supply chain disruption, changes to monetary
and fiscal policy, and the impact of armed conflict (in particular the Russian
invasion of Ukraine).

These conditions, including the current cost-of-living crisis, could be
worsened by a number of factors including: instability in the global financial
system, market volatility and change, fluctuations in the value of the pound
sterling, new or extended economic sanctions, the ongoing effects of the
COVID-19 pandemic, economic volatility in emerging markets, volatility in
commodity prices or concerns regarding sovereign debt or sovereign credit
ratings.  Economic conditions may also be affected by the changing
demographics in the markets that NatWest Group serves, increasing social and
other inequalities, or rapid changes to the economic environment due to the
adoption of technology, automation and artificial intelligence, or due to
climate change, environmental degradation, biodiversity loss and/or other
sustainability risks.

NatWest Group is also 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.
Unfavourable political, military or diplomatic events, increasing geopolitical
tensions leading to armed conflict, protectionist policies or trade barriers,
secession movements or the exit of other member states from the EU, changes to
monetary and fiscal policy, new and widespread public health crises (including
any epidemics or pandemics), state and privately sponsored cyber and terrorist
acts or threats, and the responses to each of the above economic, political or
other scenarios by various governments and markets, could negatively affect
the business and performance of NatWest Group, including as a result of the
indirect impact on regional or global trade and/or NatWest Group's customers
and counterparties.

The UK experienced significant political uncertainty in 2022 that may persist
into the foreseeable future.  This could lead to a loss of confidence in the
UK, that could in turn, negatively impact companies operating in the UK.
NatWest Group also faces political uncertainty in Scotland as a result of a
possible second Scottish independence referendum. Independence may adversely
affect NatWest Group both in relation to entities incorporated in Scotland and
in other jurisdictions. Any changes to Scotland's relationship with the UK or
the EU may adversely affect the environment in which NatWest Group and its
subsidiaries operate and may require further changes to NatWest Group,
independently or in conjunction with other mandatory or strategic structural
and organisational changes, any of which could adversely affect NatWest Group.

The COVID-19 pandemic prompted many changes that may prove to be permanent
shifts in customer behaviour and economic activity, such as changes in
spending patterns and significantly more people working in a more flexible
manner. These changes may affect asset prices, the economic environment, and
NatWest Group's customers' and counterparties' financial performance and
needs.  In response to the COVID-19 pandemic, central banks, governments,
regulators, and legislatures in the UK and elsewhere offered unprecedented
levels of support and various schemes to assist businesses and individuals,
many of which have since been curtailed or withdrawn.  However, risks remain
as to whether these loans will be repaid.

 

The value of NatWest Group's own and other securities 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 own and
other securities, particularly during periods of market displacement. This
could cause a decline in the value of NatWest Group's own and other
securities, 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 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, market events have historically been difficult
to predict, and NatWest Group, its customers and its counterparties could
realise significant losses if extreme market events were to occur.

Any of the above may adversely affect NatWest Group.

Changes in interest rates have significantly affected, and will continue to
affect, NatWest Group's business and results.

NatWest Group's performance is affected by changes in interest rates.
Benchmark overnight interest rates, such as the UK base rate, increased in
2022 and are expected to continue to rise in the short-term accompanied by
quantitative tightening. However, forward rates at 31 December 2022 suggested
interest rates may fall again in the medium-term.

 

Stable interest rates support predictable income flow and less volatility in
asset and liability valuations, although persistently low and negative
interest rates, such as those experienced during the COVID-19 pandemic, are
generally expected to be less favourable for banks.

 

For NatWest Group, persistently low interest rates may reduce the yield on its
lower interest income.

 

Volatility in interest rates may also result in unexpected outcomes both for
interest income and asset and liability valuations which may adversely affect
NatWest Group. For example, unexpected movements in spreads between key
benchmark rates such as sovereign and swap rates in turn affect liquidity
portfolio valuations. Finally, sharp unexpected rises in rates may also have
negative impacts on some asset and derivative valuations, for example. Any of
the above may have an adverse effect on NatWest Group's future results,
financial condition and/or prospects.

 

Movements in interest rates also influence and reflect the macro-economic
situation more broadly, affecting factors such as business and consumer
confidence, property prices, default rates on loans and other indicators that
may indirectly affect NatWest Group and may adversely affect its future
results, financial condition and/or prospects.

Fluctuations in currency exchange rates  may adversely affect NatWest Group's
results and financial condition.

Decisions of 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 fluctuations
in currency exchange rates.

Although NatWest Group is principally a UK focused banking group, it is
subject to structural foreign exchange risk from capital deployed in NatWest
Group's foreign subsidiaries, branches and other strategic equity
shareholdings. NatWest Group also relies on issuing securities in non-sterling
currencies that assist in meeting NatWest Group's MREL. NatWest Group conducts
banking activities in non-sterling currencies (for example, loans, deposits
and dealing activity) which affects its revenue and also uses service
providers based outside of the United Kingdom for certain services and as a
result certain operating results are subject to fluctuations in currency
exchange rates.

NatWest Group maintains policies and procedures designed to manage the impact
of exposures to fluctuations in currency exchange rates. Nevertheless, changes
in currency exchange rates, particularly in the sterling-US dollar and
euro-sterling rates, may adversely affect various factors including, the value
of assets, liabilities (including the total amount of MREL-eligible
instruments), foreign exchange dealing activity, income and expenses, RWAs and
hence the reported earnings and financial condition of NatWest Group.

Continuing uncertainty regarding the effects and extent of the UK's post
Brexit divergence from EU laws and regulation, and NatWest Group's post Brexit
EU operating model may adversely affect NatWest Group and its operating
environment.

The UK ceased to be a member of the EU and the European Economic Area ('EEA')
on 31 January 2020 ('Brexit') and the 2020 EU-UK Trade and Cooperation
Agreement ('TCA') ended the transition period on 31 December 2020. The TCA was
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 ('MoU'), which remains unsigned.
Certain aspects of the services provided by NatWest Group are therefore
subject to obtaining local licences or are subject to individual equivalence
decisions (temporary or otherwise) by relevant regulators. The EU's
equivalence regime does not cover most lending and deposit taking, and
determinations in respect of non-EU countries have not, to date, covered the
provision of most financial investment services. In addition, equivalence
determinations do not guarantee permanent access rights and can be withdrawn
with short notice. In late 2021 the European Commission proposed legislation
that would require non-EU firms to establish a branch or subsidiary in the EU
before providing 'banking services' in the EU. If these proposals become law
all 'banking services' will be licensable activities in each EU member state
and member states will not be permitted to offer bilateral permissions to
financial institutions outside the EU allowing them to provide 'banking
services' in the EU. Uncertainty remains as to whether 'banking services' will
also include investment products.

 

NatWest Group continues to evaluate its post Brexit EU operating model, making
adaptations as necessary. NatWest Group also continues to assess where NatWest
Group companies can obtain bilateral regulatory permissions to facilitate
intragroup transactions and/or to permit business to continue from its UK
entities, transferring what cannot be continued to be rendered from the UK to
an EEA subsidiary or branch where permitted or commercially reasonable to do
so. Where these 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 conduct EEA business
through an EEA licensed subsidiary or branch. Certain permissions are required
in order to maintain the ability to clear euro payments. Other permissions,
including the ability to have two intermediate EU parent undertakings, may
need to be obtained, and structural changes may need to be made, to allow
NatWest Group to continue to serve EEA customers from both the ring-fenced and
non-ring-fenced banking entities. Any failure to obtain such permissions or
make such structural changes in a timely manner, or at all, could adversely
affect NatWest Group and the EEA customers it serves. Furthermore,
transferring business to an EEA based subsidiary is a complex exercise and
involves legal, regulatory and execution risks, and could result in a loss of
business and/or customers or higher than anticipated costs. The changes to
NatWest Group's operating model have been costly and failure to receive the
requested regulatory permissions and/or further changes to its business
operations, product offering and customer engagement could result in further
costs and/or regulatory sanction.

The long-term effects of Brexit and the uncertainty regarding NatWest Group's
EU operating model may adversely affect NatWest Group and its customers and
counterparties who are themselves dependent on trading with the EU or
personnel from the EU. The long-term effects of Brexit may also be exacerbated
by wider UK and global macroeconomic trends and events.

Uncertainties remain as to the extent to which EU/EEA laws will diverge from
UK law.

For example, bank regulation in the UK may diverge from European bank
regulation if the Financial Services and Markets Bill ('FSM') is enacted into
law. The UK government has also proposed legislation to introduce automatic
'sunset' clauses for retained EU law by the end of 2023 (the Retained EU Law
(Revocation and Reform) Bill 2022), which if enacted could potentially cause
market disruption and require additional resources to manage the legal and
regulatory consequences. NatWest Group may not be able to respond to these
changes effectively, in a timely manner, or at all. The actions taken by
regulators in response to any new or revised bank regulation and other rules
affecting financial services, may adversely affect NatWest Group, including
its business, non-UK operations, group structure, compliance costs, intragroup
arrangements and capital requirements.

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 NatWest Group securities.

In its March 2021 Budget, the UK Government announced its intention 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 2026.
NatWest Group plc has: (i) carried out directed buybacks of NatWest Group plc
ordinary shares from UK Government Investments Limited ('UKGI') in March 2021
and in March 2022, (ii) carried out sales of NatWest Group plc shares by UKGI
by accelerated bookbuild in May 2021 and (iii) made purchases under NatWest
Group plc's directed and on-market buyback programmes announced in July 2021
and in March 2022. As at 17 January 2023, the UK Government held 44.98% of the
ordinary share capital with voting rights of NatWest Group plc. NatWest Group
may participate in similar directed or on-market buybacks in the near- and
medium-term future. The precise timing and extent of further UKGI's sell-downs
is uncertain, which could result in a prolonged period of price volatility for
NatWest Group plc's ordinary shares and other securities.

Any offers or sales of a substantial number of ordinary shares in NatWest
Group plc by UKGI, market expectations about these sales and any associated
directed, on or off market buyback activity by NatWest Group, could affect the
prevailing market price for the outstanding ordinary shares of NatWest Group
plc which may have an adverse effect on NatWest Group.

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, for as long as HM Treasury remains NatWest Group plc's
largest single shareholder, HM Treasury and UKGI (as manager of HM Treasury's
shareholding) could exercise a significant degree of influence over NatWest
Group including: 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. HM Treasury or UKGI's
approach depends on government policy, which could change.

The manner in which HM Treasury or UKGI exercises HM Treasury's rights as
NatWest Group's largest single 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, which may in turn
adversely affect NatWest Group.

Strategic risk

NatWest Group continues to implement its purpose-led strategy, which carries
significant execution and operational risks and may not achieve its stated
aims and targeted outcomes.

NatWest Group continues to implement its purpose-led strategy, which is
designed to champion potential and to help individuals, families and
businesses to thrive. NatWest Group's 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. Further, shifting trends include
digitalisation, decarbonisation, automation, e-commerce and hybrid working,
each of which has resulted in significant market volatility and change. There
is also increased investor, employee, stakeholder, regulatory and customer
scrutiny regarding how businesses address these changes and related climate
change, biodiversity and other sustainability issues, including tackling
inequality, working conditions,  workplace health, safety and wellbeing,
diversity and inclusion, data protection and management, workforce management,
human rights and supply chain management.

In recent years, as part of its purpose-led strategy, NatWest Group has
refocused its NatWest Markets business, and has also created the Commercial
& Institutional business segments. The Commercial & Institutional
business segment combined the pre-existing Commercial, NatWest Markets and RBS
International businesses to form a single business segment, which focuses on
serving Commercial & Institutional customers. The Commercial &
Institutional business segment is intended to allow closer operational and
strategic alignment to support growth, with increased levels of services being
provided between NatWest Group entities, with the potential increased risk of
breach of the UK ring-fencing regime requiring effective conflicts of interest
policies.

Many factors may adversely impact the successful implementation of NatWest
Group's purpose-led strategy, including:

-    macroeconomic challenges including rising inflation and interest rates
and falling economic activity which may adversely affect economic growth and
which could in turn impact certain strategic initiatives and new venture
opportunities for NatWest Group;

-    an internal culture shift across NatWest Group as to how NatWest Group
conducts its business to strive towards NatWest Group's One Bank strategy;

-    maintaining effective governance, procedures, systems and controls
giving effect to the purpose-led strategy whilst also managing emerging
climate, ESG and other sustainability-related risks and opportunities;

-    achieving a number of financial, capital and operational targets and
expectations, both for the short term and throughout the implementation
period;

-    cost-controlling measures, which may result in material one-off
provisions to lower the NatWest Group cost base, may divert investment from
other areas, and may vary considerably from year to year;

-    lower customer confidence and confidence from the wider market, which
may result in a decrease of customer activity and related income levels;

-    changes in the economic, political and regulatory environment in which
NatWest Group, its customers and its counterparties operate, regulatory
uncertainty and changes, strong market competition and industry disruption and
economic volatility; and

-    any economic downturn which may adversely affect the strategy as
certain initiatives depend on achieving growth in new ventures and
opportunities for NatWest Group.

In pursuing its purpose-led strategy, NatWest Group may not be able to
successfully: (i) implement some or all aspects of its strategy; (ii) meet any
or all of the related targets or expectations of its strategy; or (iii)
realise the intended strategic objectives of any other future strategic or
growth initiative. The scale and scope of its strategy and the intended
changes continue to present material business, operational and regulatory
(including compliance with the UK ring-fencing regime), conflicts, legal,
execution, IT system, internal culture, conduct and people risks to NatWest
Group. Implementing many changes and strategic actions concurrently, including
in respect of any growth initiatives, 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 these respects. 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 as planned, or at all, or could be phased or could progress in a
manner other than currently expected. This could lead to additional management
actions by NatWest Group.

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 costs, impact NatWest Group's products and services offering, its
reputation with customers or business model and adversely affect NatWest
Group's ability to deliver its strategy and meet its targets and guidance,
each of which could adversely affect NatWest Group's future results, financial
condition and/or prospects.

Future acquisitions or divestments by NatWest Group may not be successful, and
consolidation or fragmentation of the financial services industry may
adversely affect NatWest Group.

The financial services industry is experiencing continued competitive pressure
with technological advancement disrupting traditional business models. In
order to compete effectively, NatWest Group may decide, as part of its
purpose-led strategy, to undertake divestments, restructurings or
reorganisations.

Conversely, it may decide to grow its business through acquisitions, joint
ventures, investments and/or strategic partnerships as well as other
transactions and initiatives to: (i) enhance capabilities that may lead to
better productivity or cost efficiencies; (ii) acquire talent; (iii) pursue
new products or expand existing products; or (iv) enter new markets or enhance
its presence in existing markets.

There are risks that NatWest Group may not fully realise the expected benefits
and value from these transactions and initiatives in the time, or to the
degree, anticipated, or at all. In particular, NatWest Group may: (i) fail to
realise the business rationale for the transaction or initiative, or
assumptions underlying the business plans supporting the valuation of a target
business may prove inaccurate, for example, regarding synergies and expected
commercial demand; (ii) fail to successfully integrate any acquired businesses
(including in respect of technologies, existing strategies, products and human
capital) or to successfully divest or restructure a business; (iii) fail to
retain key employees, customers and suppliers of any acquired or restructured
business; (iv) be required or wish to terminate pre-existing contractual
relationships, which could prove costly and/or be executed at unfavourable
terms and conditions; (v) fail to discover certain contingent or undisclosed
liabilities in businesses that it acquires, or its due diligence to discover
any such liabilities may be inadequate; and (vi) not obtain necessary
regulatory and other approvals or onerous conditions may be attached to such
approvals. Accordingly, NatWest Group may not be successful in growing its
business through divestments, restructurings, reorganisations or acquisitions,
and initiatives and any particular transaction may not succeed, may be limited
in scope or scale (including due to NatWest Group's current ownership
structure) and may not conclude on the terms contemplated, or at all. Any of
the above may adversely affect NatWest Group's future results, financial
condition and/or prospects.

Continued competitive pressure in the financial services industry, including
from technology companies, may have a negative impact on NatWest Group's
business. If NatWest Group Commercial & Institutional customers merge or
are acquired by other entities that are not NatWest Group customers, this may
also lead to losses for NatWest Group. Existing larger banks or financial
institutions (and those that emerge from mergers and consolidations) may have
more bargaining power in negotiations than NatWest Group. Each of these
developments may adversely affect NatWest Group.

NatWest Group's phased withdrawal from the Republic of Ireland present various
risks.

NatWest Group's phased withdrawal from ROI continues to present significant
commercial, operational, reputational, legal and execution risks. In
particular, the phased withdrawal from ROI requires transfers of business,
assets and liabilities to third parties, and entails many risks, the most
significant of which include: (i) anticipated reductions in net income, total
lending and RWAs; (ii) potential stranded capital or an inability to return
capital from Ulster Bank Ireland DAC to its parent; (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 Ireland
DAC, 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, for example, retail and commercial deposit outflows
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) no or limited access to Euro system funding arrangements;
and (xi) brand and reputational risks and stakeholder scrutiny about the
phased withdrawal from ROI. Any of these risks and uncertainties may cost
more, be more complex or harder to mitigate than currently estimated and may
adversely affect NatWest Group's reputation, future results, financial
condition and/or prospects or its ability to execute a phased withdrawal from
ROI.

The transfer of NatWest Group's Western European corporate portfolio involves
certain risks.

To improve efficiencies and best serve customers following Brexit, NatWest
Group expects that certain of its assets, liabilities, transactions and
activities (including NatWest Group's Western European corporate portfolio
principally consisting of term funding and revolving credit facilities), may
be: (i) transferred from the ring-fenced subgroup of NatWest Group to NWM
Group and/or (ii) transferred to the ring-fenced subgroup of NatWest Group
from NWM Group, subject to regulatory and customer requirements. The timing,
success and quantum of any of these transfers remain uncertain as is the
impact of these transactions on its results of operations. As a result,
NatWest Group's future results, financial condition and/or prospects may be
adversely affected.

Financial resilience risk

NatWest Group may not meet the targets it communicates or be in a position to
continue to make discretionary capital distributions (including dividends to
shareholders).

As part of NatWest Group's strategy, it has set a number of financial, capital
and operational targets including in respect of its: CET1 ratio target, MREL
targets, return on tangible equity ('ROTE'), funding plans and requirements,
employee engagement, diversity and inclusion as well as ESG (including climate
and sustainable funding and financing targets) and customer satisfaction
targets and discretionary capital distributions (including dividends to
shareholders). See also, 'NatWest Group continues to implement 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, including its CET1 ratio target,
and make discretionary capital distributions and to successfully fulfil its
strategy is subject to various internal and external factors and risks. These
include but are not limited to: UK and global macroeconomic, political, market
and regulatory uncertainties, operational risks and risks relating to NatWest
Group's business model and strategy (including risks associated with climate,
ESG and other sustainability-related issues) and litigation, governmental
actions, investigations and regulatory matters. See also, 'NatWest Group, its
customers and its counterparties face continued economic and political risks
and uncertainties in the UK and global markets, including as a result of high
inflation and rising interest rates, supply chain disruption and the Russian
invasion of Ukraine.'

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 various changes. These include: evolving customer behaviour, technological
changes (including digital currencies and other instruments, stablecoins and
the growth of digital banking, such as from fintech entrants), competitor
behaviour, new entrants to the market (including non-traditional financial
services providers such as retail or technology conglomerates, who may have
competitive advantages in scale, technology and customer engagement),
competitive foreign-exchange offerings, industry trends resulting in increased
disaggregation or unbundling of financial services or conversely the
re-intermediation of traditional banking services, and the impact of
regulatory actions and other factors. In particular, developments in the
financial sector resulting from new 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 and commercial banking segments. Moreover, innovations such as
biometrics, artificial intelligence, automation, the cloud, blockchain,
cryptocurrencies and quantum computing may rapidly facilitate industry
transformation.

These trends have been 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. The competition enhancing measures under NatWest Group's
independently administered Alternative Remedies Package ('ARP') benefits grant
recipients and eligible competitors. The ARP may be more costly than
anticipated and may adversely affect customer service for NatWest Group's own
customers, its competitive position and reputation. Failure to comply with the
terms of the scheme 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.

Increasingly, many of the products and services offered by NatWest Group are,
and will become, more technology intensive, including through digitalisation
and the use of artificial intelligence. For example, NatWest Group has
invested in a number of fintech ventures, including Mettle, FreeAgent, Tyl,
Rapid Cash, Rooster Money and Vodeno. NatWest Group's ability to develop or
acquire 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 maintain or 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 more advanced 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 cost efficiencies.

This may limit additional investment in areas such as innovation and could
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 initiatives 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
automation and artificial intelligence. Such initiatives may result in
operational, reputational and conduct risks if the technology used is
defective, inadequate 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 NatWest Group's purpose-led strategy
(including in relation to acquisitions, reorganisations and/or partnerships),
delivery on its climate ambition, cost-controlling 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. Any of the above may adversely affect NatWest Group's future
results, financial condition and/or prospects.

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's lending strategy and associated processes/systems may fail to
identify, anticipate or quickly react to weaknesses or risks in a particular
sector, market or borrower, or NatWest Group's credit risk appetite relative
to competitors, 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 may
be affected by the recent UK and global macroeconomic and political
uncertainties and a further deterioration in prevailing economic and market
conditions (including a resurgence of the COVID-19 pandemic or other new
health crises) and by the legal and regulatory landscape in the UK and
countries where NatWest Group is exposed to credit risk. Any further
deterioration in these conditions or changes to legal or regulatory landscapes
could worsen borrower and counterparty credit quality or impact the
enforcement of contractual rights over security, increasing credit risk.

An increase in drawings upon 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, increasing interest rates or higher
inflation, particularly if prolonged. NatWest Group may be affected by
volatility in property prices (including as a result of the general UK
political or economic climate) given that NatWest Group's mortgage loan and
wholesale property loan portfolios as at 31 December 2022, amounted to £235.5
billion, representing 62% 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 9 provisions already made. This is most likely to
occur during periods of illiquidity or depressed asset valuations.

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). 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 interdependent as a result of credit, trading, clearing and other
relationships. Any perceived lack of creditworthiness of a counterparty or
borrower may lead to market-wide liquidity problems and losses for 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, adverse changes in borrower and counterparty credit risk 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 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 judgment 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 -
Credit Risk'. A credit deterioration would also lead to RWA increases.

Furthermore, the assumptions and judgments used in the MES and ECL assessment
at 31 December 2022 may not prove to be adequate resulting in incremental ECL
provisions for NatWest Group.

Due to NatWest Group's exposure to the financial industry, it also has
exposure to shadow banking entities (i.e., entities which carry out activities
of a similar nature to banks but not regulated like banks). NatWest Group is
required 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 NatWest Group's future results, financial condition
and/or prospects.

In line with certain mandated COVID-19 pandemic support schemes, NatWest Group
assisted 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, CBILS or CLBILS or the enforcing
or pursuing repayment of BBLS,CBILS and CLBILS (or a failure to exercise
forbearance), which may have an adverse effect on 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.

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 write-downs.

NatWest Group may not meet the prudential regulatory requirements for
regulatory capital and MREL, or manage its capital effectively, which could
trigger the execution of certain management actions or recovery options.

NatWest Group 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 provides NatWest Group with financial flexibility
specifically in its core UK operations in the face of turbulence and
uncertainty in the UK and the global economy. It also permits NatWest Group
plc to make discretionary capital distributions (including dividends to
shareholders).

 

As at 31 December 2022, NatWest Group plc's CET1 ratio was 14.2% and is
targeting a CET1 ratio of 13-14% by the end of 2023. NatWest Group plc's
target CET1 ratio is based on a combination of its expected regulatory
requirements and internal modelling, including stress scenarios and
management's and/or the Prudential Regulation Authority's ('PRA') views on
appropriate buffers above minimum 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 and ensuring NatWest Group meets its
medium-to-long term targets. NatWest Group intends to make capital
distributions to its equity investors of amounts surplus to its publicly
stated CET1 target, subject to macroeconomic conditions, via a combination of
dividends and buybacks. In making distribution decisions, consideration is
given to previously guided ordinary dividend pay-out ratios, an intention to
minimise the government's stake in the Group, and maximising shareholder
value.

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:

-    a depletion of its capital resources through increased costs or
liabilities or reduced profits;

-    an increase in the quantum of RWAs/Leverage Exposure in excess of that
expected, including due to regulatory changes, or a failure in internal
controls or procedures to accurately measure and report RWAs/ Leverage
Exposure;

-    changes in prudential regulatory requirements including NatWest Group
plc's Total Capital Requirement/ Leverage Requirement set by the PRA,
including Pillar 2 requirements, as applicable, and regulatory buffers as well
as any applicable scalars; and

-    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 its ability to make capital distributions and in turn NatWest Group may
not remain a viable, competitive or profitable banking business.

A minimum level of capital 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. Any breach of the combined buffer requirement may
necessitate for NatWest Group plc reducing or ceasing discretionary payments
(including payments of dividends to shareholders) to the extent of the breach.

NatWest Group plc 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 at NatWest Group plc, as the preferred resolution
strategy for NatWest Group. As a result, NatWest Group plc is the only entity
within NatWest Group that can externally issue securities that count towards
its MREL, the proceeds of which can then be downstreamed to meet the internal
MREL of its operating entities 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 regulatory 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 plc
will be written-down or converted into equity and there may be an issue of
additional equity by NatWest Group plc, which could result in the reduction in
value of the holdings of NatWest Group plc's existing shareholders. The
success of such issuances will also be dependent on favourable market
conditions and NatWest Group may not be able to raise the amount of capital
required on acceptable terms or at all. Separately, NatWest Group may address
a shortage of capital by taking action to reduce leverage exposure and/or RWAs
via asset or business disposals. These actions may, in turn, affect: NatWest
Group's product offering, credit ratings, ability to operate its businesses,
pursue its current strategies and pursue strategic opportunities, any of which
may adversely affect NatWest Group's future results, financial condition
and/or prospects. See also, 'NatWest Group may become subject to the
application of UK statutory stabilisation or resolution powers which may
result in, for example, the cancellation, transfer or dilution of ordinary
shares, or the write-down or conversion of certain other of NatWest Group's
securities.'

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 2022, NatWest Group plc subsidiaries held £470.7 billion in
deposits. The level of deposits may fluctuate due to factors outside NatWest
Group's control, such as a loss of customers and/or investor confidence
(including in individual NatWest Group entities), changes in interest rates,
government support, increasing competitive pressures for retail and corporate
customer deposits or the reduction or cessation of deposits by wholesale
depositors, which could result in a significant outflow of deposits within a
short period of time. An inability to grow or any material decrease in NatWest
Group's deposits could, particularly if accompanied by one of the other
factors described above, may adversely affect NatWest Group's ability to
satisfy its liquidity or funding needs. In turn, this could require NatWest
Group to adapt its funding plans or change its operations.

 

Current economic uncertainties and any significant market volatility 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.  As a result, NatWest Group and
its subsidiaries could be required to adapt their funding plans.  This could
exacerbate funding and liquidity risk, which may adversely affect NatWest
Group.

 

As at 31 December 2022, NatWest Group plc's liquidity coverage ratio was 145%.
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 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 may adversely affect NatWest Group's future results, financial
condition and/or prospects.

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. In October 2022, Moody's changed the
outlook from stable to negative for NatWest Bank Plc's issuer rating. NatWest
Group entity credit ratings and outlooks could be negatively affected
(directly or indirectly) by a number of factors that can change over time,
including: credit rating agencies' 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 and regions 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 higher interest rates and inflation,
supply chain disruptions and the outcome of any further Scottish independence
referendum); any reduction of the UK's sovereign credit rating (currently on
negative outlook by Moody's, S&P and Fitch) 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. See also, 'A reduction in the ESG
ratings of NatWest Group could have a negative impact on NatWest Group's
reputation and on investors' risk appetite and customers' willingness to deal
with NatWest Group.'

 

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 capital markets, reduce the size of its deposit base and trigger additional
collateral or other requirements in its funding arrangements or the need to
amend such arrangements, which could adversely affect 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 may in turn adversely affect 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.
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 NatWest Group 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 may result in: NatWest
Group's regulators requiring NatWest Group to generate additional capital,
reputational damage, increased supervision and/or regulatory sanctions,
restrictions on capital distributions and loss of investor confidence, all of
which may adversely affect its future results, financial condition and/or
prospects.

 

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 and other models for a wide
range of purposes, including to manage its business, assess the value of its
assets and its risk exposure, as well as to anticipate capital and funding
requirements (including to facilitate NatWest Group's mandated stress
testing). Uncertainties relating to the COVID-19 pandemic 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. 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
(criminal activities in the form of money laundering, terrorist financing,
bribery and corruption, tax evasion and sanctions as well as fraud risk
management (collectively, 'financial crime')). NatWest Group's models, and the
parameters and assumptions on which they are based, are periodically reviewed.

As models analyse scenarios based on assumed inputs and a conceptual approach,
model outputs therefore remain uncertain. Failure of models (including due to
errors in model design) or new data inputs (including non-representative data
sets), for example, to accurately reflect changes in the micro and
macroeconomic environment in which NatWest Group operates (for example to
account for high inflation), 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 render
some business lines uneconomic, result in increased capital requirements, may
require management action or may subject NatWest Group to regulatory sanction.
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 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). Further, accounting
policy and financial statement reporting requirements are likely to
increasingly require management to adjust existing judgments, estimates and
assumptions for the effects of climate-related, sustainability and other
matters that are inherently uncertain and for which there is little historical
experience which may affect the comparability of NatWest Group's future
financial results with its historical results. Actual results may differ due
to the inherent uncertainty in making climate-related and sustainability
estimates, judgments and assumptions.

Accounting policies deemed critical to NatWest Group's results and financial
position, based upon materiality and significant judgments and estimates,
involve a high degree of uncertainty and may have a material impact on its
results. For 2022, these include loan impairments, fair value, deferred tax
and conduct and litigation provisions. These are set out in 'Critical
accounting policies and sources of estimation uncertainty'.

 

Changes in accounting standards may materially impact NatWest Group's
financial results.

NatWest Group prepares its consolidated financial statements in conformity
with the requirements of the Companies Act 2006 and in accordance with IFRS as
issued by the International Accounting Standards Board. Changes in accounting
standards or guidance by accounting bodies or in the timing of their
implementation, whether immediate or foreseeable, could result in 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. From
time to time, the International Accounting Standards Board may issue new
accounting standards or interpretations that could materially impact how
NatWest Group calculates, reports and discloses its financial results and
financial condition, and which may affect NatWest Group capital ratios,
including the CET1 ratio. New accounting standards and interpretations that
have been issued by the International Accounting Standards Board but which
have not yet been adopted by NatWest Group are discussed in 'Future accounting
developments'.

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 adversely affect NatWest Group's future results, financial
condition and/or prospects.

NatWest Group is subject to Bank of England and PRA oversight in respect of
resolution, and NatWest Group could be adversely affected should the Bank of
England in the future deem NatWest Group's preparations to be inadequate.

NatWest Group is subject to regulatory oversight by the Bank of England and
the PRA and is required (under the PRA rulebook) to carry out an assessment of
its preparations for resolution, submit a report of the assessment to the PRA,
and disclose a summary of this report. NatWest Group has dedicated significant
resources towards the preparation of NatWest Group for a potential resolution
scenario. In June 2022 the Bank of England communicated its assessment of
NatWest Group's preparations and did not identify any shortcomings,
deficiencies or substantive impediments although two areas were highlighted as
requiring further enhancements. NatWest Group could be adversely affected
should future Bank of England assessments deem NatWest Group's preparations to
be inadequate.

If future Bank of England assessments identify a significant gap in NatWest
Group's ability to achieve the resolvability outcomes or reveals that NatWest
Group is not adequately prepared to be resolved, or did not have adequate
plans in place to meet resolvability requirements, NatWest Group may be
required to take action to enhance its preparations to be resolvable,
resulting in additional costs and the dedication of additional resources. Such
a scenario may have an impact on NatWest Group as, depending on the Bank of
England's assessment, potential action may include, but is not limited to,
restrictions on NatWest Group's maximum individual and aggregate exposures, a
requirement to dispose of specified assets, a requirement to change legal or
operational structure, a requirement to cease carrying out certain activities
and/or maintaining a specified amount of MREL. This may also impact NatWest
Group's strategic plans and may adversely affect its financial condition
and/or reputation or lead to a loss of investor confidence.

NatWest Group may become subject to the application of UK statutory
stabilisation or resolution powers which may result in, for example, 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 issued by NatWest Group, which may depend on
factors outside of NatWest Group's control. Moreover, the Banking Act
provisions remain largely untested in practice, particularly in respect of
resolutions of large financial institutions and groups.

If NatWest Group is at or is approaching the point 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 ordinary shares and other NatWest Group
securities.

Climate and sustainability-related risks

NatWest Group and its customers, suppliers and counterparties face significant
climate and sustainability-related risks, which may adversely affect NatWest
Group.

Climate-related risks represent a source of systemic risk in the global
financial system. The financial impacts of climate-related risks are expected
to be widespread, exacerbating already existing financial vulnerabilities and
may disrupt the proper functioning of financial markets and institutions,
including NatWest Group.

Financial and non-financial risks from climate change and
sustainability-related risks can arise through physical and transition risks.
In addition, physical and transition risks can trigger further losses,
stemming directly or indirectly from legal claims, litigation and conduct
liability (referred to as 'liability risk'). See also, 'NatWest Group may be
subject to potential climate, environmental, human rights and other
sustainability-related litigation, enforcement proceedings, investigations and
conduct risk.'

There are significant uncertainties as to the location, extent and timing of
the manifestation of the physical risks of climate change, such as more severe
and frequent extreme weather events (storms, flooding, subsidence, heat waves,
droughts and wildfires), rising sea levels, nature and biodiversity loss,
declining food yields, destruction of critical infrastructure, supply chain
disruption and resource scarcity. Damage to NatWest Group customers',
suppliers' and counterparties' properties and operations could disrupt
business, impair asset values and negatively impact the creditworthiness of
customers leading to increased default rates, delinquencies, write-offs and
impairment charges in NatWest Group's portfolios. In addition, NatWest Group
premises and operations, or those of its critical outsourced functions may
experience damage or disruption leading to increased costs and adversely
affect NatWest Group's reputation, future results, financial condition and/or
prospects.

In October 2021, the UK Government published its Net Zero Strategy which sets
out how the UK will deliver on its commitment to reach net-zero emissions by
2050 (defined as the point at which greenhouse gas emissions from sources are
equal to removals by sinks as set out in Article 4 of the 2015 Paris
Agreement). An independent review of the government's approach to delivering
its net zero target to ensure it is pro-business and pro-growth was published
in January 2023. The timing, content and implementation of the specific
policies and proposals remain uncertain and are subject to continuous changes
and developments. The transition to a net-zero economy across all sectors of
the economy and markets in which NatWest Group operates will be required to
meet the goals of the UN Framework Convention on Climate Change (1994), the
2015 Paris Agreement, the UK's Net Zero Strategy and the European Green Deal
initiatives. The impacts of the extensive social, commercial, technological,
policy and regulatory changes required to achieve transition remain uncertain
but are expected to be significant, subject to continuous changes and
developments and may be disruptive across the global economy and markets,
especially if these changes do not occur in an orderly or timely manner or are
not effective in reducing emissions sufficiently. Some sectors such as
property, energy (including the oil and gas industry), mobility (including
land transport, aviation, and shipping industries and the related
manufacturing and infrastructure industry) and food (including the agriculture
industry) are expected to be particularly impacted. The timing and pace of the
transition to a net-zero economy is also uncertain, will depend on many
factors and uncertainties and may be near-term, gradual and orderly, or
delayed, rapid and disorderly, or a combination of these. There is also
growing attention on the need for a 'just transition' and 'energy justice' -
in recognition that the transition to net zero should not disproportionally
affect the most disadvantaged members of society.

In addition, NatWest Group and its customers, suppliers and counterparties may
face economic, financial and non-financial risks arising from broader
sustainability issues such as: (i) risks relating to degradation of the
environment, such as air, water and land pollution, water stress, nature and
biodiversity loss and deforestation which may include for instance loss and/or
decline of the state of nature (including the state of biodiversity); (ii)
social matter-related risks (including violent conflicts, geopolitical
implications, impacts on indigenous people, migration, human rights,
diversity, equality and inclusion, the living wage, fair taxation and value
chains); and (iii) governance-related risks (including board diversity,
ethics, executive compensation and management structure).

Financial institutions, including NatWest Group, are directly and indirectly
exposed to multiple types of environmental risks (including nature and
biodiversity related risks) through their activities, including through the
risk of default by clients.

In addition to safeguards and interventions that focus on reducing negative
impacts on the environment (including nature and biodiversity), there is also
a growing need to implement solutions that focus on increasing positive
impacts on environment (including nature and biodiversity) through
nature-based solutions. In 2021, NatWest Group classified 'Biodiversity and
Nature Loss' as an emerging risk for NatWest Group within its Risk Management
Framework.

The Taskforce on Nature-Related Financial Disclosures (TNFD) is a global,
market-led initiative with the mission to develop and deliver a risk
management and disclosure framework for organisations to report and act on
evolving nature-related risks and opportunities, with the ultimate aim of
supporting a shift in global financial flows away from nature-negative
outcomes and toward nature-positive outcomes. NatWest Group is a member of the
Informal Working Group 2020 of TNFD and is a Forum Member since 2021.

Measuring the environmental related financial impacts (including impacts on
nature and biodiversity related financial impacts) as a result of funding and
financing activities as well as reporting on these is an evolving and complex
area for the financial services industry which requires collaborative
approaches with partners, stakeholders, peers and public sector bodies to help
measure and mitigate the negative impacts of the activities which NatWest
Group finances on the environment (including nature and biodiversity), as well
as supporting the growing sector of nature-based solutions and habitat
restoration and biodiversity markets. NatWest Group is in the early stages of
developing its approach to assess, manage and mitigate environmental risks and
by using emerging industry guidance such as the TNFD beta framework, NatWest
Group is seeking to further its understanding of how NatWest Group's business
activities impact nature, the dependencies NatWest Group and its customers
have on nature, and the risks and opportunities nature can generate.

There is also increased scrutiny from NatWest Group's employees, investors,
customers, counterparties (including its suppliers), communities, regulators
and other stakeholders regarding how businesses address social issues,
including tackling inequality, working conditions, workplace health, safety
and wellbeing,

diversity and inclusion, data protection and management, workforce management,
human rights and supply chain management which may impact

 

NatWest Group's employees, suppliers, customers, and their business activities
or the communities in which they operate.

 

These climate and sustainability-related risks may:

-    adversely affect economic activity, asset pricing and valuations of
financial instruments and, in turn, the wider financial system;

-    impact economic activities directly (for example through lower
corporate profitability or the devaluation of assets) or indirectly (for
example through macro-financial changes);

-    also affect the viability or resilience of business models over the
medium to longer term, particularly those business models most vulnerable to
climate and sustainability-related risks;

-    trigger further losses stemming directly or indirectly from legal
claims (liability risks) and reputational damage as a result of the public,
customers, counterparties, suppliers and/or investors associating NatWest
Group or its customers with adverse climate and sustainability-related issues;

-    intersect with and add further complexity and challenge to achieving
NatWest Group's purpose-led strategy including climate ambitions and targets;

-    be drivers of several different risk categories simultaneously and may
exacerbate existing risks, including credit risk, operational risk (including
business continuity), market risk (both traded and non-traded), liquidity and
funding risk (for example, net cash outflows or depletion of liquidity
buffers), pension risk and conduct risk; and

-    if combined, may have a greater adverse effect on NatWest Group's
reputation, future results, financial condition and/or prospects.

 

If NatWest Group fails in a timely manner to identify and address climate and
sustainability-related risks and opportunities and changing regulatory and
market expectations, or to appropriately identify, measure, manage and
mitigate climate and sustainability-related physical, transition and liability
risks and opportunities that NatWest Group, its customers, counterparties and
suppliers face, this may adversely affect NatWest Group's reputation, future
results, financial condition and/or prospects.

NatWest Group's climate change related strategy, ambitions, targets and
transition plan entail significant execution and reputational risk and are
unlikely to be achieved without significant and timely government policy,
technology and customer behavioural changes.

In February 2020, NatWest Group announced its ambition to become a leading
bank in the UK helping to address the climate challenge. As part of the
implementation of its climate ambitions, at NatWest Group's Annual General
Meeting in April 2022, ordinary shareholders passed an advisory 'Say on
Climate' resolution endorsing NatWest Group's previously announced strategy to
address climate change, including its ambitions to at least halve the climate
impact of its financing activity by 2030, achieve alignment with the 2015
Paris Agreement and reach net zero by 2050 across its financed emissions,
assets under management and operational value chain.

Furthermore, as part of its efforts to support the transition to a net-zero
economy, NatWest Group has announced its plans to (i) stop lending and
underwriting to companies with more than 15% of activities related to thermal
and lignite coal, unless they had a Credible Transition Plan in line with the
2015 Paris Agreement in place by end of 2021; phase out of thermal and lignite
coal for UK and non-UK customers who have UK coal production, coal-fired
generation and coal-related infrastructure by 1 October 2024, with a full
global phase out by 1 January 2030; (ii) to stop lending and underwriting to
major oil and gas producers unless they had a Credible Transition Plan aligned
with the 2015 Paris Agreement in place by the end of 2021; (iii) from February
2023 stop providing reserve based lending specifically for the purpose of
financing oil and gas exploration, extraction and production for new
customers, and, after the 31 December 2025 not to renew, refinance or extend
existing reserve- based lending specifically for the purpose of financing oil
and gas exploration, extraction and production; and (iv) stop providing
reserve-based lending and borrowing base financing to upstream Oil and Gas
companies specifically for the purpose of financing upstream assets located in
Arctic or Antarctic Waters.

In December 2022, NatWest Group published its science based targets validated
by Science Based Target Initiative (SBTi) for its own operational footprint
and for 79% of its loans and investments (debt securities and equity shares)
on its 2019 balance sheet, at sector level.

NatWest Group has also announced and in the future it may also announce other
climate ambitions and targets which support its overarching strategy to
address climate change.

Making the changes necessary to achieve NatWest Group's strategy on addressing
climate change, including its climate ambitions and targets and executing its
transition plan, may adversely 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 net zero or do
not have a credible transition plan in place. Increases in lending and
financing activities may wholly or partially offset some or all these
reductions, which may increase the extent of changes and reductions necessary.
It is anticipated that achieving these reductions, together with the active
management of climate and sustainability-related risks and other regulatory,
policy and market changes, is likely to necessitate material and accelerated
changes to NatWest Group's business, operating model, its existing exposures
and the products and services NatWest Group provides to its customers
(potentially on accelerated timescales) which may adversely affect NatWest
Group's ability to achieve its financial targets and generate sustainable
returns.

NatWest Group also needs to ensure that its strategy and business model adapt
to changing national and international standards, industry and scientific
practices, regulatory requirements and market expectations regarding climate
change, which remain under continuous development and are subject to different
interpretations. There can be no assurance that these standards, practices,
requirements and expectations will not be interpreted differently than what
was NatWest Group's understanding when defining its climate-related ambitions
and targets or change in a manner that substantially increases the cost or
effort for NatWest Group to achieve such ambitions and targets. In addition,
NatWest Group's ambitions and targets may prove to be considerably more
difficult or even impossible to achieve under such changing circumstances.
This may be exacerbated if NatWest Group chooses or is required to accelerate
its climate-related ambitions or targets as a result of (among other things)
UK or international regulatory developments or stakeholder expectations.

NatWest Group's ability to achieve its strategy to address climate change,
including achieving its climate ambitions and targets, will depend to a large
extent on many factors and uncertainties beyond NatWest Group's control.

These include the extent and pace of climate change, including the timing and
manifestation of physical and transition risks, the macroeconomic environment,
the timely implementation and integration of adequate government policies, the
effectiveness of actions of governments, legislators, regulators, businesses,
investors, customers and other stakeholders to mitigate the impact of climate
and sustainability-related risks, changes in customer behaviour and demand,
changes in the available technology for mitigation, the roll-out of low carbon
infrastructure and the availability of accurate, verifiable, reliable,
consistent and comparable data. See also, 'There are significant challenges in
accessing reliable, verifiable and comparable climate and other
sustainability-related data due to availability, quality and other
limitations, which contribute to the substantial uncertainties in accurately
modelling and reporting on climate and sustainability information, as well as
making appropriate important internal decisions'.

These external factors and other uncertainties will make it challenging for
NatWest Group to meet its climate ambitions and targets and there is a
significant risk that all or some of them will not be achieved.

Any delay or failure in setting, making progress against or meeting NatWest
Group's climate-related ambitions and targets may adversely affect NatWest
Group, its reputation, future results, financial condition and/or prospects
and may increase the climate and sustainability-related risks NatWest Group
faces.

There are significant limitations related to accessing reliable, verifiable
and comparable climate and other sustainability-related data, including as a
result of lack of standardisation, consistency and completeness which,
alongside other factors, contribute to substantial uncertainties in accurately
modelling and reporting on climate and sustainability information, as well as
making appropriate important internal decisions.

Meaningful reporting of climate and sustainability-related risks and
opportunities and their potential impacts and related metrics depends on
access to accurate, reliable, consistent and comparable climate and
sustainability-related data from counterparties or customers. Data may not be
generally available or, if available, may not be accurate, verifiable,
auditable, reliable, consistent, or comparable.

 

Any failure of NatWest Group to incorporate climate and/or
sustainability-related factors into its counterparty and customer data
sourcing and accompanying analytics, or to collect or develop accurate,
verifiable, auditable, reliable, consistent and comparable counterparty and
customer data, may adversely affect NatWest Group's ability to prepare
meaningful reporting of climate and sustainability-related risks and
opportunities, and it may adversely affect NatWest Group's regulatory
compliance, reputation, business and its competitive position.

 

In the absence of other sources, reporting of financed emissions by financial
institutions, including NatWest Group, is necessarily based on aggregated
information developed by third parties that may be prepared in an inconsistent
way using different methodologies, interpretations, or assumptions. NatWest
Group's climate and sustainability-related disclosures use a greater number
and level of assumptions and estimates than many of its financial disclosures.
These assumptions and estimates are highly likely to change over time, and,
when coupled with the longer timeframes used in these climate and
sustainability-related disclosures, make any assessment of materiality
inherently uncertain.

 

In particular, in the absence of actual emissions monitoring and measurement,
emissions estimates are based on industry and other assumptions that may not
be accurate for a given counterparty or customer. There may also be data gaps
that are filled using proxy data, such as sectoral averages, again developed
in different ways. As a result, NatWest Group's climate and
sustainability-related disclosures may be amended, updated or restated in the
future as the quality and completeness of NatWest Group's data and
methodologies continue to improve. These data quality challenges, gaps and
limitations could have a material impact on NatWest Group's ability to make
effective business decisions about climate risks and opportunities, including
risk management decisions, to comply with disclosure requirements and to
monitor and report progress in meeting ambitions and targets.

 

Significant risks, uncertainties and variables are inherent in the assessment,
measurement and mitigation of climate-related risks. These include data
quality gaps and limitations mentioned above, as well as the pace at which
climate science, greenhouse gas accounting standards and various emissions
reduction solutions develop. In addition, there is significant uncertainty
about how climate change and the transition to a net-zero economy will unfold
over the coming years and decades and how and when climate-related risks will
manifest. These timeframes are considerably longer than NatWest Group's
historical strategic, financial, resilience and investment planning horizons.

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 and/or quality of historical
testing capabilities, 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 which involves a number of risks and
uncertainties, for example:

-    climate scenarios are not predictions of what is likely to happen or
what NatWest Group would like to happen, rather they explore the possible
implications of different judgments and assumptions by considering a series of
scenarios;

-    climate scenarios do not provide a comprehensive description of all
possible future outcomes;

-    lack of specialist expertise in banks such that NatWest Group needs to
rely on third party advice, modelling, and data which is also subject to many
limitations and uncertainties;

-    immaturity of modelling of and data on climate-related risks on
financial assets which will evolve rapidly in the coming years;

-    the number of variables and forward-looking nature of climate
scenarios which makes them challenging to back test and benchmark;

-    the significant uncertainty as to how the climate will evolve over
time, how and when governments, regulators, businesses, investors and
customers respond and how those responses impact the economy, asset
valuations, land systems, energy systems, technology, policy and wider
society;

-    the assumptions will be continually evolving with more
data/information which may affect the baselines for comparability across
reporting periods and impact internal and external verification processes; and

-    the pace of the development of the methodologies across different
sectors may be different and therefore it may be challenging to report on the
whole balance sheet with regard to emissions.

 

Accordingly, these risks and uncertainties coupled with significantly longer
timeframes make the outputs of climate-related risk modelling, including
emission reduction targets and pathways, inherently more uncertain than
outputs modelled for traditional financial planning cycles based on historical
financial information. Furthermore, there is a lack of scientific, industry
and regulatory consensus regarding the appropriate metrics, methodologies,
modelling and standardised reporting to enable the assessment of the location,
acuteness, and severity of environmental risks (including nature and
biodiversity-related risks) and the monitoring and mitigation of these risks
in the economy and financial system.

Capabilities within NatWest Group to appropriately assess, model, report and
manage climate and sustainability-related risks and impacts and the
suitability of the assumptions required to model and manage climate and
sustainability-related risks appropriately are developing. The development of
NatWest Group's capabilities to assess, model, report and manage the impacts
of climate change and broader environmental risk (including nature and
biodiversity-related risks) is in its early stages. 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 adversely affect NatWest Group's regulatory compliance,
reputation, future results, financial condition and/or prospects.

A failure to implement effective climate change resilient governance,
procedures, systems and controls in compliance with legal and regulatory
expectations to manage climate and sustainability-related risks and
opportunities could adversely affect NatWest Group's ability to manage those
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. Legislative and regulatory authorities are
publishing expectations as to how banks should prudently manage and
transparently disclose climate-related and environmental risks under
prudential rules.

 

In April 2019, the PRA published a supervisory statement ('SS 3/19') with
particular focus on the management of financial risks from climate change with
respect to governance, risk management, scenario analysis and disclosures. In
response to the PRA's SS 3/19, following the submission of initial plans in
October 2019, on 8 October 2020 NatWest Group provided the PRA with an update
to its original plan, noting that the COVID-19 pandemic had disrupted some
elements of its original plan and, as a result, the updated plan would require
additional operating cycles reaching into 2022 and beyond to prove embedding.
Throughout 2022, NatWest Group provided the PRA with updates on how it had
addressed the commitments made in its October 2020 plan, noting the delivery
of a first generation, largely qualitative in nature, approach to the
supervisory requirements. In 2022, the PRA has also started actively
supervising firms against their supervisory expectations and it issued another
'Dear CEO letter' providing a summary of capabilities which the PRA would
expect firms to be able to demonstrate, setting out thematic observations on
firms' levels of embeddedness, and providing examples of effective practices
identified.

 

In June 2021, the Bank of England launched its 2021 Biennial Exploratory
Scenario ('2021 CBES') 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 three climate scenarios.
NatWest Group delivered its first 2021 CBES submission to the PRA in October
2021 and its submission to the second phase of the 2021 CBES exercise in the
first quarter of 2022. In May 2022, the PRA published the results of the 2021
CBES which has shown that UK banks, including NatWest Group, need to do more
to understand and manage their exposure to climate risks and that the lack of
available data on corporates' current emissions and future transition plans is
a collective issue affecting all participating firms. In July 2022, the
participating banks in the 2021 CBES exercise were invited to discuss
methodologies and challenges with regards to climate risk scenario analysis.

 

In October 2022, the Bank of England and the PRA held a conference to
facilitate discussion on the complex issues associated with adjusting the
capital framework to take account of climate-related financial risks with the
aim of providing more guidance on its approach to climate and capital by the
end of 2022. The Bank of England does not think capital frameworks should be
used to address the causes of climate change. However, as set out in the PRA's
Climate Change Adaptation Report 2021, and as with any other risk, it does
think the capital framework could be a useful tool within the broader
regulatory frameworks to ensure that PRA-regulated firms are resilient to
climate risks.

 

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 and apply the appropriate product governance in line with
applicable legal and regulatory requirements and expectations, may adversely
affect NatWest Group's regulatory compliance, prudential capital requirements,
liquidity position, reputation, future results, financial condition and/or
prospects.

 

Climate and sustainability-related disclosures are a rapidly evolving area and
increasingly expose NatWest Group to risk in the face of legal and regulatory
expectations, regulatory enforcement and class action risk. NatWest Group and
its subsidiaries currently are and in the future will be subject to increasing
entity-wide climate-related and other non-financial disclosure requirements,
including pursuant to the recommendations of the Task Force on Climate-related
Financial Disclosure ('TCFD'), the proposed SEC Climate Disclosure Rules and
ISSB sustainability reporting requirements and under other regimes. As from
February 2022, NatWest Group is required to provide enhanced climate-related
disclosures consistent with the TCFD recommendations to comply with the FCA
Policy Statement on 'Proposals to enhance climate-related disclosures by
listed issuers and clarification of existing disclosure obligations' (PS
20/17) which introduced new Listing Rules that require commercial companies
with a UK premium listing - such as NatWest Group - to make climate-related
disclosures, consistent with TCFD, on a 'comply or explain' basis. In
addition, as of the accounting period beginning on or after 1 January 2022,
NatWest Group is also in scope of the FCA Policy Statement 'Enhancing
climate-related disclosures by standard listed companies' (PS 21/23) which
confirmed its final policy position set forth in PS 20/17, extended the scope
of issuers that are subject to the new Listing Rules and added guidance
provisions on transition plan disclosure (for issuers in scope of both the PS
20/17 and the new PS 21/23 rules). As of 5 April 2022, NatWest Group is also
required to prepare mandatory climate-related financial disclosures pursuant
to The Companies (Strategic Report) (Climate-related Financial Disclosure)
Regulations 2022.

 

Furthermore, in October 2022, the FCA published a Consultation Paper on
'Sustainability Disclosure Requirements (SDR) and investment labels' (CP
22/20) which proposes that the FCA will require all regulated firms to ensure
that from June 2023 the naming and marketing of financial products and
services in the UK is clear, fair and not misleading, and consistent with the
sustainability profile of the products or services, i.e. proportionate and not
exaggerated.

 

Misrepresenting or over-emphasising the extent to which an investment,
strategy or other type of product takes into account environmentally friendly,
sustainable or ethical features and concerns, using misleading labels and
language in relation to such products and/or omitting material information
about NatWest Group's contribution to the climate crisis (including its direct
or indirect contribution to greenhouse gas emissions), or other
sustainability-related issues, could potentially result in complaints,
regulatory intervention, claims and/or litigation and reputational damage.

 

Any failure of NatWest Group to implement robust and effective climate and
sustainability-related disclosure governance and to embed appropriate product
governance policies, procedures and controls to make accurate public
statements and claims about how environmentally friendly, sustainable or
ethical NatWest Group's products and services are and to apply these in line
with applicable legal and regulatory requirements and expectations, may
adversely affect NatWest Group's regulatory compliance and reputation and
could give rise to litigation.

 

Increasing levels of climate, environmental, human rights and other
sustainability-related laws, regulation and oversight which are constantly
evolving may adversely affect NatWest Group.

There is an increasing number of EU, UK and other regulatory and legislative
initiatives to address issues around climate change (including promoting the
transition to a net-zero economy), environment (including nature and
biodiversity), human rights and other sustainability-related risks and
opportunities. As a result, an increasing number of laws, regulations and
legislative actions, including proposals, guidance, policy and regulatory
initiatives many of which have been introduced or amended recently and are
subject to further changes, is likely to affect the financial sector and the
wider economy.

 

Many of these initiatives are focused on developing standardised definitions
and criteria 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 and its associated credit, market and financial risk
profile. They could also impact NatWest Group's recognition of its climate and
sustainable funding and financing activity and may adversely affect NatWest
Group's ability to achieve its strategy and climate and sustainable funding
and financing ambitions.

 

In addition, NatWest Group's EU and other non-UK subsidiaries and branches are
and will continue to be subject to an increasing array of the EU/EEA and US
climate and sustainability-related legal and regulatory requirements. These
requirements (potentially including the EU Corporate Sustainability Due
Diligence Directive or the EU Corporate Sustainability Reporting Directive)
may be applicable to UK businesses such as NatWest Group, or used as the basis
for UK laws and regulations (such as the UK Green Taxonomy and the FCA's
Consultation Paper on 'Sustainability Disclosure Requirements (SDR) and
investment labels' (CP 22/20)), or be regarded by investors and regulators as
best practice standards whether or not they apply to UK businesses (such as
the EU Green Bond Standard). Any divergence between UK, EU/EEA and US climate
and sustainability-related legal and regulatory requirements and their
interpretation may result in NatWest Group, or any of its subsidiaries, not
meeting regulatory requirements, investors' expectations, may increase the
cost of doing business (including increased operating costs) and contentious
regulatory and litigation risk and may restrict access of NatWest Group's UK
business to the EU/EEA and US market.

 

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.

 

Compliance with these developing and evolving climate and
sustainability-related legal and regulatory requirements is likely to require
NatWest Group to implement significant changes to its business models,
products 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, and entail additional
change risk and increased compliance, regulatory sanctions and litigation
(including settlements) costs.

 

Failure to implement and comply with these legal and regulatory requirements
or emerging best practice expectations may have a material adverse effect on
NatWest Group's regulatory compliance and may result in regulatory sanctions,
reputational damage and investor disapproval each of which may adversely
affect NatWest Group's future results, financial condition and/or prospects.

 

NatWest Group may be subject to potential climate, environmental, human rights
and other sustainability-related litigation, enforcement proceedings,
investigations and conduct risk.

Due to increasing new climate and sustainability-related jurisprudence, laws
and regulations in the UK and other jurisdictions, growing demand from
investors and customers for environmentally sustainable products and services,
and regulatory scrutiny, financial institutions, including NatWest Group, may
through their business activities, face increasing litigation, conduct,
enforcement and contract liability risks related to climate change,
environmental degradation, human rights violations and other social,
governance and sustainability-related issues.

 

These risks may arise, for example, from claims pertaining to: (i) failure to
meet obligations, targets or commitments relating to, or to disclose
accurately, or provide updates on material climate and/or
sustainability-related risks, or otherwise provide fair, balanced and
appropriate disclosure to investors, customers, counterparties and other
stakeholders; (ii) conduct, mis-selling and customer protection claims,
including claims which may relate to alleged insufficient product
understanding, unsuitable product offering and /or reliance upon information
provided by NatWest Group or claims alleging unfair pricing of climate-related
products, for example in relation to products where limited liquidity or
reliable market data exists for benchmarking purposes or which may be impacted
by future climate policy uncertainty or other factors; (iii) marketing that
portrays products, securities, activities or policies as having positive
climate, environmental or sustainable outcomes to an extent that may not be
the case, or may not adequately be qualified and/or omits material information
about NatWest Group's contribution to the climate crisis and/or its direct /
indirect contribution to greenhouse gas emissions or other
sustainability-related issues; (iv) damages claims under various tort
theories, including common law public nuisance claims, or negligent
mismanagement of physical and/or transition risks; (v) alleged violations of
officers', directors' and other fiduciaries' duties, for example by financing
various carbon-intensive, environmentally harmful or otherwise highly exposed
assets, companies, and industries; (vi) changes in the understanding of what
constitutes positive climate, environmental or sustainable outcomes as a
result of developing climate science, leading to discrepancy between current
product offerings and investor and/or market and/or broader stakeholder
expectations; (vii) any weaknesses or failures in specific systems or
processes associated particularly with climate, environmental or
sustainability linked products, and/or human rights due diligence, including
any failure in the timely implementation, onboarding and/or updating of such
systems or processes; or (viii) counterparties, collaborators, customers to
whom NatWest Group provides services and third parties in NatWest Group's
value chain who act, or fail to act, or undertake due diligence, or apply
appropriate risk management and product governance in a manner that may
adversely affect NatWest Group's reputation or sustainability credentials.

 

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, environmental degradation and
human rights violations and for not supporting the principles of 'just
transition' (i.e. maximising the social benefits of the transition, mitigating
the social risks of the transition, empowering those affected by the change,
anticipating future shifts to address issues up front and mobilising
investments from the public and private sectors).

 

There is a risk that as environmental and climate science develop and societal
understanding of these issues increases and deepens, courts, regulators and
enforcement authorities may apply the then current understandings of
environmental, climate and broader sustainability-related matters
retrospectively when assessing claims about historical conduct or dealings of
financial institutions, including NatWest Group. See also, 'NatWest Group is
exposed to the risks of 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'.

 

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, and may adversely affect NatWest
Group's reputation, future results, financial condition and/or prospects.

 

A reduction in the ESG ratings of NatWest Group could have a negative impact
on NatWest Group's reputation and on investors' risk appetite and customers'
willingness to deal with NatWest Group.

ESG ratings from agencies and data providers which rate how NatWest Group
manages environmental, social and governance risks are increasingly
influencing investment decisions pertaining to NatWest Group's and/or its
subsidiaries' securities or being used as a basis to label financial products
and services as environmentally friendly or sustainable. ESG ratings are (i)
unsolicited; (ii) subject to the assessment and interpretation by the ESG
rating agencies; (iii) provided without warranty; (iv) not a sponsorship,
endorsement, or promotion of NatWest Group by the relevant rating agency; and
(v) may depend on many factors some of which are beyond NatWest Group's
control (e.g. any change in rating methodology). In addition, certain NatWest
Group entities offer or sell products and services to customers and
counterparties based exclusively or largely on a rating by an unregulated ESG
rating agency. ESG rating agencies, at this stage, are not subject to any
specific regulatory or other regime or oversight (although there are proposals
by regulators in different jurisdictions to regulate rating agencies and data
providers). Regulators have expressed concern that harm may arise from
potential conflicts of interest within ESG rating and review or opinion
providers and there is a lack of transparency in methodologies and data
points, which renders ratings and reviews incomparable between agencies or
providers.  There is currently no market consensus on what precise attributes
are required for a particular asset to be classified as 'ESG'. Any reduction
in the ESG ratings of NatWest Group, or a regulatory sanction or enforcement
action involving an ESG rating agency used by a NatWest Group entity, could
have a negative impact on NatWest Group's reputation, could influence
investors' risk appetite for NatWest Group's and/or its subsidiaries'
securities, particularly ESG securities, could increase the cost of issuing
securities for NatWest Group and/or its subsidiaries and could affect a
customer's willingness to deal with NatWest Group.

 

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 or disruption resulting from inadequate
or failed internal processes, procedures, people or systems, or from external
events, including legal and regulatory risks. NatWest Group operates in a
number of countries, offering a diverse range of products and services
supported directly or indirectly by third party suppliers.

As a result, operational risks or losses can arise from a number of internal
or external factors (including for example, payment errors or financial crime
and fraud), for which there is continued scrutiny by third parties on NatWest
Group's compliance with financial crime requirements; see also, 'NatWest Group
is exposed to the risks of 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.' These risks are also present when
NatWest Group relies on critical service providers (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 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, and the organisational and
operational changes involved, including: NatWest Group's phased withdrawal
from ROI, NatWest Group's current cost-controlling measures, the NatWest
Markets refocusing, the creation of the Commercial & Institutional
business segment, the progression towards working as One Bank across NatWest
Group to serve customers and conditions affecting the financial services
industry generally (including macroeconomic 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 may adversely
affect NatWest Group's future results, financial condition and/or prospects.

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, reinforcing 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
emerging threats. In 2022, NatWest Group and its supply chain were subjected
to a small number of Distributed Denial of Service ('DDOS') and ransomware
attacks, which are a pervasive and significant threat to the 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 seek to minimise the impact of any such attacks, 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 the potential negative impacts
of any such attacks from occurring. See also, 'NatWest Group's operations are
highly dependent on its complex IT systems 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 systems or other
sensitive information (including as a result of an outage) and may cause
associated reputational damage. Any of these factors could increase costs
(including costs relating to notification of, or compensation for customers,
credit monitoring or card reissuance), result in regulatory investigations or
sanctions being imposed or may affect NatWest Group's ability to retain and
attract customers. Regulators in the UK, US, Europe and Asia continue to
recognise cybersecurity as an important systemic risk to the financial sector
and have highlighted the need for financial institutions to improve their
monitoring and control of, and resilience (particularly of critical services)
to cyberattacks, and to provide timely reporting or notification of them, as
appropriate. Cyberattacks on NatWest Group's counterparties may also damage
NatWest Group's operations.

 

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 systems or that of NatWest Group's customers or
employees. Cybersecurity and information security events can derive from
groups or factors such as: internal or external threat actors, human error,
fraud or malice on the part of NatWest Group's employees or third parties,
including third party providers, or may result from technological failure. Any
of the above may have an adverse effect on NatWest Group's reputation, future
results, financial condition and/or prospects.

 

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 IT-related disruption, either through a cyberattack or
some other disruptive event. Such increased regulatory engagement, supervision
and enforcement is uncertain in relation to the scope, cost, consequence and
the pace of change, which may adversely affect NatWest Group's future results,
financial condition and/or prospects. Due to NatWest Group's reliance on
technology and the increasing sophistication, frequency and impact of
cyberattacks, such attacks may have an adverse effect on NatWest Group.

 

In accordance with the Data Protection Act 2018 and the European Union
Withdrawal Act 2018, the Data Protection, Privacy and Electronic
Communications (Amendments Etc.) (EU Exit) Regulations 2019, as amended by the
Data Protection, Privacy and Electronic Communications (Amendments Etc.) (EU
Exit) Regulations 2020 ('UK Data Protection Framework') and European Banking
Authority ('EBA') Guidelines on ICT and Security Risk Management, 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 UK Data Protection
Framework 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.
Investment is being made in data tools and analytics, including raising
awareness around data ethical usage and privacy across NatWest Group. The
availability and accessibility of current, complete, detailed, accurate and,
wherever possible, machine-readable customer segment and sub-sector data,
together with appropriate governance and accountability for data, is fast
becoming a critical strategic asset, which is subject to increased regulatory
focus. Failure to have or be able to access that data or the ineffective use
or governance of that data could result in a failure to manage and report
important risks and opportunities or satisfy customers' expectations including
the inability to deliver products and services. This could also result in a
failure to deliver NatWest Group's strategy and could place 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 weaknesses and limitations, or the unethical or inappropriate use of
data, and/or non-compliance with data protection laws could give rise to
conduct and litigation risks and may increase the risk of operational
challenges, losses, reputational damage or other adverse consequences due to
inappropriate models, systems, processes, decisions or other actions.

NatWest Group's operations are highly dependent on its complex IT systems 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, fraud systems and controls, risk
management, credit analysis and reporting, accounting, customer service and
other IT systems (some of which are owned and operated by other entities in
NatWest Group or third parties), as well as the communication networks between
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
significant damage to: (i) important business services across NatWest Group
and (ii) NatWest Group's ability to provide services to its customers, which
could result in reputational damage, significant compensation costs and
regulatory sanctions (including fines resulting from regulatory
investigations) or a breach of applicable regulations and could affect NatWest
Group's regulatory approvals, competitive position, business and brands, which
could undermine its ability to attract and retain customers. NatWest Group
outsources certain functions as it innovates and offers new digital solutions
to its customers to meet the demand for online and mobile banking. Outsourcing
alongside hybrid working patterns of NatWest Group employees, heighten the
above risks.

NatWest Group uses 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.

In 2022, 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, may adversely affect
NatWest Group's operations, its reputation and ability to retain or grow its
customer business or adversely affect its competitive position.

NatWest Group relies on attracting, retaining and developing diverse senior
management and skilled personnel, and is required to maintain good employee
relations.

NatWest Group's success depends on its ability to attract, retain through
creating an inclusive environment, and develop highly skilled and qualified
diverse personnel, including senior management, directors and key employees
especially for technology and data focused roles, in a highly competitive
market and under internal cost efficiency pressures.

NatWest Group's ability to do this may be more difficult due to the
cost-controlling measures, a failure to pay employees competitive
compensation, heightened regulatory oversight of banks and the increasing
scrutiny of, and (in some cases) restrictions placed upon, employee
compensation arrangements (in particular those of banks that have been in
receipt of government support such as NatWest Group). This may impact the cost
of hiring, training and retaining diverse skilled personnel. In addition,
certain economic, market and regulatory conditions and political developments
may reduce the pool of candidates for key management and non-executive roles,
including non-executive directors with the right skills, knowledge and
experience, or increase the number of departures of existing employees.
Moreover, a failure to foster a diverse and inclusive workforce may adversely
affect NatWest Group's employee engagement and the formulation and execution
of its strategy and could also have an adverse effect on its reputation with
customers, investors and regulators.

The inability to compensate employees competitively and/or any reduction of
compensation, as a result of negative economic developments or otherwise,
could have an adverse effect on NatWest Group's ability to hire, retain and
engage appropriately qualified employees, especially at a senior level, which
may adversely affect NatWest Group's future results, financial condition
and/or prospects.

Many of NatWest Group's employees in the UK, the ROI and continental Europe
are represented by employee representative bodies, including trade unions and
works councils. Engagement with its employees and such bodies is important to
NatWest Group in maintaining good employee relations. Any failure to do so may
adversely affect 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
delivery of its long-term strategy. NatWest Group's Enterprise-Wide Risk
Management Framework sets out the approach for managing risk within the
NatWest Group including in relation to risk governance and risk appetite. A
failure to adhere to this framework, or any material weaknesses or
deficiencies in the framework's controls and procedures, could adversely
affect NatWest Group's financial condition and strategic delivery including in
relation to inaccurate adherence to agreed risk appetite statements and
accurate risk reporting of risk exposures.

In addition, financial crime risk management is dependent on the use and
effectiveness of financial crime assessment, systems and controls. Weak or
ineffective financial crime processes and controls may risk NatWest Group
inadvertently facilitating financial crime which may result in regulatory
investigation, sanction, litigation, fines and reputational damage. Financial
crime continues to evolve, whether through fraud, scams, cyber-attacks or
other criminal activity. NatWest Group has made and continues to make
significant, multi-year investments to strengthen and improve its overall
financial crime control framework with prevention systems and capabilities. As
part of its ongoing programme of investment, there is current and future
investment planned to further strengthen financial crime controls over the
coming years, including investment in new technologies and capabilities to
further enhance customer due diligence, transaction monitoring, sanctions and
anti-bribery and corruption systems.

Ineffective risk management may arise from a wide variety of factors,
including lack of transparency or incomplete risk reporting, manual processes
and controls, inaccurate data, inadequate IT systems, unidentified conflicts
or misaligned incentives, lack of accountability control and governance,
incomplete risk monitoring and management or insufficient challenges or
assurance processes or a failure to timely complete risk remediation projects.
Failure to manage risks effectively, or within regulatory expectations, could
adversely affect 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 and fraud), any of which could result in
regulatory fines or sanctions and serious reputational or financial harm to
NatWest Group. Remote working arrangements for NatWest Group employees
continues to place heavy reliance on the IT systems that enable remote working
and may place additional pressure on NatWest Group's ability to maintain
effective internal controls and governance frameworks. Remote working
arrangements are also subject to regulatory scrutiny to ensure adequate
recording, surveillance and supervision of regulated activities, and
compliance with regulatory requirements and expectations, including
requirements to: meet threshold conditions for regulated activities; ensure
the ability to oversee functions (including any outsourced functions); ensure
no detriment is caused to customers; and ensure no increased risk of financial
crime.

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 risk management, including the ongoing development of
a risk management strategy in line with regulatory expectations. However, such
efforts may not insulate NatWest Group from 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 or the
public's expectations, including with respect to NatWest Group's purpose-led
strategy and related targets, the creation of the Commercial &
Institutional business segment, the progression towards working as One Bank
across the NatWest Group to serve customers, or due to any events, behaviour,
action or inaction by NatWest Group, its employees or those with whom NatWest
Group is associated. See also 'NatWest Group's businesses are subject to
substantial regulation and oversight, which are constantly evolving and may
adversely affect NatWest Group.'  This includes harm to its brand, 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, or there is
perceived to be, 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/institutional
and retail depositors) and engage with counterparties may be adversely
affected by factors including: 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 and fraud,
the level of direct and indirect government support, or the actual or
perceived practices in the banking and financial industry in general, or a
wide variety of other factors.

Modern technologies, in particular online social networks and other broadcast
tools that facilitate communication with large audiences in short timeframes
and with minimal costs, may also significantly increase and accelerate the
impact of damaging information and allegations.

Although NatWest Group has implemented a Reputational Risk Policy to monitor
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, guidelines, corporate
governance practice and disclosure requirements, administrative actions and
policies in each jurisdiction in which it operates, which represents ongoing
compliance and conduct risks. Many of these have been introduced or amended
recently and are subject to further material changes, which may increase
compliance and conduct risks, particularly as EU/EEA and UK laws diverge as a
result of Brexit. 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. 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 protection and IT resilience
requirements, financial market infrastructure reforms (including enhanced data
protection 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,
competition and disputes regimes, anti-money laundering, anti-corruption,
anti-bribery, anti-tax evasion, payment systems, sanctions and anti-terrorism
laws and regulations.

In addition, there is significant oversight by competition authorities of the
jurisdictions in which NatWest Group operates. The competitive landscape for
banks and other financial institutions in the UK, EU/EEA, Asia and the US is
rapidly changing. Recent regulatory and legal changes have and may continue to
result in new market participants and changed competitive dynamics in certain
key areas. Regulatory and competition authorities, including the CMA, are
currently also looking at and focusing more on how they can support
competition and innovation in digital and other markets. Recent regulatory
changes, proposed (such as US proposals to increase regulation around
cybersecurity) 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.

Other areas in which, and examples of where, governmental policies, regulatory
and accounting changes, and increased public and regulatory scrutiny could
have an adverse effect (some of which could be material) on 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 scrutiny including from the CMA, FCA and Payment Systems
Regulator ('PSR') for the protection and resilience of, and competition and
innovation in, digital and other markets, UK payment systems and retail
banking developments relating to the UK initiative on Open Banking, Open
Finance and the European directive on payment services;

-    the ongoing compliance by NatWest Group with CMA's Market Orders
including the Retail Banking Market Order 2017 (the 'Order') and SME
Undertakings as well as the ongoing consultation by the UK Government to
introduce penalties for breaches of such requirements (in addition to the
current customer remediation requirements);

-    ongoing competition litigation in the English courts around payment
card interchange fees, combined with increased regulatory scrutiny (from the
PSR) of the Visa and Mastercard card schemes;

-    increased risk of new class action claims being brought against
NatWest Group in the Competition Appeal Tribunal for breaches of competition
law;

-    new or increased regulations relating to customer data protection as
well as IT controls and resilience, such as the proposed UK Data Protection
and Digital Information Bill and in India, the Digital Personal Data
Protection Bill;

-    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, introduction of global minimum tax rules, 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;

-    increased regulatory focus on customer protection (such as the FCA's
Consumer Duty policy statement and final rules and guidance) in retail or
other financial markets;

-    the potential introduction by the Bank of England of a Central Bank
Digital Currency which could result in deposit outflows, higher funding costs,
and/or other implications for UK banks including NatWest Group; and

-    regulatory enforcement in the form of PRA imposed financial penalties
for failings in banks' regulatory reporting governance and controls, and
regulatory scrutiny following the 2019 PRA 'Dear CEO letter' regarding PRA's
ongoing focus on:  the integrity of regulatory reporting, which the PRA
considers has equal standing with financial reporting; the PRA's thematic
reviews of the governance, controls and processes for preparing regulatory
returns of selected UK banks, including NatWest Group; the publication of the
PRA's common findings from those reviews in September 2021; and NatWest
Group's programme of improvements to meet PRA expectations.

 

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,
competitive position, product offerings and business models. Future
competition investigations, market reviews, or the regulation of mergers may
lead to the imposition of financial penalties or market remedies that may
adversely affect NatWest Group's competitive or financial position. 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 timeframes required.

Changes in laws, rules or regulations, or in their interpretation or
enforcement, or the implementation of new laws, rules or regulations,
including contradictory or conflicting laws, rules or regulations by key
regulators or policymakers in different jurisdictions, or failure by 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, capital and risk
management planning.

NatWest Group is exposed to the risks of 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 civil
actions (including those following on from regulatory sanction), as well as
criminal, regulatory and governmental proceedings. NatWest Group has resolved
a number of legal and regulatory actions over the past several years but
continues to be, and may in the future be, involved in such actions in the US,
the UK, Europe and other jurisdictions.

NatWest Group is currently, has recently been and will likely be involved in a
number of significant legal and regulatory actions, including investigations,
proceedings and ongoing reviews (both formal and informal) by governmental law
enforcement and other agencies and litigation proceedings, including in
relation to the offering of securities, conduct in the foreign exchange
market, the setting of benchmark rates such as LIBOR and related derivatives
trading, the issuance, underwriting, and sales and trading of fixed-income
securities (including government securities), product mis-selling, customer
mistreatment, anti-money laundering, antitrust, VAT recovery and various other
issues. Legal and regulatory actions are subject to many uncertainties, and
their outcomes, including the timing, amount of fines, damages or settlements
or the form of any settlements, which may be material and in excess of any
related provisions, are often difficult to predict, particularly in the early
stages of a case or investigation. NatWest Group's expectation for resolution
may change and substantial additional provisions and costs may be recognised
in respect of any matter.

The resolution of significant investigations include: NWM Plc's December 2021
spoofing-related guilty plea in the United States, which involves a three-year
period of probation, an independent corporate monitor, and commitments to
compliance programme reviews and improvements and reporting obligations. For
additional information relating to this and other legal and regulatory
proceedings and matters to which NatWest Group is currently exposed, see
'Litigation and regulatory matters' at Note 26 to the consolidated accounts.

The 2021 guilty plea, other recently resolved matters or adverse outcomes or
resolution of current or future legal or regulatory actions could increase the
risk of greater regulatory and third-party scrutiny and could have material
collateral consequences for NatWest Group's business and result in
restrictions or limitations on NatWest Group's operations.

These may include the effective or actual disqualification from carrying on
certain regulated activities and consequences resulting from the need to
reapply for various important licences 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 and implications
of which are uncertain.

Disqualification from carrying on any activities, whether automatically as a
result of the resolution of a particular matter or as a result of the failure
to obtain such licences or waivers could adversely affect NatWest Group's
business, in particular in the US. This in turn and/or any fines, settlement
payments or penalties may adversely affect NatWest Group's reputation, future
results, financial condition and/or prospects.

Failure to comply with undertakings made by NatWest Group to its regulators,
or the conditions of probation resulting from the spoofing-related guilty
plea, 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 replacement risk-free rates.

UK and international regulators are driving the transition from the use of
interbank offer rates ('IBORs'), to replacement rates generally referred to as
'risk-free rates' ('RFRs'). As of 31 December 2021, LIBOR, as currently
determined, has ceased for all tenors of GBP, JPY, CHF, EUR, and for the 1
week and 2-month tenors for USD. The remaining USD LIBOR tenors, as currently
determined, are due to cease after 30 June 2023. The FCA has used its powers
under the UK Benchmarks Regulation ('UK BMR') to require, for a limited period
of time after 31 December 2021, the ongoing publication of the 1-, 3-, and
6-month GBP and JPY LIBOR tenors using a changed methodology (i.e., 'Art23A
LIBOR' on a synthetic basis). The UK has passed the Critical Benchmarks
(References and Administrators' Liability)

 

Act 2021 ('Critical Benchmarks Act') which establishes a framework that allows
the ongoing use of Art23A LIBOR under certain circumstances where contracts
have not pro-actively transitioned onto the replacement rates. These
concessions provided under UK BMR and the Critical Benchmarks Act are
temporary. The FCA confirmed that Art23A will no longer be available from: (i)
the end of 2022 for JPY, (ii) March 2023 for 1- and 6-month GBP LIBOR and
(iii) March 2024 for 3-month GBP LIBOR. The transition away from these
temporary concessions may expose NatWest Group, its customers and the
financial services industry more widely to various risks, including: (i) the
FCA further restricting use of Art23A LIBOR resulting in proactive transition
of contracts; and (ii) mis-matches between positions in cleared derivatives
and the exposures they are hedging where those exposures are permitted to make
use of Art23A LIBOR. Although the formal cessation date for the remaining USD
LIBOR tenors (as currently determined) is not until the end of June 2023, US
and UK regulators have clarified that this is only to support the rundown of
existing USD LIBOR exposures. No new contracts should reference these USD
LIBOR tenors after 31 December 2021, other than in a very limited range of
circumstances. NatWest Group will continue to have ongoing exposure to the
remaining USD LIBOR tenors until cessation in June 2023.

 

NatWest Group has held significant exposures to various IBORs and has actively
sought to transition away from these during 2021 and 2022 in accordance with
regulatory expectations and milestones. Transition measures have included the
pro-active development of new products using the replacement rates,
restructuring existing LIBOR exposures to reference these replacement rates
and embedding RFR transition language into relevant contracts. Central
Counterparty Clearing houses (CCPs) conducted mass conversion exercises in
December 2021 covering GBP, JPY, CHF and EUR LIBOR, transitioning derivatives
to the relevant RFR, conversion exercises for USD are scheduled for May 2023.
NWG entities, along with many of their major counterparties, have adhered to
the ISDA IBOR fall-backs protocol which establishes a contractual process to
transition from IBORs to RFRs for bilateral derivative products.

These transition efforts have involved extensive engagement with customers,
industry working groups and regulators to seek to deliver transition in a
transparent and economically appropriate manner. These changes coincide with
the recognition that market liquidity is lower than it has been and whilst it
will be inherently difficult to disaggregate the different impacts from each
other it may be that similar levels of market liquidity are not reached for
these RFR products, clear and consistent market conventions for all
replacement products may not be implemented or they may not be accepted by
market participants including NatWest Group counterparties. Where there
remains an uncertainty around the manner of transition to RFRs, NatWest Group,
clients and the financial services industry are exposed to the related risks.

Examples of these risks include (i) legal (including litigation) risks
relating to documentation for new and the majority of existing transactions
(including, changes, lack of changes, unclear contractual provisions, and
disputes in respect of these); (ii) financial risks from any changes in
valuation of financial instruments linked to relevant IBORs, including cost of
funds and relevant risk management related financial models; (iii) changes to
benchmark rates could impact pricing, interest rate or settlement mechanisms
for certain instruments; (iv) operational risks linked to the adaptation of IT
systems, trade reporting infrastructure and operational processes, as well as
ensuring compliance with restrictions on new USD LIBOR usage after December
2021; (v) conduct risks arising from communication of the potential impact on
customers, engagement with customers during and after the transition period,
or non-acceptance by customers of replacement rates; and (vi) different
legislative provisions in different jurisdictions, for example, unlike certain
US states and the EU, the UK has not provided a clear and robust safe harbour
to protect against litigation and potential liability arising out of the
switch to 'synthetic LIBOR'.

Although the majority of NWG's IBOR exposure has already been transitioned to
RFRs, there remains a large population linked to USD LIBOR, scheduled for
transition by June 2023. Until IBOR transition is complete there is some
uncertainty as to the impact of the transition, or the potential costs of
implementing any relevant remedial action including in the event that the
transition is not completed in a timely manner, or at all. The implementation
of any alternative RFRs may be impossible or impracticable under the existing
terms of certain financial instruments and may adversely affect their value or
return and therefore on NatWest Group's future results.

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 in 'Critical accounting
policies and sources of estimation uncertainty', 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 £2,178 million as at 31 December 2022.
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

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