REG - NatWest Group plc Natwest Markets PLC NatWest Markets N.V. - Interim Results - NatWest Markets N.V.
29/07/2022 07:15
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RNS Number : 1750U NatWest Group plc 29 July 2022
NatWest Markets N.V.
Interim Results 2022
NatWest Markets N.V.
Results for the half year ended 30 June 2022
Growing sustainably
In H1 2022, we have made good progress through our One Bank initiatives to
grow in our target customer segment and markets. The creation of NatWest
Group's new Commercial and Institutional franchise (C&I) announced in
January 2022, which includes NatWest Markets, will provide further
opportunities to deepen our customer relationships and drive sustainable
income growth across the C&I franchise.
Against a backdrop of challenging market conditions and reduced levels of
market liquidity in Fixed Income markets, we have overall delivered a strong
financial performance in the first half of the year and maintained our strong
capital and liquidity position. We continue to monitor the evolving economic
outlook including the continued rise in cost of living and are mindful of the
impact that rising inflation, higher interest rates and supply-chain shortages
are having on our customers. We continue to monitor the situation closely
regarding the Russian invasion of Ukraine. NatWest Markets N.V. (NWM N.V.) has
no material direct exposure to the region through our operations or material
dependencies on suppliers.
We continue to make progress in our remediation programmes relating to
Financial Crime, Data Management, Outsourcing and Capital Models and our
progress is shared regularly with the relevant supervisors.
Climate and sustainable funding and financing have continued to perform well,
and as at the end of H1 2022 we had delivered €5.3 billion towards the
NatWest Group climate and sustainable funding and financing target of £100
billion between 1 July 2021 and the end of 2025.
Management Board and Supervisory Board update
In May 2022, Vincent Goedegebuure joined NWM N.V. as Chief Executive Officer
and Chairman of the Managing Board.
In April 2022, David King stepped down as Chief Financial Officer of NatWest
Markets Plc (NWM Plc) and, as a result, he also stepped down as NWM N.V.
Supervisory Board member.
Outlook((1)) We retain the Outlook as set out in NWM N.V. 2021 Annual Report
and Accounts.
(1) The targets, expectations and trends discussed in this section
represent management's current expectations and are subject to change,
including as a result of the factors described in the Risk Factors section on
pages 127 to 150 of NWM N.V. 2021 Annual Report and Accounts and the Summary
Risk Factors set out on pages 28 and 29 of this announcement for H1 2022.
These statements constitute forward-looking statements. Refer to
Forward-looking statements in this announcement.
Financial review
Profit for the period was €11 million compared with €40 million in H1
2021. The total decrease of €29 million was mainly due to an impairment
charge of €7 million compared with a release of €4 million in H1 2021, a
€7 million decrease in total income from €111 million to €104 million
and a tax charge of €7 million compared with a tax credit of €2 million in
H1 2021.
Net interest income was a net expense of €1 million compared with a net
expense of €4 million in H1 2021.
Non-interest income decreased by €10 million to €105 million compared with
€115 million in H1 2021. Net fees and commissions of €94 million (H1 2021
- €129 million) primarily related to transfer pricing income from NWM Plc of
€60 million (H1 2021 - €76 million) and syndicate fee income of €34
million (H1 2021 - €52 million). The decrease in transfer pricing income is
mainly driven by lower income from revenue share models. Income from trading
activities was a gain of €10 million compared with a €2 million loss in H1
2021. Other operating income was a gain of €1 million compared with a loss
of €12 million in H1 2021, largely reflecting the loss on disposal of Loans
to customers of €12 million in the comparative period.
Operating expenses were €79 million compared with €77 million in H1 2021.
Staff costs decreased by €2 million to €39 million in H1 2022, mainly due
to restructuring expenses in H1 2021. Premises and equipment costs were €3
million (H1 2021 - €3 million). Administrative expenses increased by €4
million to €35 million, compared with €31 million in H1 2021, primarily
driven by higher cost recharges from NatWest Group companies. Depreciation and
amortisation was €2 million (H1 2021 - €2 million).
Impairments were a charge of €7 million, compared with a release of €4
million in H1 2021, mainly driven by increases in IFRS 9 Stage 1 and 2
exposures and associated expected credit loss in the period. The €4 million
release in H1 2021 was mainly driven by a reduction of an individual
significant exposure.
Tax charge was €7 million compared with a tax credit of €2 million in H1
2021, largely driven by the utilisation of deferred tax assets in H1 2022 and
the release of a legacy tax provision in the comparative period.
Balance sheet
Total assets and total liabilities both increased by €6.2 billion to €27
billion and €24.7 billion respectively as at 30 June 2022, compared with 31
December 2021.
- Cash and balances at central banks decreased by €1.2 billion to €3.9
billion at 30 June 2022, with the full balance placed with the Dutch Central
Bank.
- Trading assets increased to €4.6 billion (31 December 2021 - €4.2
billion), driven by an increase in reverse repos of €0.9 billion, partially
offset by a decrease in collateral given of €0.5 billion.
- Derivative assets increased to €10.7 billion (31 December 2021 - €7.8
billion) and derivative liabilities increased to €10.2 billion (31 December
2021 - €8.9 billion), primarily reflecting movements in interest rate
derivatives and FX derivatives.
- Settlement balance assets and liabilities were €1.9 billion (31 December
2021 - €0.4 billion) and €2.9 billion (31 December 2021 - €0.2 billion)
respectively due to higher trading volume around June 2022 month end compared
to December 2021 month end.
- Loans to banks - amortised cost increased by €0.3 billion to €0.4 billion
at 30 June 2022, largely driven by timing differences in Nostro accounts.
- Loans to customers - amortised cost increased by €0.3 billion to €0.9
billion, reflecting new deals.
- Amounts due from holding company and fellow subsidiaries increased to €3.1
billion compared with €1.4 billion at 31 December 2021, mainly due to
increases in deals pending settlement and loans subject to reverse repo
agreements.
- Other financial assets increased by €0.3 billion to €1.4 billion,
reflecting an increase in treasury bills of €0.4 billion and a decrease in
equity shares of €0.1 billion.
- Bank deposits increased by €0.2 billion to €0.2 billion at 30 June 2022.
- Customer deposits increased from €0.9 billion to €1.3 billion, reflecting
increased funding requirement.
- Amounts due to holding companies and fellow subsidiaries increased by €0.1
billion to €4.0 billion, mainly driven by an increase in deposits subject to
repo agreements of €0.7 billion, partially offset by a decrease in cash
collateral of €0.5 billion.
- Trading liabilities increased to €3.7 billion (31 December 2021 - €2.1
billion) primarily reflecting increases in collateral received and repos of
€1.5 billion and €0.2 billion respectively.
- Subordinated liabilities decreased by €0.1 billion to €0.5 billion
primarily due to valuation changes.
- Other financial liabilities were €1.9 billion (31 December 2021 - €1.9
billion).
- Equity attributable to controlling interests increased by €49 million to
€2.3 billion, mainly driven by the profit for the period of €11 million
and own credit adjustments of €59 million due to widening of credit spreads.
This was partially offset by dividends paid on AT1 capital securities of €7
million and fair value through other comprehensive income movements of €13
million.
Financial review
Capital and liquidity
Capital ratios and risk-weighted assets (RWAs) on the CRR transitional basis
are set out below.
30 June 31 December
2022 2021
Capital ratios % %
CET1 26.9 29.7
Tier 1 30.9 34.1
Total 33.2 37.4
Risk-weighted assets €m €m
Credit risk 4,869 3,785
Market risk 1,054 1,269
Operational risk 354 620
Settlement risk - 2
Total RWAs 6,277 5,676
Liquidity % %
Liquidity coverage ratio (LCR) 218 255
- The decrease in market risk RWAs was primarily due to a decrease in
Credit Valuation Adjustment (CVA) RWAs.
- The increase in credit risk RWAs was mainly driven by increased
corporate lending. This was also the primary driver for the decrease in the
CET1 ratio.
- There were no capital actions during H1 2022.
- The decrease in the LCR ratio was driven by increased intercompany and
increased lending, partially offset by increased funding over H1 2022.
Condensed consolidated income statement for the half year ended 30 June 2022
(unaudited)
Half year ended
30 June 30 June
2022 2021
€m €m
Interest receivable 24 22
Interest payable (25) (26)
Net interest income (1) (4)
Fees and commissions receivable 106 143
Fees and commissions payable (12) (14)
Income from trading activities 10 (2)
Other operating income 1 (12)
Non-interest income 105 115
Total income 104 111
Staff costs (39) (41)
Premises and equipment (3) (3)
Other administrative expenses (35) (31)
Depreciation and amortisation (2) (2)
Operating expenses (79) (77)
Profit before impairment (losses)/releases 25 34
Impairment (losses)/releases (7) 4
Operating profit before tax 18 38
Tax (charge)/credit (7) 2
Profit for the period 11 40
Attributable to:
Ordinary shareholders 4 33
AT1 capital securities 7 7
11 40
Condensed consolidated statement of comprehensive income for the half year
ended 30 June 2022 (unaudited)
Half year ended
30 June 30 June
2022 2021
€m €m
Profit for the period 11 40
Items that do not qualify for reclassification
Profit/(loss) on fair value of credit in financial liabilities designated at
fair value through
profit or loss due to own credit risk 59 (19)
Fair value through other comprehensive income (FVOCI) financial assets (5) (1)
54 (20)
Items that qualify for reclassification
FVOCI financial assets (8) (1)
Currency translation (1) 3
(9) 2
Other comprehensive income/(loss) after tax 45 (18)
Total comprehensive income for the period 56 22
Attributable to:
Ordinary shareholders 49 15
AT1 capital securities 7 7
56 22
Condensed consolidated balance sheet as at 30 June 2022 (unaudited)
30 June 31 December
2022 2021
€m €m
Assets
Cash and balances at central banks 3,928 5,145
Trading assets 4,565 4,174
Derivatives 10,747 7,767
Settlement balances 1,861 391
Loans to banks - amortised cost 397 139
Loans to customers - amortised cost 915 660
Amounts due from holding companies and fellow subsidiaries 3,109 1,380
Other financial assets 1,369 1,027
Other assets 98 95
Total assets 26,989 20,778
Liabilities
Bank deposits 182 -
Customer deposits 1,259 880
Amounts due to holding companies and fellow subsidiaries 4,035 3,923
Settlement balances 2,857 186
Trading liabilities 3,727 2,080
Derivatives 10,170 8,854
Other financial liabilities 1,868 1,907
Subordinated liabilities 536 652
Other liabilities 59 49
Total liabilities 24,693 18,531
Total equity 2,296 2,247
Total liabilities and equity 26,989 20,778
Condensed consolidated statement of changes in equity for the half year ended
30 June 2022 (unaudited)
Half year ended
30 June 30 June
2022 2021
€m €m
Share capital and premium account - at beginning and end of period (1) 1,700 1,700
AT1 capital securities - at the beginning and end of period 250 250
FVOCI reserve - at beginning of period 4 7
Unrealised losses (17) (1)
Realised losses/(gains) 4 (1)
At end of period (9) 5
Foreign exchange reserve - at beginning of period 13 9
Retranslation of net assets (1) 11
Foreign currency losses on hedges of net assets - (8)
At end of period 12 12
Retained earnings - at beginning of period 280 207
Profit attributable to ordinary shareholders and other equity owners 11 40
AT1 capital securities dividends paid (7) (7)
Changes in fair value of credit in financial liabilities designated at fair 59 (19)
value through profit or loss
At end of period 343 221
Total equity at end of period 2,296 2,188
Attributable to:
Ordinary shareholders 2,046 1,938
AT1 capital securities 250 250
2,296 2,188
(1) Includes Ordinary share capital of €50,000 (2021 - €50,000).
Condensed consolidated cash flow statement for the half year ended 30 June
2022 (unaudited)
Half year ended
30 June 30 June
2022 2021
€m €m
Operating activities
Operating profit before tax 18 38
Adjustments for non-cash items (65) (16)
Net cash flows from trading activities (47) 22
Changes in operating assets and liabilities (196) 131
Net cash flows from operating activities before tax (243) 153
Income taxes paid (2) (25)
Net cash flows from operating activities (245) 128
Net cash flows from investing activities (345) (178)
Net cash flows from financing activities (23) (17)
Effects of exchange rate changes on cash and cash equivalents 22 32
Net decrease in cash and cash equivalents (591) (35)
Cash and cash equivalents at beginning of period 7,229 7,286
Cash and cash equivalents at end of period 6,638 7,251
Notes
1. Presentation of condensed consolidated financial statements
The condensed consolidated financial statements are set out on pages 5 to 27.
The directors have prepared these on a going concern basis after assessing the
principal risks, forecasts, projections and other relevant evidence over the
twelve months from the date they are approved and in accordance with IAS 34
'Interim Financial Reporting', as adopted by the European Union. They should
be read in conjunction with the NatWest Markets N.V. 2021 Annual Report and
Accounts.
2. Accounting policies
NatWest Markets N.V.'s principal accounting policies are as set out on pages
65 to 68 of the NatWest Markets N.V. 2021 Annual Report and Accounts.
Amendments to IFRS effective from 1 January 2022 had no material effect on the
condensed consolidated financial Statements.
Critical accounting policies and key sources of estimation uncertainty
The judgements and assumptions that are considered to be the most important to
the portrayal of NatWest Markets N.V.'s financial condition are those relating
to deferred tax, fair value of financial instruments and loan impairment
provisions. These critical accounting policies and judgements are noted on
page 68 of NatWest Markets N.V. 2021 Annual Report and Accounts.
Information used for significant estimates
Key financial estimates are based on management's latest five-year revenue and
cost forecasts. Measurement of deferred tax and expected credit losses are
highly sensitive to reasonably possible changes in those anticipated
conditions. Changes in judgments and assumptions could result in a material
adjustment to those estimates in future reporting periods. (Refer to the Risk
factors on page 28 which should be read in conjunction with the Risk factors
included in the NatWest Markets N.V.'s 2021 Annual Report and Accounts).
3. Analysis of net fees and commissions
Half year ended
30 June 30 June
2022 2021
€m €m
Fees and commissions receivable
- Transfer pricing arrangements (Note 11) 60 76
- Underwriting fees 30 52
- Lending and financing 10 9
- Other 6 6
Total 106 143
Fees and commissions payable (12) (14)
Net fees and commissions 94 129
4. Tax
The actual tax charge differs from the expected tax charge computed by
applying the standard Dutch corporation tax rate of 25.8% as follows:
Half year ended
30 June 30 June
2022 2021
€m €m
Profit before tax 18 38
Expected tax charge (5) (9)
Foreign profits taxed at other rates (1) -
Losses brought forward and utilised - 8
Tax on AT1 capital securities 2 -
Adjustments in respect to prior years (3) 3
Actual tax (charge)/credit (7) 2
Deferred tax assets - Deferred tax assets of €57 million recognised at 31
December 2021 have decreased to €54 million at 30 June 2022 due to
utilisations. NWM N.V. Group has considered the carrying value of this asset
as at 30 June 2022 and concluded that it is recoverable based on future profit
projections.
Notes
5. Derivatives
The table below shows third party derivatives by type of contract. The master
netting agreements and collateral shown do not result in a net presentation on
the balance sheet under IFRS.
30 June 2022 31 December 2021
Notional
GBP USD Euro Other Total Assets Liabilities Notional Assets Liabilities
€bn €bn €bn €bn €bn €m €m €bn €m €m
Gross exposure 7,325 6,811 5,175 6,713
IFRS offset - - - -
Carrying value 422 72 1,575 35 2,104 7,325 6,811 1,814 5,175 6,713
Of which:
Interest rate (1) 410 12 1,516 6 1,944 4,453 3,865 1,664 3,243 4,321
Exchange rate 12 60 59 29 160 2,870 2,944 149 1,932 2,382
Credit - - - - - 2 2 1 - 10
Carrying value 2,104 7,325 6,811 1,814 5,175 6,713
Counterparty mark-to-market netting (3,295) (3,295) (2,747) (2,747)
Cash collateral (2,524) (2,425) (1,382) (3,105)
Securities collateral (880) (183) (534) (365)
Net exposure 626 908 512 496
Banks (2) 18 117 32 35
Other financial institutions (3) 282 371 233 179
Corporate (4) 311 342 247 259
Government (5) 15 78 - 23
Net exposure 626 908 512 496
UK 10 6 7 3
Europe 606 902 470 493
US - - 4 -
RoW 10 - 31 -
Net exposure 626 908 512 496
Asset quality of uncollateralised derivative assets
AQ1-AQ4 559 446
AQ5-AQ10 67 66
Net exposure 626 512
(1) The notional amount of interest rate derivatives includes €1,820
billion (31 December 2021 - €1,556 billion) in respect of contracts cleared
through central clearing counterparties.
(2) Transactions with certain counterparties with whom NWM N.V. has
netting arrangements but collateral is not posted on a daily basis; certain
transactions with specific terms that may not fall within netting and
collateral arrangements; derivative positions in certain jurisdictions, for
example China, where the collateral agreements are not deemed to be legally
enforceable.
(3) Includes transactions with securitisation vehicles and funds where
collateral posting is contingent on NWM N.V.'s external rating.
(4) Mainly large corporates with whom NWM N.V. may have netting
arrangements in place, but operational capability does not support collateral
posting.
(5) Sovereigns and supranational entities with no collateral
arrangements, collateral arrangements that are not considered enforceable, or
one-way collateral agreements in their favour.
Notes
6. Financial instruments - classification
The following tables analyse financial assets and liabilities in accordance
with the categories of financial instruments in IFRS 9.
Amortised Other
MFVTPL FVOCI cost assets Total
Assets €m €m €m €m €m
Cash and balances at central banks 3,928 3,928
Trading assets 4,565 4,565
Derivatives 10,747 10,747
Settlement balances 1,861 1,861
Loans to banks - amortised cost 397 397
Loans to customers - amortised cost 915 915
Amounts due from holding companies and fellow subsidiaries 1,006 - 2,098 5 3,109
Other financial assets 1,222 147 1,369
Other assets 98 98
30 June 2022 16,318 1,222 9,346 103 26,989
Cash and balances at central banks 5,145 5,145
Trading assets 4,174 4,174
Derivatives 7,767 7,767
Settlement balances 391 391
Loans to banks - amortised cost 139 139
Loans to customers - amortised cost 660 660
Amounts due from holding companies and fellow subsidiaries 765 - 612 3 1,380
Other financial assets 1 904 122 1,027
Other assets 95 95
31 December 2021 12,707 904 7,069 98 20,778
Held-for- Amortised Other
trading DFV cost liabilities Total
Liabilities €m €m €m €m €m
Bank deposits 182 182
Customer deposits 1,259 1,259
Amounts due to holding companies and fellow subsidiaries 2,414 - 1,590 31 4,035
Settlement balances 2,857 2,857
Trading liabilities 3,727 3,727
Derivatives 10,170 10,170
Other financial liabilities 635 1,233 1,868
Subordinated liabilities 260 276 536
Other liabilities 9 50 59
30 June 2022 16,311 895 7,406 81 24,693
Bank deposits - -
Customer deposits 880 880
Amounts due to holding companies and fellow subsidiaries 2,068 - 1,825 30 3,923
Settlement balances 186 186
Trading liabilities 2,080 2,080
Derivatives 8,854 8,854
Other financial liabilities - 586 1,321 1,907
Subordinated liabilities 394 258 652
Other liabilities 7 42 49
31 December 2021 13,002 980 4,477 72 18,531
Notes
6. Financial instruments - classification continued
Amounts due from/to holding companies and fellow subsidiaries as below:
30 June 2022 31 December 2021
Holding Fellow Holding Fellow
companies subsidiaries Total companies subsidiaries Total
€m €m €m €m €m €m
Assets
Trading assets 1,006 - 1,006 765 - 765
Loans to banks - amortised cost 358 17 375 61 24 85
Loans to customers - amortised cost 146 - 146 135 - 135
Settlement balances 1,570 7 1,577 392 - 392
Other assets 5 - 5 3 - 3
Amounts due from holding companies and fellow
subsidiaries 3,085 24 3,109 1,356 24 1,380
Derivatives (1) 3,422 - 3,422 2,592 - 2,592
-
Liabilities
Trading liabilities 2,414 - 2,414 2,068 - 2,068
Bank deposits - amortised cost 972 - 972 1,037 3 1,040
Customer deposits - amortised cost - 96 96 - 179 179
Other financial liabilities - subordinated liabilities 150 - 150 150 - 150
Settlement balances 372 - 372 456 - 456
Other liabilities 17 14 31 23 7 30
Amounts due to holding companies and fellow
subsidiaries 3,925 110 4,035 3,734 189 3,923
Derivatives (1) 3,359 - 3,359 2,141 - 2,141
(1) Intercompany derivatives are included within derivative
classification on the balance sheet.
Notes
6. Financial instruments - valuation
Disclosures relating to the control environment, valuation techniques and
related aspects pertaining to financial instruments measured at fair value are
included in NWM N.V.'s 2021 Annual Report and Accounts. Valuation and input
methodologies at 30 June 2022 are consistent with those described in Note 8 to
NWM N.V.'s 2021 Annual Report and Accounts.
Fair value hierarchy
The table below shows the assets and liabilities held by NWM N.V. split by
fair value hierarchy level. Level 1 are considered
the most liquid instruments, and level 3 the most illiquid, valued using
expert judgment and hence carry the most significant price uncertainty.
30 June 2022 31 December 2021
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
€m €m €m €m €m €m €m €m
Assets
Trading assets
Loans - 4,480 85 4,565 - 4,112 59 4,171
Securities - - - - - - 3 3
Derivatives - 10,669 78 10,747 - 7,655 112 7,767
Amounts due from holding companies and
fellow subsidiaries - 1,006 - 1,006 - 765 - 765
Other financial assets - securities 855 364 3 1,222 460 445 - 905
Total financial assets held at fair value 855 16,519 166 17,540 460 12,977 174 13,611
As a % of total fair value assets 5% 94% 1% 3% 96% 1%
Liabilities
Amounts due to holding companies and
fellow subsidiaries - 2,414 - 2,414 - 2,068 - 2,068
Trading liabilities
Deposits - 3,708 - 3,708 - 2,059 - 2,059
Short positions - 19 - 19 - 21 - 21
Derivatives - 10,060 110 10,170 - 8,794 60 8,854
Other financial liabilities
Deposits - 580 - 580 - 586 - 586
Debt securities in issue - 55 - 55 - - - -
Subordinated liabilities - 260 - 260 - 394 - 394
Total financial liabilities held at fair value - 17,096 110 17,206 - 13,922 60 13,982
As a % of total fair value liabilities - 99% 1% - 100% 0%
(1) Level 1 - Instruments valued using unadjusted quoted prices in
active and liquid markets, for identical financial instruments. Examples
include government bonds, listed equity shares and certain exchange-traded
derivatives.
Level 2 - Instruments valued using valuation techniques that have observable
inputs. Observable inputs are those that are readily available with limited
adjustments required. Examples include most government agency securities,
investment-grade corporate bonds, certain mortgage products - including CLOs,
most bank loans, repos and reverse repos, state and municipal obligations,
most notes issued, certain money market securities, loan commitments and most
OTC derivatives.
Level 3 - Instruments valued using a valuation technique where at least one
input which could have a significant effect on the instrument's valuation, is
not based on observable market data. Examples include non-derivative
instruments which trade infrequently, certain syndicated and commercial
mortgage loans, private equity, and derivatives with unobservable model
inputs.
(2) Transfers between levels are deemed to have occurred at the
beginning of the quarter in which the instruments were transferred.
Notes
6. Financial instruments - valuation
Level 3 sensitivities
The table below shows the high and low range of fair value of the level 3
assets and liabilities.
30 June 2022 31 December 2021
Level 3 Favourable Unfavourable Level 3 Favourable Unfavourable
Assets €m €m €m €m €m €m
Trading assets
Loans 85 - - 59 - -
Securities - - - 3 - -
Derivatives 78 10 (10) 112 10 (10)
Other financial assets - Securities 3 - - - - -
Total financial assets held at fair value 166 10 (10) 174 10 (10)
Liabilities
Derivatives 110 10 (10) 60 - -
Total financial liabilities held at fair value 110 10 (10) 60 - -
Alternative assumptions
Reasonably plausible alternative assumptions of unobservable inputs are
determined based on a specified target level of certainty of 90%. Alternative
assumptions are determined with reference to all available evidence including
consideration of the following: quality of independent pricing information
considering consistency between different sources, variation over time,
perceived tradability or otherwise of available quotes; consensus service
dispersion ranges; volume of trading activity and market bias (e.g. one-way
inventory); day 1 profit or loss arising on new trades; number and nature of
market participants; market conditions; modelling consistency in the market;
size and nature of risk; length of holding of position; and market
intelligence.
Movement in level 3 assets and liabilities
The following table shows the movement in level 3 assets and liabilities.
Half year ended 30 June 2022 Half year ended 30 June 2021
Other Other
Trading financial Total Total Trading financial Total Total
assets (1) assets (2) assets liabilities assets (1) assets (2) assets liabilities
€m €m €m €m €m €m €m €m
At 1 January 174 - 174 60 133 - 133 59
Amount recorded in the income statement (3) (23) - (23) 34 (31) - (31) (6)
Level 3 transfers in - - - 1 - 35 35 -
Level 3 transfers out - - - (1) (7) - (7) (3)
Purchases/originations 95 3 98 35 46 - 46 13
Settlements/other decreases (9) - (9) (6) (4) (5) (9) 3
Sales (73) - (73) (13) (1) - (1) (3)
Foreign exchange and other (1) - (1) - 4 - 4 -
At 30 June 163 3 166 110 140 30 170 63
Amounts recorded in the income statement in
respect of balances held at year end
- unrealised (23) - (23) 34 (31) - (31) (6)
(1) Trading assets comprise assets held at fair value in trading
portfolios.
(2) Other financial assets comprise fair value through other
comprehensive income, designated as at fair value through profit or loss and
other fair value through profit or loss.
(3) There were €57 million net losses on trading assets and
liabilities (30 June 2021 - €25 million) recorded in income from trading
activities.
Notes
6. Financial instruments - valuation continued
Fair value of financial instruments measured at amortised cost on the balance
sheet
The following table shows the carrying value and fair value of financial
instruments carried at amortised cost on the balance sheet.
Items where
fair value
approximates Carrying Fair value hierarchy level
carrying value value Fair value Level 2 Level 3
30 June 2022 €m €m €m €m €m
Financial assets
Cash and balances at central banks 3,928
Settlement balances 1,861
Loans to banks 222 175 175 73 102
Loans to customers 915 888 - 888
Amounts due from holding companies and fellow subsidiaries 1,577 521 521 - 521
Other financial assets 147 147 - 147
31 December 2021
Financial assets
Cash and balances at central banks 5,145
Settlement balances 391
Loans to banks 18 121 121 62 59
Loans to customers 660 656 - 656
Amounts due from holding companies and fellow subsidiaries 612 612 - 612
Other financial assets 122 122 - 122
30 June 2022
Financial liabilities
Bank deposits 32 150 150 - 150
Customer deposits 3 1,256 1,256 - 1,256
Amounts due to holding companies and fellow subsidiaries 357 1,233 1,239 150 1,089
Settlement balances 2,857
Other financial liabilities 1,233 1,233 553 680
Subordinated liabilities 276 367 367 -
31 December 2021
Financial liabilities
Bank deposits - - - - -
Customer deposits 4 876 876 - 876
Amounts due to holding companies and fellow subsidiaries 31 1,794 1,807 157 1,650
Settlement balances 186
Other financial liabilities 1,321 1,321 814 507
Subordinated liabilities 258 382 380 2
Short-term financial instruments
For certain short-term financial instruments: cash and balances at central
banks, items in the course of collection from other banks, settlement
balances, items in the course of transmission to other banks, and customer
demand deposits, carrying value is deemed a reasonable approximation of fair
value.
Loans to banks and customers
In estimating the fair value of net loans to customers and banks measured at
amortised cost, NWM N.V.'s loans are segregated into appropriate portfolios
reflecting the characteristics of the constituent loans. Two principal methods
are used to estimate fair value; contractual cash flows and expected cash
flows.
Debt securities and subordinated liabilities
Most debt securities are valued using quoted prices in active markets or from
quoted prices of similar financial instruments in active markets. For the
remaining population, fair values are determined using market standard
valuation techniques, such as discounted cash flows.
Bank and customer deposits
Fair value of deposits are estimated using discounted cash flow valuation
techniques.
Notes
7. Trading assets and liabilities
Trading assets and liabilities comprise assets and liabilities held at fair
value in trading portfolios.
30 June 31 December
2022 2021
Assets €m €m
Loans
Reverse repos 1,819 946
Collateral given 2,648 3,164
Other loans 98 61
Total loans 4,565 4,171
Securities - 3
Total 4,565 4,174
Liabilities
Deposits
Repos 754 586
Collateral received 2,953 1,468
Other deposits 1 5
Total deposits 3,708 2,059
Short positions 19 21
Total 3,727 2,080
8. Loan impairment provisions
Economic loss drivers
Introduction
The portfolio segmentation and selection of economic loss drivers for IFRS 9
follow closely the approach used in stress testing. To enable robust modelling
the forecasting models for each portfolio segment (defined by product or asset
class and where relevant, industry sector and region) are based on a selected,
small number of economic factors, (typically three to four) that best explain
the temporal variations in portfolio loss rates. The process to select
economic loss drivers involves empirical analysis and expert judgment.
Economic scenarios
At 30 June 2022, the range of anticipated future economic conditions was
defined by a set of four internally developed scenarios and their respective
probabilities. In addition to the base case, they comprised upside, downside
and extreme downside scenarios. The scenarios primarily reflected a range of
outcomes associated with the most prominent risks facing the economy, and the
associated effects on labour and asset markets.
The four economic scenarios are translated into forward-looking projections of
credit cycle indices (CCIs) using a set of econometric models. Subsequently
the CCI projections for the individual scenarios are averaged into a single
central CCI projection according to the given scenario probabilities. The
central CCI projection is then overlaid with an additional mean reversion
assumption i.e., after reaching their worst forecast position the CCIs start
to gradually revert to their long-run average of zero.
Upside - This scenario assumes a very strong recovery through 2022 as
consumers dip into excess savings built up since amidst COVID-19. The labour
market remains resilient, with the unemployment rate falling substantially
below pre-COVID-19 levels. Inflation is marginally higher than the base case
but eventually retreats close to the target without substantial tightening and
with no major effect on growth. The housing market shows a strong performance.
Base case - After a strong recovery in 2021, growth moderates in 2022 as real
incomes decline and consumer confidence falls. The unemployment rate decreases
initially but subsequently increases above pre-COVID-19 levels, although
remains low by historical standards. Inflation remains elevated at close to
current levels through to early 2023 before retreating. Interest rates are
raised to 2% to control price pressures. There is a gradual cooling in the
housing market, but activity remains firm. As inflation retreats, economic
growth returns to its pre-COVID-19 pace over the course of 2023, remaining
steady through the forecast period.
Downside - This scenario assumes that inflation accelerates to 15%, triggered
by further escalation in geopolitical tensions and an associated rise in
energy prices. This undermines the recovery, harming business and consumer
confidence and pushing the economy into recession. Unemployment rate rises
above the levels seen during COVID-19 and there is a modest decline in house
prices. Inflation subsequently normalises, paving the way for cuts to interest
rates and recovery.
Notes
8. Loan impairment provisions continued
Economic loss drivers
Extreme downside - The trigger for the extreme downside is similar to the
downside scenario. However, in this scenario, inflation remains more
persistent, necessitating a significant degree of rate tightening. This
tighter policy and fall in real income leads to a deep recession. There is
widespread job shedding in the labour market while asset prices see deep
corrections, with housing market falls higher than those seen during previous
episodes. The recovery is tepid throughout the five-year period, meaning only
a gradual decline in joblessness.
For June 2022, the four scenarios were deemed appropriate in capturing the
uncertainty in economic forecasts and the non-linearity in outcomes under
different scenarios. These four scenarios were developed to provide sufficient
coverage across potential rises in unemployment, inflation and asset price
falls around which there are pronounced levels of uncertainty.
The tables below provide details of the key economic loss drivers under the
four scenarios.
The main macroeconomic variables for each of the four scenarios used for
expected credit loss (ECL) modelling are set out in the table below. The
compound annual growth rate (CAGR) for GDP is shown. It also shows the
five-year average for unemployment and the European Central Bank main
refinancing rate.
Main macroeconomic variables
30 June 2022 31 December 2021
Extreme Extreme
Upside Base case Downside downside Upside Base case Downside downside
Five-year summary % % % % % % % %
Eurozone
GDP - CAGR 2.3 2.0 0.7 0.1 2.6 2.2 1.2 0.6
Unemployment - average 7.2 7.4 8.7 10.0 7.4 7.6 8.6 9.9
European Central Bank
- main refinancing rate - average 1.3 2.0 0.1 1.4 0.8 0.1 0.2 -
Probability weight 21.0 45.0 20.0 14.0 30.0 45.0 20.0 5.0
(1) The five year period starts after Q1 2022 for 30 June 2022 and Q3
2021 for 31 December 2021.
(2) CAGR figures are not comparable with 31 December 2021 data, as the
starting quarters are different.
Probability weightings of scenarios
NWM N.V. Group's approach to IFRS 9 multiple economic scenarios (MES) involves
selecting a suitable set of discrete scenarios to characterise the
distribution of risks in the economic outlook and assigning appropriate
probability weights. The scale of the economic effect of COVID-19 and the
range of recovery paths had necessitated subjective assignment of probability
weights. However, for H1 2022, NWM N.V. Group resurrected the quantitative
approach used pre-COVID-19. The approach involves comparing GDP paths for NWM
N.V. Group's scenarios against a set of 1,000 model runs, following which, a
percentile in the distribution is established that most closely corresponded
to the scenario. The probability weight for the base case is set based on
judgement while probability weights for the alternate scenarios are assigned
based on these percentiles scores.
A 21% weighting was applied to the upside scenario (compared to 30% at 31
December 2021), a 45% weighting applied to the base case scenario (unchanged
from 31 December 2021), a 20% weighting applied to the downside scenario
(unchanged from 31 December 2021) and a 14% weighting applied to the extreme
downside scenario (compared to 5% at 31 December 2021).
The assigned probability weights reflect the outputs of NWM N.V. Group's
quantitative approach and were judged to be aligned with subjective assessment
of balance of the risks in the economy, presenting good coverage to the range
of outcomes assumed in the central scenarios, including the potential for a
robust recovery on the upside and exceptionally challenging outcomes on the
downside. The current geopolitical tensions pose considerable uncertainty to
the economic outlook, with respect to their persistence, range of outcomes and
subsequent impacts on inflation and economic activity. Given that backdrop,
and the higher possibility of a more challenging economic backdrop than
assumed in the base case, NWM N.V. Group judged it appropriate to apply a
lower probability weight to the upside scenario and a higher probability to
downside-biased scenarios, than at 31 December 2021.
Notes
8. Loan impairment provisions continued
Economic loss drivers
Annual figures
Extreme
Upside Base case Downside downside
Eurozone - GDP - annual growth % % % %
2022 3.5 3.0 2.6 2.4
2023 3.9 2.4 (3.8) (6.1)
2024 2.7 2.3 1.3 (0.3)
2025 1.2 1.8 2.5 2.9
2026 1.5 1.6 2.1 2.6
Extreme
Upside Base case Downside downside
Eurozone - unemployment rate - annual average % % % %
2022 7.4 7.5 7.6 7.7
2023 7.1 7.4 9.1 9.6
2024 7.1 7.4 9.5 11.8
2025 7.2 7.3 8.8 10.9
2026 7.2 7.3 8.2 9.4
Extreme
Upside Base case Downside downside
European Central Bank - main refinancing rate - annual average % % % %
2022 0.1 0.3 - 0.2
2023 1.3 2.1 - 1.7
2024 1.7 2.4 - 2.4
2025 1.7 2.4 0.1 1.8
2026 1.7 2.4 0.3 0.9
Use of the scenarios in lending
The lending ECL methodology is based on the concept of CCIs. The CCIs
represent all relevant economic loss drivers for a region/industry segment
aggregated into a single index value that describes the loss rate conditions
in the respective segment relative to its long-run average. A CCI value of
zero corresponds to loss rates at long-run average levels, a positive CCI
value corresponds to loss rates below long run average levels and a negative
CCI value corresponds to loss rates above long-run average levels.
Finally, ECL is calculated using a Monte Carlo approach by averaging
probability of default (PD) and loss given default (LGD) values arising from
many CCI paths simulated around the central CCI projection.
The rationale for the approach is the long-standing observation that loss
rates tend to follow regular cycles. This allows NWM N.V. Group to enrich the
range and depth of future economic conditions embedded in the final ECL beyond
what would be obtained from using the discrete macro-economic scenarios alone.
Economic uncertainty
Businesses are still trying to recover fully from the effects of COVID-19 and
to service additional debt which was accessed during the period. New headwinds
on inflation, cost of living and supply chain have arisen.
Inflation and supply chain issues are presenting significant headwinds for
some businesses and sectors. These are a result of various factors and in many
cases are compounding and look set to remain a feature of the economic
environment into 2023. NWM N.V. Group has considered where these are most
likely to affect the customer base including assessing which businesses that
NWM N.V. Group do not believe will fully pass the costs onto the consumer and
those that can, driving further cost of living risks.
Notes
8. Loan impairment provisions continued
Economic uncertainty
The effects of these risks are not expected to be fully captured by
forward-looking credit modelling, particularly given the unique high
inflation, low unemployment base case outlook. Any incremental ECL effects for
these risks will be captured via post model adjustments and are detailed
further in the Governance and post model adjustments section.
Model monitoring and enhancement
As of January 2022, a new definition of default for internal ratings based
models was introduced in line with PRA and EBA guidance. This definition of
default was also adopted for IFRS 9. Underlying observed one year default
rates (after isolating one-off effects from the new definition of default)
across all portfolios still trend at or below pre-COVID-19 levels. As a
result, most recent back-testing of forward-looking IFRS 9 PDs continues to
show some overprediction in some portfolios. As in previous quarters, model
recalibrations to adjust for this overprediction have been deferred based on
the judgment that low default rate actuals during COVID-19 were distorted, due
to government support.
Going forward, NWM N.V. Group expects potential increases in default emergence
to come primarily from forward-looking risks like high inflation and rising
interest rates, rather than from delayed COVID-19 effects. Therefore,
previously applied lags to the projections from the economic forecasting
models of up to 12 months have been discontinued.
Governance and post model adjustments
The IFRS 9 PD, EAD and LGD models are subject to NWM N.V. Group's model risk
policy that stipulates periodic model monitoring, periodic re-validation and
defines approval procedures and authorities according to model materiality.
Various post model adjustments were applied where management judged they were
necessary to ensure an adequate level of overall ECL provision.
All post model adjustments were subject to formal approval through
provisioning governance, and were categorised as follows:
- Deferred model calibrations - ECL adjustments where PD model monitoring
indicated that actual defaults were below estimated levels but where it was
judged that an implied ECL release was not supportable due to the influence of
government support schemes on default levels in the past two years. As a
consequence, any potential ECL release was deferred and retained on the
balance sheet until modelled ECL levels are affirmed by new model parallel
runs or similar analyses.
- Economic uncertainty - ECL adjustments primarily arising from
uncertainties associated with increased inflation and cost of living risks as
well as supply chain disruption, along with the residual effect of COVID-19
and government support schemes. In all cases, management judged that
additional ECL was required until further credit performance data became
available as the full effects of these issues matures.
- Other adjustments - ECL adjustments where it was judged that the
modelled ECL required to be amended.
Post model adjustments will remain a key focus area of NWM N.V. Group's
ongoing ECL adequacy assessment process. A holistic framework has been
established including reviewing a range of economic data, external benchmark
information and portfolio performance trends with a particular focus on
segments of the portfolio that are likely to be more susceptible to inflation,
cost of living and supply chain risks.
Measurement uncertainty and ECL sensitivity analysis
The recognition and measurement of ECL is complex and involves the use of
significant judgment and estimation, particularly in times of economic
volatility and uncertainty. 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.
The focus of the simulations is on ECL provisioning requirements on performing
exposures in Stage 1 and Stage 2. The simulations are run on a stand-alone
basis and are independent of each other; the potential ECL impacts reflect the
simulated impact at 30 June 2022. Scenario impacts on a significant increase
in credit risk (SICR) should be considered when evaluating the ECL movements
of Stage 1 and Stage 2. In all scenarios the total exposure was the same but
exposure by stage varied in each scenario.
Stage 3 provisions are not subject to the same level of measurement
uncertainty - default is an observed event as at the balance sheet date. Stage
3 provisions therefore have not been considered in this analysis.
Notes
8. Loan impairment provisions continued
Measurement uncertainty and ECL sensitivity analysis
The impact arising from the base case, upside, downside and extreme downside
scenarios has been simulated. NWM N.V. Group has assumed that the economic
macro variables associated with these scenarios replace the existing base case
economic assumptions, giving them a 100% probability weighting and therefore
serving as a single economic scenario.
These scenarios have been applied to all modelled portfolios in the analysis
below, with the simulation impacting both PDs and LGDs. Modelled post model
adjustments present in the underlying ECL estimates are also sensitised in
line with the modelled ECL movements, but those that were judgmental in
nature, primarily those for deferred model calibrations and economic
uncertainty, are not (refer to the Governance and post model adjustments
section). As expected, the scenarios create differing impacts on ECL by
portfolio and the impacts are deemed reasonable. In this simulation, it is
assumed that existing modelled relationships between key economic variables
and loss drivers hold, but in practice other factors would also have an
impact, for example, potential customer behaviour changes and policy changes
by lenders that might impact on the wider availability of credit.
NWM N.V. Group's core criterion to identify a SICR is founded on PD
deterioration, as discussed above. Under the simulations, PDs change and
result in exposures moving between Stage 1 and Stage 2 contributing to the ECL
impact.
Measurement uncertainty and ECL adequacy
- During the first half of 2022, both the Stage 2 size and overall
modelled ECL reduced in line with stable portfolio performance and underlying
ECL driver trends. Judgmental ECL post model adjustments, although reduced in
value terms from 31 December 2021, continue to reflect economic uncertainty
with the expectation of increased defaults later in 2022 and beyond.
- If the economics were as negative as observed in the extreme
downside, total Stage 1 and Stage 2 ECL was simulated to increase. In this
scenario, Stage 2 exposure increased significantly and was the key driver of
the simulated ECL rise. The movement in Stage 2 balances in the other
simulations was less significant.
- In the Wholesale portfolio, there was a significant increase to
ECL under both the moderate and extreme downsides.
The changes in the economic outlook and scenarios used in the IFRS 9 MES
framework at 30 June 2022 to capture the increased risks of inflation, cost of
living and supply chain had a minimal effect on modelled ECL. Given that
uncertainty has increased due to these risks, NWM N.V. Group utilised a
framework of quantitative and qualitative measures to support the directional
change and levels of ECL coverage, including economic data, credit performance
insights on higher risk portfolio segments and problem debt trends. This was
particularly important for consideration of post model adjustments.
As the effects of inflation, cost of living and supply chain risks evolve
during 2022 and into 2023 and government support schemes have to be
serviced, there is a risk of credit deterioration. However, the income
statement effect of this will be mitigated by the forward-looking provisions
retained on the balance sheet at 30 June 2022.
There are a number of key factors that could drive further downside to
impairments, through deteriorating economic and credit metrics and increased
stage migration as credit risk increases for more customers. Such factors
would include an adverse deterioration in GDP and unemployment in the
economies in which NWM N.V. Group operates.
Notes
8. Loan impairment provisions continued
Portfolio summary
The table below shows gross loans and related credit impairment measurements,
within the scope of the ECL IFRS 9 framework.
30 June 31 December
2022 2021
€m €m
Loans - amortised cost and fair value through other comprehensive income
(FVOCI)
Stage 1 883 732
Stage 2 215 50
Stage 3 - 39
Inter-Group (1) 521 220
Total 1,619 1,041
ECL provisions
Stage 1 5 -
Stage 2 3 1
Stage 3 - 39
Total 8 40
ECL provisions coverage (2)
Stage 1 (%) 0.57 -
Stage 2 (%) 1.40 2.00
Stage 3 (%) - 100.00
Total 0.73 4.87
Other financial assets - gross exposure 5,255 6,072
Other financial assets - ECL provision - -
Half year ended
30 June 30 June
2022 2021
€m €m
Impairment losses
ECL (release)/charge - third party (3) 7 (4)
Amounts written-off 43 38
(1) NWM N.V. Group's intercompany assets were classified in Stage
1. The ECL for these loans was €0.1 million (31 December 2021 - €0.1
million).
(2) ECL provisions coverage is calculated as ECL provisions
divided by loans - amortised cost and FVOCI. It is calculated on third party
loans and total ECL provisions.
(3) Includes €0.1 million (30 June 2021 - nil) related to other
financial assets and nil (30 June 2021 - nil) relating to contingent
liabilities.
(4) The table shows gross loans only and excludes amounts that are
outside the scope of the ECL framework. Refer to page 39 for Financial
instruments within the scope of the IFRS 9 ECL framework in the NWM N.V. Group
2021 Annual Report and Accounts for further details. Other financial assets
within the scope of the IFRS 9 ECL framework were cash and balances at central
banks totalling €3.9 billion (31 December 2021 - €5.1 billion) and debt
securities of €1.3 billion (31 December 2021 - €0.9 billion).
Notes
8. Loan impairment provisions continued
Sector analysis - portfolio summary
The table below shows exposures and ECL by stage, for key sectors.
Loans - amortised cost and FVOCI Off-balance sheet ECL provisions
Loan Contingent
Stage 1 Stage 2 Stage 3 Total commitments liabilities Stage 1 Stage 2 Stage 3 Total
30 June 2022 €m €m €m €m €m €m €m €m €m €m
Property 16 - - 16 313 - - - - -
Financial institutions 479 8 - 487 896 475 1 - - 1
Corporate 388 207 - 595 6,112 - 4 3 - 7
Of which:
Agriculture 2 - - 2 - - - - - -
Airlines and aerospace 1 - - 1 39 - - - - -
Automotive 6 - - 6 644 - - - - -
Health 21 - - 21 - - - - - -
Land transport and logistics 15 60 - 75 327 - - 1 - 1
Leisure - 14 - 14 169 - - - - -
Oil and gas 3 - - 3 481 - - - - -
Retail 8 - - 8 332 - - - - -
Total 883 215 - 1,098 7,321 475 5 3 - 8
31 December 2021
Property 23 - - 23 285 - - - - -
Financial institutions 195 3 - 198 927 474 - - - -
Corporate 514 47 39 600 4,640 1 - 1 39 40
Of which:
Agriculture - - 39 39 - - - - 39 39
Airlines and aerospace - - - - 33 - - - - -
Automotive - - - - 647 - - - - -
Health 5 - - 5 178 - - - - -
Land transport and logistics 87 - - 87 273 - - - - -
Leisure - 4 - 4 174 - - - - -
Oil and gas 300 - - 300 - - - - - -
Retail - - - - 332 - - - - -
Total 732 50 39 821 5,852 475 - 1 39 40
Notes
8. Loan impairment provisions continued
Flow statement
The flow statement that follows shows the main ECL and related income
statement movements. It also shows the changes in ECL as well as the changes
in related financial assets used in determining ECL. Due to differences in
scope, exposures may differ from those reported in other tables, principally
in relation to exposures in Stage 1 and Stage 2. These differences do not have
a material ECL impact because they relate to balances at central banks. Other
points to note:
- Financial assets include treasury liquidity portfolios, comprising
balances at central banks and debt securities, as well as loans. Both modelled
and non-modelled portfolios are included.
- Stage transfers (for example, exposures moving from Stage 1 into Stage
2) are a key feature of the ECL movements, with the net re-measurement cost of
transitioning to a worse stage being a primary driver of income statement
charges. Similarly, there is an ECL benefit for accounts improving stage.
- Changes in risk parameters shows the reassessment of the ECL within a
given stage, including any ECL overlays and residual income statement gains or
losses at the point of write-off or accounting write-down.
- Amounts written-off represent the gross asset written-down against
accounts with ECL, including the net asset write-down for any debt sale
activity.
Stage 1 Stage 2 Stage 3 Total
Financial Financial Financial Financial
assets ECL assets ECL assets ECL assets ECL
NatWest Markets N.V. €m €m €m €m €m €m €m €m
At 1 January 2022 6,937 - 46 1 39 39 7,022 40
Currency translation and other adjustments (41) 1 2 - (3) 4 (42) 5
Inter group transfers 76 - - - - - 76 -
Transfers from Stage 1 to Stage 2 (377) - 377 - - - - -
Transfers from Stage 2 to Stage 1 204 3 (204) (3) - - - -
Net re-measurement of ECL on stage transfer (2) 5 - 3
Changes in risk parameters (model inputs) 1 - - 1
Other changes in net exposure 93 2 9 - 7 - 109 2
Other Profit or loss only items - 1 - 1
Income statement (releases)/charges 1 6 - 7
Amounts written-off - - - - (43) (43) (43) (43)
At 30 June 2022 6,892 5 230 3 - - 7,122 8
Net carrying amount 6,887 227 - 7,114
At 1 January 2021 6,311 1 388 41 72 69 6,771 111
2021 movements (425) - 51 (6) (37) (33) (411) (39)
At 30 June 2021 5,886 1 439 35 35 36 6,360 72
Net carrying amount 5,885 404 (1) 6,288
- The effect of the Russian invasion of Ukraine remains limited to
indirect or second order impact.
- Stage 2 provisions were largely due to legacy assets for
non-go-forward clients following the strategic review in 2020. A significant
portion of these provisions are expected to be released in Q3 2022 as some of
the positions are being exited.
- Stage 3 write-off was related to legacy assets that were fully
provisioned earlier and has negligible P&L impact.
Notes
9. Contingent liabilities, commitments and guarantees
30 June 31 December
2022 2021
€m €m
Guarantees and assets pledged as collateral security 486 486
Other contingent liabilities 1
Standby facilities, credit lines and other commitments 7,497 5,957
Contingent liabilities and commitments 7,983 6,444
Commitments and contingent obligations are subject to NWM NV's normal credit
approval processes. The amounts shown do not, and are not intended to, provide
any indication of the NWM N.V.'s expectation of future losses.
Included within guarantees and assets pledged as collateral security as at 30
June 2022 is €0.5 billion (31 December 2021 - €0.5 billion) which relates
to the NatWest Group's obligations over liabilities held within the Dutch
State acquired businesses included in ABN AMRO Bank N.V..
Risk-sharing agreements
NWM Plc and NWM N.V. have limited risk-sharing arrangements in place to
facilitate the smooth provision of services to NatWest Markets' customers. The
arrangements include:
- The provision of a funded guarantee of up to €1.2 billion by NWM Plc
to NWM N.V. that limits certain NWM N.V.'s exposures to large individual
customer credits. Funding is provided by NWM Plc deposits placed with NWM N.V.
of not less than the guaranteed amount. At 30 June 2022, the deposits amounted
to €0.9 billion and the guarantee fees in the period were €2.4 million.
- The provision of a funded and an unfunded guarantee by NWM Plc in
respect of NWM N.V.'s legacy portfolio. At 30 June 2022 the exposure at
default covered by the guarantees was approximately €0.2 billion (of which
€40 million was cash collateralised). Fees of €0.8 million in relation to
the guarantees were recognised in the period.
10. Litigation and regulatory matters
NWM N.V. and certain members of NatWest Group are party to legal proceedings
and involved in regulatory matters, including as the subject of investigations
and other regulatory and governmental action (Matters) in the Netherlands, the
United Kingdom (UK), the European Union (EU), the United States (US) and other
jurisdictions.
NWM N.V. Group recognises a provision for a liability in relation to these
matters when it is probable that an outflow of economic benefits will be
required to settle an obligation resulting from past events, and a reliable
estimate can be made of the amount of the obligation.
In many of these Matters, it is not possible to determine whether any loss is
probable or to estimate reliably the amount of any loss, either as a direct
consequence of the relevant proceedings and regulatory matters or as a result
of adverse impacts or restrictions on NWM N.V. Group's reputation, businesses
and operations. Numerous legal and factual issues may need to be resolved,
including through potentially lengthy discovery and document production
exercises and determination of important factual matters, and by addressing
novel or unsettled legal questions relevant to the proceedings in question,
before a liability can reasonably be estimated for any claim. NWM N.V. Group
cannot predict if, how, or when such claims will be resolved or what the
eventual settlement, damages, fine, penalty or other relief, if any, may be,
particularly for claims that are at an early stage in their development or
where claimants seek substantial or indeterminate damages.
There are situations where NWM N.V. Group may pursue an approach that in some
instances leads to a settlement agreement. This may occur in order to avoid
the expense, management distraction or reputational implications of continuing
to contest liability, or in order to take account of the risks inherent in
defending claims or regulatory matters, even for those matters for which NWM
N.V. Group believes it has credible defences and should prevail on the merits.
The uncertainties inherent in all such matters affect the amount and timing of
any potential outflows for both matters with respect to which provisions have
been established and other contingent liabilities.
It is not practicable to provide an aggregate estimate of potential liability
for our legal proceedings and regulatory matters as a class of contingent
liabilities.
Notes
10. Litigation and regulatory matters continued
The future outflow of resources in respect of any matter may ultimately prove
to be substantially greater than or less than the aggregate provision that NWM
N.V. Group has recognised. Where (and as far as) liability cannot be
reasonably estimated, no provision has been recognised.
NatWest Group is involved in ongoing litigation and regulatory matters that
are not described below but are described on pages 104 to 108 of NatWest
Group's H1 Results 2022. NatWest Group expects that in future periods,
additional provisions, settlement amounts and customer redress payments will
be necessary, in amounts that are expected to be substantial in some
instances. While NWM N.V. Group may not be directly involved in such NatWest
Group matters, any final adverse outcome of those matters may also have an
adverse effect on NWM N.V. Group.
Litigation
Madoff
NWM N.V. was named as a defendant in two actions filed by the trustee for the
bankruptcy estates of Bernard L. Madoff and Bernard L. Madoff Investment
Securities LLC, in bankruptcy court in New York, which together seek to
clawback more than US$298 million that NWM N.V. allegedly received from
certain Madoff feeder funds and certain swap counterparties. The claims were
previously dismissed, but as a result of an August 2021 decision by the United
States Court of Appeals for the Second Circuit (US Court of Appeals), they
will now proceed in the bankruptcy court, where they have now been
consolidated into one action, subject to NWM N.V.'s legal and factual
defences. In May 2022, NWM N.V. filed a motion to dismiss the amended
complaint in the consolidated action.
Australian Bank Bill Swap Reference Rate (BBSW)
In August 2017, a class action complaint was filed in the United States
District Court for the Southern District of New York (SDNY) against certain
NatWest Group companies (including NWM N.V.) and a number of other financial
institutions. The complaint alleged that the defendants conspired to
manipulate the BBSW and asserts claims under the U.S. antitrust laws, the
Commodity Exchange Act, RICO (Racketeer Influenced and Corrupt Organizations
Act), and the common law. In April 2022, the parties in this case finalised a
settlement agreement resolving the claims, which remains subject to court
approval. The settlement amount paid on behalf of NatWest Group companies was
covered by an existing provision held at NWM Plc.
FX litigation
In December 2021, a claim was issued in the Netherlands against NatWest Group
plc, NWM Plc and NWM N.V. by Stichting FX Claims, seeking a declaration from
the court that anti-competitive FX market conduct described in decisions of
the European Commission (EC) of 16 May 2019 is unlawful, along with
unspecified damages. The claimant has requested the court's permission to
amend its claim to also refer to a December 2021 decision by the EC, which
also described anti-competitive FX market conduct.
Anti-Terrorism Act litigation against NWM N.V.
NWM N.V. and certain other financial institutions are defendants in several
actions filed by a number of US nationals (or their estates, survivors, or
heirs), most of whom are or were US military personnel, who were killed or
injured in attacks in Iraq between 2003 and 2011. NWM Plc is also a defendant
in some of these cases.
According to the plaintiffs' allegations, the defendants are liable for
damages arising from the attacks because they allegedly conspired with Iran
and certain Iranian banks to assist Iran in transferring money to Hezbollah
and the Iraqi terror cells that committed the attacks, in violation of the US
Anti-Terrorism Act, by agreeing to engage in 'stripping' of transactions
initiated by the Iranian banks so that the Iranian nexus to the transactions
would not be detected.
The first of these actions was filed in the United States District Court for
the Eastern District of New York in November 2014. In September 2019, the
district court dismissed the case, finding that the claims were deficient for
several reasons, including lack of sufficient allegations as to the alleged
conspiracy and causation. The plaintiffs are appealing the decision to the US
Court of Appeals. Another action, filed in the SDNY in 2017, was dismissed in
March 2019 on similar grounds, but remains subject to appeal to the US Court
of Appeals. Other follow-on actions that are substantially similar to the two
that have now been dismissed are pending in the same courts.
Notes
10. Litigation and regulatory matters continued
Regulatory matters (including investigations)
NWM N.V. Group's financial condition can be affected by the actions of various
governmental and regulatory authorities in the Netherlands, the UK, the EU,
the US and elsewhere. NatWest Group has engaged, and will continue to engage,
in discussions with relevant governmental and regulatory authorities,
including in the Netherlands, the UK, the EU, the US and elsewhere, on an
ongoing and regular basis, and in response to informal and formal inquiries or
investigations, regarding operational, systems and control evaluations and
issues including those related to compliance with applicable laws and
regulations, including consumer protection, investment advice, business
conduct, competition/anti-trust, VAT recovery, anti-bribery, anti-money
laundering and sanctions regimes.
NWM Group companies have been providing information regarding a variety of
matters, including, for example, offering of securities, the setting of
benchmark rates and related derivatives trading, conduct in the foreign
exchange market, product mis-selling and various issues relating to the
issuance, underwriting, and sales and trading of fixed income securities,
including structured products and government securities, some of which have
resulted, and others of which may result, in investigations or proceedings.
Any matters discussed or identified during such discussions and inquiries may
result in, among other things, further inquiry or investigation, other action
being taken by governmental and regulatory authorities, increased costs being
incurred by NWM N.V. Group, remediation of systems and controls, public or
private censure, restriction of NWM N.V. Group's business activities and/or
fines. Any of these events or circumstances could have a material adverse
effect on NWM N.V. Group, its business, authorisations and licences,
reputation, results of operations or the price of securities issued by it, or
lead to material additional provisions being taken.
11. Related party transactions
NWM N.V. has a related party relationship with associates, joint ventures, key
management and shareholders. NWM N.V. enters into transactions with related
parties.
Interim pricing agreement
NWM N.V. is a party to transfer pricing arrangements with NWM Plc under which
NWM N.V. received income of €60 million (€76 million in H1 2021) for the
activities it now performs for European clients on behalf of NWM Plc. The at
arm's length nature of the transfer pricing arrangements is confirmed by
transfer pricing documentation which has been prepared by an external expert.
Business transfers
During H1 2022, €0.5 billion of contingent liabilities and commitments were
transferred from NatWest Bank Plc to NWM N.V. in relation to the Western
European Corporate Portfolio. As part of a larger initiative to increase the
size and diversity of its banking book portfolio €0.3 billion of contingent
liabilities and commitments and €0.1bn of drawn balances were transferred
from NatWest Bank Plc to NWM N.V..
Loan purchases via NWM Plc
In H1 2022 NWM N.V. continued purchasing loans from market participants via
NWM Plc onto the banking book as part of a larger initiative to increase size
and diversity of its banking book portfolio. As at 30 June 2022, the balance
of these loans purchased from market participants with assistance from NWM Plc
amounted to €230 million (31 December 2021 - €24 million).
Full details of the NWM N.V. Group's related party transactions for the year
ended 31 December 2021 are included in the NatWest Markets N.V. 2021 Annual
Report and Accounts.
12. Post balance sheet events
Other than as disclosed there have been no other significant events between 30
June 2022 and the date of approval of these accounts which would require a
change to or additional disclosure in the condensed consolidated financial
statements.
13. Date of approval
The interim results for the half year ended 30 June 2022 were approved by the
Supervisory Board on 28 July 2022.
NatWest Markets N.V. Summary Risk Factors
Summary of Principal Risks and Uncertainties
Set out below is a summary of the principal risks and uncertainties for the
remaining six months of the financial year which could adversely affect NWM
N.V. Group. This summary should not be regarded as a complete and
comprehensive statement of all potential risks and uncertainties; a fuller
description of these and other risk factors is included on pages 127 to 150 of
the NatWest Markets N.V. 2021 Annual Report and Accounts. Any of the risks
identified may have a material adverse effect on NWM N.V. Group's business,
operations, financial condition or prospects.
Economic and political risk
- NWM N.V. Group faces continued economic and political risks and
uncertainty in the UK, European and global markets, including as a result of
high inflation, rising interest rates, supply chain disruption and the Russian
invasion of Ukraine.
- The impact of the COVID-19 pandemic and related uncertainties
continue to affect the UK, Dutch, European and global economies and financial
markets and NWM N.V. Group's customers, as well as its competitive
environment, which may continue to have an adverse effect on NWM N.V. Group.
- Continuing uncertainty regarding the effects and extent of the
UK's post Brexit divergence from EU laws and regulation, and NWM N.V.'s post
Brexit EU operating model may continue to adversely affect NWM Plc (NWM N.V.'s
parent company) and its operating environment and NatWest Group plc (NWM
N.V.'s ultimate parent company) and may have an indirect effect on NWM N.V.
Group.
- Changes in interest rates have affected and will continue to
affect NWM N.V. Group's business and results.
- HM Treasury (or UKGI on its behalf) could exercise a significant
degree of influence over NatWest Group and NWM N.V. Group is ultimately
controlled by NatWest Group.
Strategic risk
- NWM Group (including NWM N.V. Group) has been in a period of
significant structural and other change, including as a result of NatWest
Group's purpose-led strategy (including the NWM Refocusing and NatWest Group's
recent creation of its Commercial & Institutional franchise, of which NWM
Group (including NWM N.V. Group) forms part) and may continue to be subject to
significant structural and other change. There is no certainty that the
intended benefits of any such change for NWM Group (including NWM N.V. Group)
will be realised within the timeline or in the manner currently contemplated,
or that NWM Group (or NWM N.V. Group) will meet its targets and expectations
as a result of such changes.
- Trends relating to the COVID-19 pandemic may adversely affect NWM
N.V. Group's strategy and impair its ability to meet its targets and strategic
objectives.
Financial resilience risk
- NWM Group, including NWM N.V. Group, may not meet the targets it
communicates, generate returns or implement its strategy effectively.
- NWM N.V. is NatWest Group's banking and trading entity located in
the Netherlands. NWM N.V. has repurposed its banking licence, and NWM N.V.
Group may be subject to further changes.
- NWM N.V. may not meet the prudential regulatory requirements for
capital and liquidity.
- NWM N.V. Group may not be able to adequately access sources of
liquidity and funding.
- NWM N.V. Group is reliant on access to the capital markets to meet
its funding requirements. The inability to do so may adversely affect NWM N.V.
Group.
- NWM N.V. may not manage its capital, liquidity or funding
effectively which could trigger the execution of certain management actions or
recovery options.
- Any reduction in the credit rating and/or outlooks assigned to
NatWest Group plc, any of its subsidiaries (including NWM Plc or NWM N.V.) or
any of their respective debt securities could adversely affect the
availability of funding for NWM N.V. Group, reduce NWM N.V. Group's liquidity
position and increase the cost of funding.
- NWM N.V. Group operates in markets that are highly competitive,
with increasing competitive pressures and technology disruption.
- NWM N.V. Group may be adversely affected if NatWest Group fails to
meet the requirements of regulatory stress tests.
- The effects of the COVID-19 pandemic could affect NWM N.V. 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.
- The impact of the COVID-19 pandemic on the credit quality of NWM
N.V. Group's counterparties may negatively impact NWM N.V. Group.
- NWM N.V. Group has significant exposure to counterparty and
borrower risk.
- NWM N.V. Group could incur losses or be required to maintain
higher levels of capital as a result of limitations or failure of various
models.
- NWM N.V. Group's financial statements are sensitive to underlying
accounting policies, judgments, estimates and assumptions.
- Changes in accounting standards may materially impact NWM N.V.
Group's financial results.
- NatWest Group (including NWM N.V.) may become subject to the
application of statutory stabilisation or resolution powers which may result
in, among other actions, the write-down or conversion of certain Eligible
Liabilities (including NWM N.V.'s Eligible Liabilities).
- NatWest Group is subject to Bank of England and PRA oversight in
respect of resolution. Following submission of a biennial assessment of
NatWest Group's preparations for resolution to the PRA, the Bank of England
has not identified any shortcomings, deficiencies or substantive impediments
associated with NatWest Group's ability to achieve resolvability outcomes, but
has highlighted two areas as requiring further enhancements. NatWest Group,
including NWM Group (and NWM N.V. Group), could be adversely affected should
future Bank of England assessments deem NatWest Group's preparations to be
inadequate.
NatWest Markets N.V. Summary Risk Factors
Summary of Principal Risks and Uncertainties continued
Climate and sustainability-related risks
- NWM N.V. Group and its customers, suppliers and counterparties
face significant climate-related risks, including in transitioning to a net
zero economy, which may adversely impact NWM N.V. Group.
- NatWest Group's purpose-led strategy includes climate change as
one of its three areas of focus and, following the passing of a 'Say on
Climate' resolution by NatWest Group's shareholders in April 2022, NatWest
Group is required to publish an initial climate transition plan in 2023.
NatWest Group's climate strategy and transition plan entails significant
execution and reputational risk and is unlikely to be achieved without
internal and external actions including significant government policy,
technology and customer changes.
- Any failure by NWM N.V. Group to prepare or execute a credible
transition plan or implement effective and compliant climate change resilient
systems, controls and procedures could adversely affect NWM N.V. Group's
reputation or its ability to manage climate-related risks.
- There are significant challenges in relation to climate related
data due to quality and other limitations, lack of consistency,
standardisation and incompleteness which amongst other factors contribute to
the significant uncertainties inherent in accurately modelling the impact of
climate related risks.
- A failure to adapt NWM N.V. Group's business strategy, governance,
procedures, systems and controls to manage emerging sustainability-related
risks and opportunities may have a material adverse effect on NWM N.V. Group,
its reputation, business, results of operations and outlook.
- Any reduction in the ESG ratings of NatWest Group or NWM Group
(including NWM N.V. Group) could have a negative impact on NatWest Group's or
NWM Group's (including NWM N.V. Group) reputation and on investors' risk
appetite and customers' willingness to deal with NatWest Group, NWM Group or
NWM N.V. Group.
- Increasing levels of climate, environmental and
sustainability-related laws, regulation and oversight may adversely affect NWM
N.V. Group's business and expose NWM N.V. Group to increased costs of
compliance, regulatory sanction and reputational damage.
- NWM N.V. Group may be subject to potential climate, environmental
and other sustainability-related litigation, enforcement proceedings,
investigations and conduct risk
Operational and IT resilience risk
- Operational risks (including reliance on third party suppliers and
outsourcing of certain activities) are inherent in NWM N.V. Group's
businesses.
- NWM N.V. Group is subject to increasingly sophisticated and
frequent cyberattacks.
- NWM N.V. Group operations and strategy are highly dependent on the
accuracy and effective use of data.
- NWM N.V. Group relies on attracting, retaining, developing and
remunerating diverse senior management and skilled personnel (such as market
trading specialists), and is required to maintain good employee relations.
- NWM N.V. Group's operations are highly dependent on its complex IT
systems (including those that enable remote working), IT infrastructure and
cloud platforms and any IT failure could adversely affect NWM N.V. Group.
- Remote working may adversely affect NWM N.V. Group's ability to
maintain effective internal controls.
- A failure in NWM N.V. Group's risk management framework could
adversely affect NWM N.V. Group, including its ability to achieve its
strategic objectives.
- NWM N.V. Group's operations are subject to inherent reputational
risk.
Legal, regulatory and conduct risk
- NWM N.V. Group's businesses are subject to substantial regulation
and oversight, which are constantly evolving and may adversely affect NWM N.V.
Group.
- NWM N.V. Group and NWM Plc are exposed to the risks of various
litigation matters, regulatory and governmental actions and investigations as
well as remedial undertakings, the outcomes of which are inherently difficult
to predict, and which could have an adverse effect on NWM N.V. Group.
- NWM N.V. Group may not effectively manage the transition of LIBOR
and other IBOR rates to alternative risk-free rates.
Additional information
Contact
Alexander Holcroft Investor Relations +44 (0) 20 7672 1758
Presentation of Information
NatWest Markets N.V. (NWM N.V.) is a wholly owned subsidiary of RBS Holdings
N.V. ('RBSH N.V.' or 'the intermediate holding company'). NWM N.V. Group
refers to NWM N.V. and its subsidiary and associated undertakings. The term
'RBSH Group' refers to RBSH N.V. and its only subsidiary, NWM N.V.. RBSH N.V.
is a wholly-owned subsidiary of NatWest Markets Plc (NWM Plc). The term 'NWM
Group' refers to NWM Plc and its subsidiary and associated undertakings.
NatWest Group plc is 'the ultimate holding company'. The term 'NatWest Group'
refers to NatWest Group plc and its subsidiary and associated undertakings.
NatWest Group plc is registered at 36 St Andrew Square, Edinburgh, Scotland.
NWM N.V. publishes its financial statements in 'euro', the European single
currency. The abbreviation '€' represents the 'euro', and the abbreviations
'€m' and '€bn' represent millions and thousands of millions of euros,
respectively, and references to 'cents' represent cents in the European Union
('EU'). The abbreviations '£m' and '£bn' represent millions and thousands of
millions of pounds sterling, respectively, and references to 'pence' represent
pence in the United Kingdom ('UK'). Reference to 'dollars' or '$' are to
United States of America ('US') dollars. The abbreviations '$m' and '$bn'
represent millions and thousands of millions of dollars, respectively, and
references to 'cents' represent cents in the US. The term 'EEA' refers to
European Economic Area.
Forward-looking statements
This document contains forward-looking statements within the meaning of the
United States Private Securities Litigation Reform Act of 1995, such as
statements that include, without limitation, the words 'expect', 'estimate',
'project', 'anticipate', 'commit', 'believe', 'should', 'intend', 'will',
'plan', 'could', 'probability', 'risk', 'Value-at-Risk (VaR)', 'target',
'goal', 'objective', 'may', 'endeavour', 'outlook', 'optimistic', 'prospects'
and similar expressions or variations on these expressions. These statements
concern or may affect future matters, such as NWM N.V. Group's future economic
results, business plans and current strategies. In particular, this document
may include forward-looking statements relating to NWM N.V. Group in respect
of, but not limited to: its economic and political risks, NWM N.V.'s
regulatory capital position and related requirements, its financial position,
profitability and financial performance (including financial, capital, cost
savings and operational targets), NWM Group's strategic and structural change
and the implementation of NatWest Group's purpose-led strategy, its ESG and
climate related targets, its access to adequate sources of liquidity and
funding, increasing competition from new incumbents and disruptive
technologies, the impact of the COVID-19 pandemic, its exposure to third party
risks and ensuring operational continuity in resolution, its credit exposures
under certain specified scenarios, substantial regulation and oversight,
ongoing legal, regulatory and governmental actions and investigations, the
transition of LIBOR and other IBOR rates to alternative risk free rates and
NWM N.V. Group's exposure to operational risk, conduct risk, cyber, data and
IT risk, financial crime risk, key person risk and credit rating risk.
Forward-looking statements are subject to a number of risks and uncertainties
that might cause actual results and performance to differ materially from any
expected future results or performance expressed or implied by the
forward-looking statements. Factors that could cause or contribute to
differences in current expectations include, but are not limited to: the
outcome of legal, regulatory and governmental actions and investigations,
legislative, political, fiscal and regulatory developments, accounting
standards, competitive conditions, technological developments, interest and
exchange rate fluctuations, general economic and political conditions, the
impact of climate related risks and the transitioning to a net zero economy
and the impact of the COVID-19 pandemic. These and other factors, risks and
uncertainties that may impact any forward-looking statement or the NWM N.V.
Group's actual results are discussed in NWM N.V. Group's 2021 Annual Report
and Accounts (ARA), NWM N.V.'s Interim Results for H1 2022 and other public
filings. The forward-looking statements contained in this document speak only
as of the date of this document and NWM N.V. Group does not assume or
undertake any obligation or responsibility to update any of the
forward-looking statements contained in this document, whether as a result of
new information, future events or otherwise, except to the extent legally
required.
Management's report on the interim financial statements
Pursuant to section 5:25d, paragraph 2(c), of the Dutch Financial Supervision
Act (Wet op het financieel toezicht (Wft)), the members of the Managing Board
state that to the best of their knowledge:
- the interim financial statements give a true and fair view, in all material
respects, of the assets and liabilities, financial position, and profit or
loss of NatWest Markets N.V. and the companies included in the consolidation
as at 30 June 2022 and for the six month period then ended.
- the interim report, for the six month period ending on 30 June 2022, gives a
true and fair view of the information required pursuant to section 5:25d,
paragraphs 8 and 9, of the Dutch Financial Supervision Act of NatWest Markets
N.V. and the companies included in the consolidation.
Amsterdam
28 July 2022
Cornelis Visscher
Chief Financial Officer
NatWest Group plc 2138005O9XJIJN4JPN90
NatWest Markets N.V. X3CZP3CK64YBHON1LE12
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