REG - NatWest Group plc - NWM NV H1 2023 Interim Management Statement
28/07/2023 07:00
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RNS Number : 4917H NatWest Group plc 28 July 2023
NatWest Markets N.V.
Interim Results 2023
NatWest Markets N.V.
Results for the half year ended 30 June 2023
Overview of the half year
In H1 2023, we have continued to focus on our strengths to support our
customers' evolving needs with financing and risk solutions. Our improved
connectivity as part of the NatWest Group Commercial & Institutional
segment is enabling us to unlock further opportunities for growth and to build
even deeper relationships with NatWest Group customers.
We have delivered a strong performance in the first half of the year and
maintained our robust 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 and higher interest rates
are having on our customers.
As of 30 June 2023, NWM N.V. surpassed a balance sheet total of €30 billion
at the regulatory consolidated level. By exceeding this threshold, NWM N.V.
will most likely qualify as a "significant institution" in the foreseeable
future, which may result in changes to supervision and regulations applicable
to it.
Climate and sustainable funding and financing have continued to perform well,
and as at the end of H1 2023 we had delivered €14.7 billion towards the
NatWest Group climate and sustainable funding and financing target((1)) of
£100 billion between 1 July 2021 and the end of 2025.
Management Board and Supervisory Board update
In March 2023, Anne Snel stepped down as Supervisory Board Member following
the conclusion of her term of appointment.
Outlook((2))
We retain the Outlook for the CET1 ratio and leverage ratio as set out in
NatWest Markets N.V. 2022 Annual Report and Accounts. NWM N.V. Group intends
to issue potentially up to €1 billion in 2023, subject to the evolution of
asset origination, through a mix of public benchmark transactions and private
placements.
(1) This comprises funding and financing for climate and
sustainable finance to support transition towards a net-zero and
climate-resilient economy. NatWest Group uses its climate and sustainable
funding and financing inclusion criteria (CSFFI criteria) to determine the
assets, activities and companies that are eligible to be counted towards its
climate and sustainable funding and financing targets.
(2) 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 of
NatWest Markets N.V. 2022 Annual Report and Accounts and the Summary Risk
Factors set out in this announcement for H1 2023. These statements constitute
forward-looking statements. Refer to Forward-looking statements in this
announcement.
Financial review
Profit for the period was €61 million compared with €11 million in H1
2022. The total increase of €50 million was mainly due to net interest
income of €50 million compared with a net interest expense of €1 million
in H1 2022 and an impairment release of €3 million compared with an
impairment loss of €7 million in H1 2022. This was partially offset by a
€10 million decrease in non-interest income from €105 million to €95
million.
Net interest income was a net income of €50 million compared with a net
expense of €1 million in H1 2022, primarily driven by rising interest rates
and by changes in the lending portfolio and the funding book in H1 2023 in
comparison with H1 2022.
Non-interest income decreased by €10 million to €95 million compared with
a gain of €105 million in H1 2022. Net fees and commissions of €99 million
(H1 2022 - €94 million) primarily related to transfer pricing income from
NWM Plc of €61 million (H1 2022 - €60 million) and syndicate fee income of
€39 million (H1 2022 - €34 million). Income from trading activities was a
loss of €5 million compared with a gain of €10 million in H1 2022. Other
operating income was a gain of €1 million in both H1 2023 and H1 2022.
Operating expenses were €82 million compared with €79 million in H1 2022.
Staff costs increased by €1 million to €40 million in H1 2023. Premises
and equipment costs were €3 million (H1 2022 - €3 million). Administrative
expenses increased by €3 million to €38 million, compared with €35
million in H1 2022. Depreciation and amortisation was €1 million (H1 2022 -
€2 million).
Impairments were a release of €3 million, compared with a loss of €7
million in H1 2022, mainly driven by improvements in economics and scenario
weightings which were partially offset by post model adjustments.
Tax charge was €5 million compared with a tax charge of €7 million in H1
2022, largely driven by the utilisation of deferred tax assets.
Total assets and total liabilities increased by €4.0 billion and €4.1
billion to €30.4 billion and €28.2 billion respectively at 30 June 2023,
compared with €26.4 billion and €24.1 billion at 31 December 2022.
- Cash and balances at central banks increased by €4.4 billion to
€8.3 billion at 30 June 2023, with the full balance placed with the Dutch
Central Bank.
- Trading assets decreased to €4.3 billion (31 December 2022 - €4.4
billion), driven by a decrease in collateral given of €0.5 billion,
partially offset by an increase in loans subject to reverse repurchase
agreements of €0.4 billion.
- Derivative assets decreased to €9.4 billion (31 December 2022 -
€12.3 billion) and derivative liabilities decreased to €8.1 billion (31
December 2022 - €11.1 billion), primarily reflecting lower fair values of
interest rate derivatives and FX derivatives.
- Settlement balance assets and liabilities were €2.4 billion (31
December 2022 - €0.7 billion) and €1.8 billion (31 December 2022 - €0.6
billion) respectively due to higher trading volume around June 2023 month end
compared to December 2022 month end.
- Loans to banks - amortised cost increased by €0.1 billion to €0.3
billion at 30 June 2023, mainly due to the increase in nostro balances.
- Loans to customers - amortised cost increased by €0.1 billion to
€1.1 billion, reflecting new deals.
- Amounts due from holding company and fellow subsidiaries increased to
€2.4 billion compared with €2.0 billion at 31 December 2022, mainly due to
an increase in settlement balances of €0.4 billion.
- Other financial assets increased by €0.4 billion to €2.1 billion,
reflecting an increase in debt securities of €0.5 billion, partially offset
by a decrease in treasury bills of €0.1 billion.
- Customer deposits increased from €1.0 billion to €6.3 billion, in
line with our strategy to increase customer deposits to match planned banking
book asset growth.
- Amounts due to holding companies and fellow subsidiaries increased by
€0.5 billion to €4.8 billion, mainly driven by an increase in settlement
balances of €0.8 billion, which was partially offset by a decrease in
trading liabilities of €0.3 billion.
- Trading liabilities increased to €4.5 billion (31 December 2022 -
€4.0 billion), primarily reflecting an increase in deposits subject to
repurchase agreements of €0.8 billion, partially offset by a decrease in
collateral received of €0.2 billion.
- Other financial liabilities decreased by €0.1 billion to €2.3
billion (31 December 2022 - €2.4 billion), largely driven by maturities in
the period, partially offset by new issuance.
- Subordinated liabilities decreased by €0.1 billion to €0.3 billion
primarily due to maturities.
- Equity attributable to controlling interests decreased by €62
million to €2.2 billion, mainly driven by ordinary dividends paid of €0.1
billion, dividends paid on AT1 capital securities of €11 million and cash
flow hedging movements of €11 million. This was partially offset by the
profit for the period of €61 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
2023 2022
Capital ratios % %
Common Equity Tier 1 (CET1) 20.4 21.0
Tier 1 23.6 24.0
Total 25.5 25.9
Risk-weighted assets €m €m
Credit risk 6,493 6,596
Market risk 1,134 1,116
Operational risk 332 354
Settlement risk - -
Total RWAs 7,959 8,066
Liquidity % %
Liquidity coverage ratio (LCR) 196 230
- The lower capital ratios are largely due to dividend payments in H1
2023.
- RWAs remained stable throughout H1 2023.
- The decrease in the LCR ratio is driven by an increase in short term
funding.
Condensed consolidated income statement for the period ended 30 June 2023
(unaudited)
Half year ended
30 June 30 June
2023 2022
€m €m
Interest receivable 145 24
Interest payable (95) (25)
Net interest income 50 (1)
Fees and commissions receivable 110 106
Fees and commissions payable (11) (12)
Income from trading activities (5) 10
Other operating income 1 1
Non-interest income 95 105
Total income 145 104
Staff costs (40) (39)
Premises and equipment (3) (3)
Other administrative expenses (38) (35)
Depreciation and amortisation (1) (2)
Operating expenses (82) (79)
Profit before impairment releases/losses 63 25
Impairment releases/(losses) 3 (7)
Operating profit before tax 66 18
Tax charge (5) (7)
Profit for the period 61 11
Attributable to:
Ordinary shareholders 50 4
AT1 capital securities 11 7
61 11
Condensed consolidated statement of comprehensive income
for the period ended 30 June 2023 (unaudited)
Half year ended
30 June 30 June
2023 2022
€m €m
Profit for the period 61 11
Items that do not qualify for reclassification
Changes in fair value of credit in financial liabilities designated at FVTPL (5) 59
FVOCI financial assets 1 (5)
(4) 54
Items that do qualify for reclassification
FVOCI financial assets 3 (8)
Cash flow hedges (11) -
Currency translation - (1)
(8) (9)
Other comprehensive (losses)/income after tax (12) 45
Total comprehensive income for the period 49 56
Attributable to:
Ordinary shareholders 38 49
AT1 capital securities 11 7
49 56
Condensed consolidated balance sheet as at 30 June 2023 (unaudited)
30 June 31 December
2023 2022
€m €m
Assets
Cash and balances at central banks 8,339 3,961
Trading assets 4,316 4,440
Derivatives 9,391 12,335
Settlement balances 2,401 739
Loans to banks - amortised cost 270 223
Loans to customers - amortised cost 1,147 1,024
Amounts due from holding company and fellow subsidiaries 2,391 1,951
Other financial assets 2,104 1,673
Other assets 83 90
Total assets 30,442 26,436
Liabilities
Bank deposits 147 150
Customer deposits 6,282 1,046
Amounts due to holding company and fellow subsidiaries 4,809 4,359
Settlement balances 1,812 608
Trading liabilities 4,486 3,998
Derivatives 8,081 11,114
Other financial liabilities 2,264 2,441
Subordinated liabilities 272 365
Other liabilities 60 64
Total liabilities 28,213 24,145
Total equity 2,229 2,291
Total liabilities and equity 30,442 26,436
Condensed consolidated statement of changes in equity
for the period ended 30 June 2023 (unaudited)
Half year ended
30 June 30 June
2023 2022
€m €m
Share capital and premium account - at beginning of period (1) 1,700 1,700
Share capital restructuring (2) (150) -
At end of period 1,550 1,700
AT1 capital securities - at beginning and end of period 250 250
FVOCI reserve - at beginning of period (11) 4
Unrealised gains/(losses) 4 (17)
Realised losses - 4
At end of period (7) (9)
Cash flow hedging reserve - at beginning of period (10) -
Amount recognised in equity (27) -
Amount transferred from equity to earnings 16 -
At end of period (21) -
Foreign exchange reserve - at beginning of period 6 13
Retranslation of net assets - (1)
At end of period 6 12
Retained earnings - at beginning of period 356 280
Profit attributable to ordinary shareholders and other equity owners 61 11
AT1 capital securities dividends paid (11) (7)
Ordinary dividends paid (100) -
Share capital restructuring (2) 150 -
Changes in fair value of credit in financial liabilities designated at FVTPL (5) 59
At end of period 451 343
Total equity at end of period 2,229 2,296
Attributable to:
Ordinary shareholders 1,979 2,046
AT1 capital securities 250 250
2,229 2,296
(1) Includes Ordinary share capital of €50,004 (2022 - €50,004).
(2) On 31 March 2023, after obtaining regulatory permission, NWM N.V. executed a
share capital restructuring, converting €150 million of share premium to
retained earnings.
Condensed consolidated cash flow statement for the period ended 30 June 2023
(unaudited)
Half year ended
30 June 30 June
2023 2022
€m €m
Operating activities
Operating profit before tax 66 18
Adjustments for non-cash and other items (32) (65)
Net cash flows from trading activities 34 (47)
Changes in operating assets and liabilities 6,339 (196)
Net cash flows from operating activities before tax 6,373 (243)
Income taxes paid (2) (2)
Net cash flows from operating activities 6,371 (245)
Net cash flows from investing activities (401) (345)
Net cash flows from financing activities (211) (23)
Effects of exchange rate changes on cash and cash equivalents 27 22
Net increase/(decrease) in cash and cash equivalents 5,786 (591)
Cash and cash equivalents at beginning of period 6,518 7,229
Cash and cash equivalents at end of period 12,304 6,638
Notes
1. Presentation of condensed consolidated financial statements
The condensed consolidated financial statements should be read in conjunction
with NatWest Markets N.V.'s 2022 Annual Report and Accounts. The accounting
policies are the same as those applied in the consolidated financial
statements.
The directors have prepared the condensed consolidated financial statements 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.
Amendments to IFRS effective from 1 January 2023 had no material effect on the
condensed consolidated financial statements.
2. Analysis of net fees and commissions
Half year ended
30 June 30 June
2023 2022
€m €m
Fees and commissions receivable
- Transfer pricing arrangements (Note 10) 61 60
- Underwriting fees 37 30
- Lending and financing 12 10
- Other - 6
Total 110 106
Fees and commissions payable (11) (12)
Net fees and commissions 99 94
3. Tax
The actual tax charge differs from the expected tax charge computed by
applying the statutory tax rate of the Netherlands of 25.8% (2022 - 25.8%) as
follows:
Half year ended
30 June 30 June
2023 2022
€m €m
Profit before tax 66 18
Expected tax charge (17) (5)
Foreign profits taxed at other rates (1) (1)
Losses brought forward and utilised 9 -
Tax on AT1 capital securities 3 2
Adjustments in respect to prior years 1 (3)
Actual tax charge (5) (7)
Deferred tax assets of €52 million recognised at 31 December 2022 have
decreased to €49 million at 30 June 2023 due to utilisations. NWM N.V. Group
has considered the carrying value of this asset as at 30 June 2023 and
concluded that it is recoverable based on future profit projections.
Notes
4. 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 2023 31 December 2022
Notional
GBP USD EUR Other Total Assets Liabilities Notional Assets Liabilities
€bn €bn €bn €bn €bn €m €m €bn €m €m
Gross exposure 7,393 5,909 8,993 8,135
IFRS offset (204) (204) (798) (798)
Carrying value 53 52 945 26 1,076 7,189 5,705 2,119 8,195 7,337
Of which:
Interest rate (1) 39 14 895 5 953 5,122 3,741 1,966 5,272 3,940
Exchange rate 14 38 49 21 122 2,065 1,958 152 2,922 3,394
Credit - - 1 - 1 2 6 1 1 3
Carrying value 1,076 7,189 5,705 2,119 8,195 7,337
Counterparty mark-to-market netting (3,011) (3,011) (3,752) (3,752)
Cash collateral (3,055) (1,815) (3,279) (2,348)
Securities collateral (732) (101) (646) (423)
Net exposure 391 778 518 814
Banks (2) 16 15 66 13
Other financial institutions (3) 165 338 166 357
Corporate (4) 210 400 273 432
Government (5) - 25 13 12
Net exposure 391 778 518 814
Europe 368 778 462 814
US 12 - 50 -
RoW 11 - 6 -
Net exposure 391 778 518 814
Asset quality of uncollateralised
derivative assets
AQ1-AQ4 361 468
AQ5-AQ10 30 50
Net exposure 391 518
(1) The notional amount of interest rate derivatives includes €828
billion (31 December 2022 - €1,865 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 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
5. 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
€m €m €m €m €m
Assets
Cash and balances at central banks 8,339 8,339
Trading assets 4,316 4,316
Derivatives 9,391 9,391
Settlement balances 2,401 2,401
Loans to banks - amortised cost 270 270
Loans to customers - amortised cost 1,147 1,147
Amounts due from holding companies and fellow subsidiaries 1,494 887 10 2,391
Other financial assets 1 989 1,114 2,104
Other assets 83 83
30 June 2023 15,202 989 14,158 93 30,442
Cash and balances at central banks 3,961 3,961
Trading assets 4,440 4,440
Derivatives 12,335 12,335
Settlement balances 739 739
Loans to banks - amortised cost 223 223
Loans to customers - amortised cost 1,024 1,024
Amounts due from holding companies and fellow subsidiaries 1,406 535 10 1,951
Other financial assets 1 1,309 363 1,673
Other assets 90 90
31 December 2022 18,182 1,309 6,845 100 26,436
Held-for- Amortised Other
trading DFV cost liabilities Total
€m €m €m €m €m
Liabilities
Bank deposits 147 147
Customer deposits 6,282 6,282
Amounts due to holding companies and fellow subsidiaries 2,565 2,222 22 4,809
Settlement balances 1,812 1,812
Trading liabilities 4,486 4,486
Derivatives 8,081 8,081
Other financial liabilities 291 1,973 2,264
Subordinated liabilities 252 20 272
Other liabilities 10 50 60
30 June 2023 15,132 543 12,466 72 28,213
Bank deposits 150 150
Customer deposits 1,046 1,046
Amounts due to holding companies and fellow subsidiaries 2,857 1,480 22 4,359
Settlement balances 608 608
Trading liabilities 3,998 3,998
Derivatives 11,114 11,114
Other financial liabilities 370 2,071 2,441
Subordinated liabilities (1) 251 114 365
Other liabilities (2) 8 56 64
31 December 2022 17,969 621 5,477 78 24,145
(1) The cumulative own credit adjustment, representing an increase of
the subordinated liability value, was €6 million (31 December 2022 - €38
million).
(2) Includes lease liabilities of €8 million (31 December 2022 -
€7 million), held at amortised cost.
Notes
5. Financial instruments - classification continued
NWM N.V. Group's financial assets and liabilities include amounts due from/to
holding companies and fellow subsidiaries as below:
30 June 2023 31 December 2022
Holding Fellow Holding Fellow
companies subsidiaries Total companies subsidiaries Total
€m €m €m €m €m €m
Assets
Trading assets 1,494 - 1,494 1,406 - 1,406
Loans to banks - amortised cost 69 268 337 358 15 373
Loans to customers - amortised cost 20 - 20 21 - 21
Settlement balances 515 15 530 141 - 141
Other assets 10 - 10 10 - 10
Amounts due from holding companies and fellow
subsidiaries 2,108 283 2,391 1,936 15 1,951
Derivatives (1) 2,202 - 2,202 4,140 - 4,140
Liabilities
Trading liabilities 2,565 - 2,565 2,857 - 2,857
Bank deposits - amortised cost 1,060 - 1,060 1,102 - 1,102
Other financial liabilities - subordinated liabilities 150 - 150 150 - 150
Settlement balances 1,011 - 1,011 222 4 226
Other liabilities 9 14 23 9 15 24
Amounts due to holding companies and fellow
subsidiaries 4,795 14 4,809 4,340 19 4,359
Derivatives (1) 2,376 - 2,376 3,777 - 3,777
(1) Intercompany derivatives are included within derivative
classification on the balance sheet.
Notes
5. 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 2022 Annual Report and Accounts. Valuation, sensitivity
methodologies and input methodologies at 30 June 2023 are consistent with
those described in Note 8 to NWM N.V.'s 2022 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 2023 31 December 2022
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 - 4,301 15 4,316 - 4,403 37 4,440
Derivatives - 9,340 51 9,391 - 12,279 56 12,335
Amounts due from holding companies and
fellow subsidiaries - 1,494 - 1,494 - 1,406 - 1,406
Other financial assets
Loans - - 30 30 - - 30 30
Securities 710 247 3 960 982 295 3 1,280
Total financial assets held at fair value 710 15,382 99 16,191 982 18,383 126 19,491
As % of total fair value assets 4% 95% 1% 5% 94% 1%
Liabilities
Amounts due to holding companies and
fellow subsidiaries - 2,565 - 2,565 - 2,857 - 2,857
Trading liabilities
Deposits - 4,468 - 4,468 - 3,930 - 3,930
Short positions - 18 - 18 51 17 - 68
Derivatives - 7,861 220 8,081 - 10,938 176 11,114
Other financial liabilities
Debt securities in issue - 83 - 83 - 54 - 54
Deposits - 208 - 208 - 316 - 316
Subordinated liabilities - 252 - 252 - 251 - 251
Total financial liabilities held at fair value - 15,455 220 15,675 51 18,363 176 18,590
As % of total fair value liabilities - 99% 1% 0% 99% 1%
(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
5. 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 2023 31 December 2022
Level 3 Favourable Unfavourable Level 3 Favourable Unfavourable
€m €m €m €m €m €m
Assets
Trading assets
Loans 15 - - 37 - -
Derivatives 51 - - 56 - -
Other financial assets
Loans 30 - - 30 - -
Securities 3 - - 3 - -
Total financial assets held at fair value 99 - - 126 - -
Liabilities
Derivatives 220 10 (10) 176 10 (10)
Total financial liabilities held at fair value 220 10 (10) 176 10 (10)
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 2023 Half year ended 30 June 2022
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 93 33 126 176 174 - 174 60
Amount recorded in the income statement (3) (1) - (1) (8) (23) - (23) 34
Level 3 transfers in - - - 2 - - - 1
Level 3 transfers out (28) - (28) (2) - - - (1)
Purchases/originations 10 - 10 61 95 3 98 35
Settlements/other decreases - - - - (9) - (9) (6)
Sales (8) - (8) (8) (73) - (73) (13)
Foreign exchange and other - - - (1) (1) - (1) -
At 30 June 66 33 99 220 163 3 166 110
Amounts recorded in the income statement in
respect of balances held at year end
- unrealised (1) - (1) (8) (23) - (23) 34
(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 €7 million net gains on trading assets and
liabilities (30 June 2022 - €57 million net losses) recorded in income from
trading activities.
Notes
5. 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 2023 €m €m €m €m €m
Financial assets
Cash and balances at central banks 8,339
Settlement balances 2,401
Loans to banks 3 267 267 115 152
Loans to customers 1,147 1,133 - 1,133
Amounts due from holding companies and fellow
subsidiaries 530 357 357 - 357
Other financial assets 1,114 1,108 - 1,108
31 December 2022
Financial assets
Cash and balances at central banks 3,961
Settlement balances 739
Loans to banks 41 182 182 79 103
Loans to customers 1,024 989 - 989
Amounts due from holding companies and fellow
subsidiaries 142 393 393 - 393
Other financial assets 363 411 - 411
30 June 2023
Financial liabilities
Bank deposits 2 145 145 - 145
Customer deposits 19 6,263 6,263 - 6,263
Amounts due to holding companies and fellow
subsidiaries 1,031 1,191 1,193 152 1,041
Settlement balances 1,812
Other financial liabilities 1,973 1,972 858 1,114
Subordinated liabilities 20 17 17 -
31 December 2022
Financial liabilities
Bank deposits - 150 150 - 150
Customer deposits 7 1,039 1,039 - 1,039
Amounts due to holding companies and fellow
subsidiaries 317 1,163 1,165 152 1,013
Settlement balances 608
Other financial liabilities 2,071 2,073 1,076 997
Subordinated liabilities 114 120 120 -
The assumptions and methodologies underlying the calculation of fair values of
financial instruments at the balance sheet date are as follows:
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. The
remaining population, is valued using discounted cash flows at current offer
rates.
Bank and customer deposits
Fair values of deposits are estimated using contractual cashflows using a
market discount rate incorporating the current spread.
Notes
6. Trading assets and liabilities
Trading assets and liabilities comprise assets and liabilities held at fair
value in trading portfolios.
30 June 31 December
2023 2022
€m €m
Assets
Loans
Reverse repos 2,245 1,849
Collateral given 2,043 2,539
Other loans 28 52
Total 4,316 4,440
Liabilities
Deposits
Repos 1,188 425
Collateral received 3,279 3,503
Other deposits 1 2
Total deposits 4,468 3,930
Short positions 18 68
Total 4,486 3,998
Notes
7. Loan impairment provisions
Economic loss drivers
Introduction
The portfolio segmentation and selection of economic loss drivers for IFRS 9
follows 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 variables (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 2023, 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 the current
risks faced by the economy, particularly related to persistently high
inflation and interest rate environment, resulting in a fall in real household
income, economic slowdown, a rise in unemployment and asset price declines.
For 30 June 2023, 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, asset price
declines and the degree of permanent damage to the economy, around which there
remains pronounced levels of uncertainty.
Upside - This scenario assumes robust growth as inflation falls sharply and
rates are lowered. Consumer spending is supported by savings built up since
COVID-19 and further helped by fiscal support and strong business investment.
The labour market remains resilient, with the unemployment rate remaining
below pre-COVID-19 levels.
Base case - In the midst of high inflation and significant monetary policy
tightening, economic growth remains muted. However, recession is avoided. The
unemployment rate rises modestly but job losses are contained. Inflation
moderates over the medium-term and falls to the target level of 2%.
Since 31 December 2022, the economic outlook has improved as energy prices
fell sharply and the labour market remained resilient. However, the inflation
outlook remains elevated due to higher core inflation pressure. As a result,
interest rates need to rise higher than assumed previously. The base case now
assumes muted growth in 2023 as opposed to a mild recession assumed
previously. The unemployment rate still rises but the peak is lower,
reflecting the labour market's recent resilience.
Downside - Inflation remains persistently high. The economy experiences a
recession as consumer confidence weakens due to a fall in real income.
Interest rates are raised higher than the base case and remain elevated for
longer. High rates are assumed to have a more significant impact on the labour
market. Unemployment remains higher than the base case scenario.
The previous year's downside scenario also included a deep recession and
labour market deterioration, but the current downside scenario explores these
risks in a persistently high inflation, high rates environment.
Extreme downside - This scenario assumes high and persistent inflation.
Households see the highest recorded decline in real income. Interest rates
rise to levels last observed in early 2000s. Resulting economic recession is
deep and leads to widespread job losses. Unemployment rate rises to a level
above that observed in the aftermath of the sovereign debt crisis.
The main macroeconomic variables for each of the four scenarios used for
expected credit loss (ECL) modelling are set out in the main macroeconomic
variables table below.
Main macroeconomic variables
30 June 2023 31 December 2022
Extreme Weighted Extreme Weighted
Upside Base case Downside downside average Upside Base case Downside downside average
Five-year summary % % % % % % % % % %
GDP - CAGR 2.4 1.5 1.0 (0.3) 1.3 2.4 1.7 0.8 - 1.4
Unemployment - average 6.0 6.8 7.4 10.6 7.3 6.8 7.0 8.1 9.9 7.7
European Central Bank
- main refinancing rate - average 3.3 3.5 3.5 4.3 3.6 2.7 2.9 1.3 3.7 2.6
Probability weight 19.5 45.0 21.5 14.0 18.6 45.0 20.8 15.6
(1) The five year summary runs from 2023-2027 for 30 June 2023.
(2) Comparatives have been aligned with the current calculation
approach.
Notes
7. Loan impairment provisions continued
Probability weightings of scenarios
NWM N.V. Group's quantitative 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. This quantitative approach is used for 30 June 2023.
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.
Probability weight for base case is set first based on judgment, while
probability weights for the alternate scenarios are assigned based on these
percentiles scores.
The assigned probability weights were judged to be aligned with the subjective
assessment of balance of the risks in the economy. The weights were broadly
comparable to those used at 31 December 2022. Since then, the outlook has
improved across key areas of the economy. However, the risks still remain
elevated and there is considerable uncertainty in the economic outlook,
particularly with respect to persistence and the range of outcomes on
inflation. Given that backdrop, NWM N.V. Group judges it appropriate that
downside-biased scenarios have higher probability weights than the
upside-biased scenario. It presents good coverage to the range of outcomes
assumed in the scenarios, including the potential for a robust recovery on the
upside and exceptionally challenging outcomes on the downside. A 19.5%
weighting was applied to the upside scenario, a 45.0% weighting applied to the
base case scenario, a 21.5% weighting applied to the downside scenario and a
14.0% weighting applied to the extreme downside scenario.
Notes
7. Loan impairment provisions continued
Economic loss drivers
Annual figures
Extreme Weighted
Upside Base case Downside downside average
Eurozone - GDP - annual growth % % % % %
2023 1.9 0.8 0.5 - 0.8
2024 4.7 1.6 (0.6) (4.0) 1.0
2025 2.3 1.9 1.9 0.6 1.8
2026 1.8 1.8 1.8 1.0 1.7
2027 1.3 1.4 1.4 1.0 1.3
2028 1.1 1.3 1.3 1.0 1.2
Extreme Weighted
Upside Base case Downside downside average
Eurozone - unemployment rate - annual average % % % % %
2023 6.7 6.8 6.9 7.4 6.9
2024 6.0 6.9 7.7 11.8 7.6
2025 5.7 6.8 7.7 12.4 7.5
2026 5.7 6.7 7.5 11.4 7.3
2027 5.7 6.6 7.2 10.2 7.1
2028 5.7 6.6 7.0 9.2 6.9
Extreme Weighted
Upside Base case Downside downside average
European Central Bank - main refinancing rate - annual average % % % % %
2023 3.6 3.7 3.7 3.9 3.7
2024 3.6 4.0 3.8 5.2 4.1
2025 3.1 3.5 3.4 4.8 3.6
2026 3.0 3.1 3.3 4.2 3.3
2027 3.0 3.0 3.3 3.5 3.1
2028 3.0 3.0 3.3 3.0 3.1
Worst points
30 June 2023 31 December 2022
Extreme Extreme
Downside downside Downside downside
Eurozone % Quarter % Quarter % Quarter % Quarter
GDP (0.8) Q2 2024 (4.7) Q2 2024 (3.5) Q4 2023 (4.3) Q4 2023
Unemployment rate (peak) 7.8 Q2 2024 12.5 Q1 2025 9.0 Q3 2024 11.9 Q4 2024
(1) Unless specified otherwise, the figures show falls relative to the
starting period. The calculations are performed over five years, with a
starting point of Q4 2022 for 30 June 2023 scenarios.
(2) Comparatives have been aligned with the current calculation
approach.
Use of the scenarios in lending
The lending scenario methodology is based on the concept of credit cycle
indices (CCIs). The CCIs represent all relevant economic drivers for a
region/industry segment aggregated into a single index value that describes
the credit conditions in the respective segment relative to its long-run
average. A CCI value of zero corresponds to credit conditions at long-run
average levels, a positive CCI value corresponds to credit conditions below
long run average levels and a negative CCI value corresponds to credit
conditions above long-run average levels.
The individual economic scenarios are translated into forward-looking
projections of CCIs using a set of econometric models. Subsequently the CCI
projections for the individual scenarios are averaged into a single central
CCI projection according to the given scenario probabilities. The central CCI
projection is then extended with an additional mean reversion assumption to
gradually revert to the long-run average CCI value of zero in the outer years
of the projection horizon.
Finally, ECL is calculated using a Monte Carlo approach by averaging PD and
LGD values arising from many CCI paths simulated around the central CCI
projection.
Economic uncertainty
The high inflation environment alongside rapidly rising interest rates and
supply chain disruption are presenting significant headwinds for some
businesses and consumers. 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 2024. NWM N.V. Group has considered where these are most
likely to affect the customer base, with the rising cost of borrowing during
2023 for both businesses and consumers presenting an additional affordability
challenge for many borrowers in recent months.
The effects of these risks are not expected to be fully captured by
forward-looking credit modelling, particularly given the unique high inflation
environment, 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.
Notes
7. Loan impairment provisions continued
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 model
monitoring and similar analyses indicates that model adjustments will be
required to ensure ECL adequacy. As a consequence, an estimate of the ECL
impact is recorded 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 high inflation and rapidly rising interest rates
as well as supply chain disruption. In all cases, management judged that
additional ECL was required until further credit performance data became
available as the observable effects of these issues crystallise.
- Other adjustments - ECL adjustments where it was judged that the
modelled ECL required amendment.
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 (both commercial and consumer) that are likely to be
more susceptible to high inflation, rapidly rising interest rates and supply
chain disruption, where risks may not be fully captured by the models. There
were €2 million post model adjustments at H1 2023 (31 December 2022 - nil).
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 conditions into ECL to meet the measurement
objective of IFRS 9. The ECL provision is sensitive to the model inputs and
economic assumptions underlying the estimate.
The impact arising from the base case, upside, downside and extreme downside
scenarios was 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 were applied to all modelled portfolios in the analysis below,
with the simulation impacting both PDs and LGDs. Post model adjustments
included in the ECL estimates that were modelled were sensitised in line with
the modelled ECL movements, but those that were judgmental in nature,
primarily those for deferred model calibrations and economic uncertainty, were
not (refer to the Governance and post model adjustments section). As expected,
the scenarios create differing impacts on ECL by portfolio and the impacts are
deemed reasonable. In this simulation, it is assumed that existing modelled
relationships between key economic variables and loss drivers hold, but in
practice other factors would also have an impact, for example, potential
customer behaviour changes and policy changes by lenders that might impact on
the wider availability of credit.
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 2023. Scenario impacts on 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 were not considered in this analysis.
NWM N.V. Group's core criterion to identify a SICR is founded on PD
deterioration. 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
- The changes in the economic outlook and scenarios used in the IFRS
9 MES framework at 30 June 2023 resulted in a decrease in modelled ECL. Given
that continued uncertainty remains due to high inflation, rapidly rising
interest rates and supply chain disruption, NWM N.V. Group utilised a
framework of quantitative and qualitative measures to support the levels of
ECL coverage, including economic data, credit performance insights, supply
chain contagion analysis and problem debt trends. This was particularly
important for consideration of post model adjustments.
- As the effects of high inflation, rapidly rising interest rates
and supply chain disruption evolve during 2023 and into 2024, there is a risk
of credit deterioration. However, the income statement effect of this should
have been mitigated by the forward-looking provisions retained on the balance
sheet at 30 June 2023.
- 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 which could impact the IFRS 9 models, include an adverse deterioration
in GDP and unemployment in the economies in which NWM N.V. Group operates.
Notes
7. 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
2023 2022
€m €m
Loans - amortised cost and fair value through other comprehensive income
(FVOCI)
Stage 1 1,275 944
Stage 2 176 303
Inter-Group (1) 357 393
Total 1,808 1,640
ECL provisions
Stage 1 5 6
Stage 2 3 5
Total 8 11
ECL provisions coverage (2)
Stage 1 (%) 0.39 0.64
Stage 2 (%) 1.70 1.65
Total 0.55 0.88
Other financial assets - gross exposure 10,370 5,564
Other financial assets - ECL provision 1 1
Half year ended
30 June 30 June
2023 2022
€m €m
Impairment losses
ECL (release)/charge - third party (3) (3) 7
Amounts written-off 1 43
(1) NWM N.V. Group's intercompany assets were classified in Stage
1. The ECL for these loans was €0.1 million (31 December 2022 - €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 €0.4 million (30 June 2022 - €0.1 million)
related to other financial assets and nil (30 June 2022 - 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
2022 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 €8.3 billion (31 December 2022 - €4.0 billion) and debt
securities of €2 billion (31 December 2022 - €1.6 billion).
Notes
7. 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 2023 €m €m €m €m €m €m €m €m €m €m
Property 49 2 - 51 203 - - - - -
Financial institutions 676 5 - 681 733 508 1 - - 1
Corporate 550 169 - 719 6,234 - 4 3 - 7
Of which:
Agriculture 1 - - 1 - - - - - -
Airlines and aerospace - 1 - 1 187 - - - - -
Automotive 2 - - 2 635 - - - - -
Chemicals 11 - - 11 74 - - - - -
Health 22 1 - 23 - - - - - -
Industrials 178 62 - 240 273 - - 1 - 1
Land transport and logistics 12 58 - 70 362 - - - - -
Leisure 1 - - 1 - - - - - -
Oil and gas 3 - - 3 304 - - - - -
Power Utilities 122 - - 122 2,999 - - - - -
Retail - - - - 452 - - - - -
Shipping 2 - - 2 - - - - - -
Water and waste 4 - - 4 58 - - - - -
Total 1,275 176 - 1,451 7,170 508 5 3 - 8
31 December 2022
Property 15 115 - 130 208 - - 1 - 1
Financial institutions 535 6 - 541 936 508 1 - - 1
Corporate 394 182 - 576 6,731 - 5 4 - 9
Of which:
Agriculture - 2 - 2 - - - - - -
Airlines and aerospace - 1 - 1 183 - - - - -
Automotive 2 - - 2 644 - - - - -
Chemicals 15 - - 15 72 - - - - -
Health 22 2 - 24 - - - - - -
Industrials 38 63 - 101 289 - 1 - - 1
Land transport and logistics 20 59 - 79 353 - - 1 - 1
Leisure 1 - - 1 - - - - - -
Oil and gas 4 - - 4 545 - - - - -
Power Utilities 108 - - 108 2,897 - 1 - - 1
Retail - - - - 486 - - - - -
Shipping 2 - - 2 - - - - - -
Water and waste 4 - - 4 286 - - - - -
Total 944 303 - 1,247 7,875 508 6 5 - 11
Notes
7. 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 effect 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
€m €m €m €m €m €m €m €m
At 1 January 2023 7,179 6 303 5 - - 7,482 11
Currency translation and other adjustments 4 1 - (1) - - 4 -
Inter group transfers - - - - - - - -
Transfers from Stage 1 to Stage 2 (52) (1) 52 1 - - - -
Transfers from Stage 2 to Stage 1 170 2 (170) (2) - - - -
Net re-measurement of ECL on stage transfer (1) 1 - -
Changes in risk parameters (model inputs) (2) - - (2)
Other changes in net exposure 1,548 - (33) - - - 1,515 -
Other Profit or loss only items - - (1) (1)
Income statement (releases)/charges (3) 1 (1) (3)
Amounts written-off - - (1) (1) - - (1) (1)
At 30 June 2023 8,849 5 151 3 - - 9,000 8
Net carrying amount 8,844 148 - 8,992
At 1 January 2022 6,937 - 46 1 39 39 7,022 40
2022 movements (45) 5 184 2 (39) (39) 100 (32)
At 30 June 2022 6,892 5 230 3 - - 7,122 8
Net carrying amount 6,887 227 - 7,114
(1) The table above excludes inter-Group.
- The ECL release from changes in IFRS 9 multiple economic scenarios
probability weights was partially offset by post model adjustments in relation
to longer inflation and rising interest rates. The post model adjustments were
partially realised through PD degradation assumptions which in turn also drove
the transfers into Stage 2.
- The remaining post model adjustments were related to increased cost,
refinancing and assumptions around liquidity.
- The credit portfolio overall continues to be biased strongly to
investment grade credit and regulated sectors.
Notes
8. Contingent liabilities and commitments
The amounts shown in the table below are intended only to provide an
indication of the volume of business outstanding at 30 June 2023. Although NWM
N.V. Group is exposed to credit risk in the event of non-performance of the
obligations undertaken by customers, the amounts shown do not, and are not
intended to, provide any indication of NWM N.V. Group's expectation of future
losses.
30 June 31 December
2023 2022
€m €m
Contingent liabilities and commitments
Guarantees 508 508
Standby facilities, credit lines and other commitments 7,189 7,901
Total 7,697 8,409
Commitments and contingent obligations are subject to NWM N.V. Group's normal
credit approval processes.
Included within guarantees and assets pledged as collateral security as at 30
June 2023 is €0.5 billion (31 December 2022 - €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 2023, the deposits amounted
to €0.9 billion and the guarantee fees in the period were €2.7 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 2023 the exposure at
default covered by the guarantees was approximately €0.2 billion (of which
€31 million was cash collateralised). Fees of €0.8 million in relation to
the guarantees were recognised in the period.
9. 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 in respect of any such
Matter.
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
9. 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 97 to 101 of NatWest
Group's H1 Results 2023. 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
bankrupt 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 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 and such motion was denied in March 2023. As a result, the
case is now expected to enter the discovery phase.
FX litigation
In December 2021, a claim was filed in the Netherlands against NatWest Group
plc, NWM Plc and NWM N.V. by Stichting FX Claims on behalf of a number of
claimants, 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 claimants amended
their claim to also refer to a December 2021 decision by the EC, which
described anti-competitive FX market conduct. The defendants contested the
jurisdiction of the Dutch court. In March 2023, the district court in
Amsterdam accepted that it has jurisdiction to hear claims against NWM N.V.
but refused jurisdiction to hear any claims against the other defendant banks
(including NatWest Group plc and NWM Plc) unless the claimants are domiciled
in the Netherlands. Certain of the claimants are so domiciled and are
therefore permitted to continue with their claims against all defendants,
including NatWest Group plc and NWM Plc. The claimants are appealing that
decision. In June 2023, a new group of claimants indicated their intention to
join Stichting FX Claims to pursue similar claims against the defendants.
US Anti-Terrorism Act litigation
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 and/or
aided and abetted 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, alleging conspiracy claims but not aiding and
abetting claims, 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. In January 2023, the US Court of Appeals affirmed the district
court's dismissal of this case. It is anticipated that the plaintiffs will
file a motion to re-open the case to assert aiding and abetting claims that
they previously did not assert. Another action, filed in the United States
District Court for the Southern District of New York (SDNY) in 2017, which
asserted both conspiracy and aiding and abetting claims, was dismissed by the
SDNY in March 2019 on similar grounds as the first case, but remains subject
to appeal to the US Court of Appeals. Other follow-on actions that are
substantially similar to those described above are pending in the same courts.
Notes
9. 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.
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.
10. 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 €61 million (€60 million in H1 2022) for
business interactions with 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 and loan portfolio transfers
During H1 2023, drawn balances of €18 million were transferred from NWM N.V.
to NatWest Bank Europe GmbH and contingent liabilities and commitments of
€10 million were transferred from NWM N.V. to NatWest Bank Plc and NatWest
Bank Europe GmbH. Additionally drawn balances of €20 million were
transferred from NWM N.V. to NatWest Bank Plc and €4 million were
transferred vice versa.
Full details of the NWM N.V. Group's related party transactions for the year
ended 31 December 2022 are included in the NatWest Markets N.V. 2022 Annual
Report and Accounts.
11. Post balance sheet events
Other than as disclosed in this document there have been no significant events
between 30 June 2023 and the date of approval of this announcement which would
require a change to, or additional disclosure in, the announcement.
12. Date of approval
The interim results for the half year ended 30 June 2023 were approved by the
Supervisory Board on 27 July 2023.
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 138 to 161 of
the NatWest Markets N.V. 2022 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, its customers and its counterparties face
continued economic and political risks and uncertainties in the UK, European
and global markets, including as a result of high inflation and rising
interest rates, supply chain disruption and the Russian invasion of Ukraine.
- 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 and NatWest Group's recent creation of its
C&I business segment (of which NWM Group forms part) and may continue to
be subject to significant structural and other change.
Financial resilience risk
- 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 Group, including NWM N.V. Group, may not meet the targets it
communicates, generate returns or implement its strategy effectively.
- 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.
- 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, for example, 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, and NWM N.V. Group could be adversely affected should
the Bank of England in the future 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 and sustainability-related risks, which may adversely
affect NWM N.V. Group.
- 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.
- 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.
- 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 NWM N.V. Group's ability to manage those
risks.
- Increasing levels of climate, environmental, human rights and
other sustainability-related laws, regulation and oversight which are
constantly evolving may adversely affect NWM N.V. Group.
- NWM N.V. Group may be subject to potential climate, environmental,
human rights and other sustainability-related litigation, enforcement
proceedings, investigations and conduct risk.
- A 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's) reputation and on investors' risk
appetite and customers' willingness to deal with NatWest Group, NWM Group or
NWM N.V. Group.
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, and any IT failure could adversely affect NWM N.V. Group.
- 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 risk 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 replacement risk-free rates.
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 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 (including due to high
inflation, supply chain disruption and the Russian invasion of Ukraine), its
regulatory capital position and related requirements, its financial position,
profitability and financial performance (including financial, capital, cost
savings and operational targets), the NWM Group's strategy and
implementation of NatWest Group's purpose-led strategy and NatWest Group's
recent creation of its Commercial & Institutional franchise (of which NWM
Group forms part), its ESG and climate related targets, its access to adequate
sources of liquidity and funding, increasing competition from new incumbents
and disruptive technologies, 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 replacement risk free rates and NWM N.V. Group's
exposure to operational risk, conduct risk, financial crime risk, cyber, data
and IT 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. 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 2022 Annual Report
and Accounts (ARA), NWM N.V.'s Interim Results for H1 2023, 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 2023 and for the six month period then ended.
- the interim report, for the six month period ending on 30 June 2023, 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
27 July 2023
Cornelis Visscher
Chief Financial Officer
NatWest Group plc 2138005O9XJIJN4JPN90
NatWest Markets N.V. X3CZP3CK64YBHON1LE12
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