NatWest Group plc (formerly The Royal Bank of Scotland Group plc) — 2019 Form 20-F Summary
Business context and reporting period
The filing is an annual report for the year ended 31 December 2019, prepared under IFRS as issued by the IASB. The group provides personal, commercial, private, international and markets banking services, primarily in the UK and Republic of Ireland. The company announced plans to rename the parent company NatWest Group plc during 2020.
Business Banking was transferred into Commercial Banking from 1 January 2019, and comparative segment information was restated. The UK ring-fencing structure was operational throughout 2019, with most UK and Irish banking activities held within NatWest Holdings.
Financial performance, liquidity and capital
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total income | £14.253bn | £13.402bn | +6.3% |
| Net interest income | £8.047bn | £8.656bn | -7.0% |
| Non-interest income | £6.206bn | £4.746bn | +30.8% |
| Operating expenses | £9.325bn | £9.645bn | -3.3% |
| Impairment losses | £696m | £398m | +£298m |
| Operating profit before tax | £4.232bn | £3.359bn | +26.0% |
| Profit attributable to ordinary shareholders | £3.133bn | £1.622bn | +93.2% |
| Basic earnings per share | 26.0p | 13.5p | +12.5p |
| Return on tangible equity | 9.4% | 4.8% | +4.6 percentage points |
| Cost:income ratio | 65.1% | 71.7% | -6.6 percentage points |
| Net interest margin | 1.79% | 1.98% | -19 basis points |
Reported income benefited from a £444m Alawwal Bank/Saudi British Bank merger gain, £1.459bn of foreign-exchange recycling gains and a £256m legacy liability release. Excluding notable items, income decreased by £813m, or 6.3%, reflecting margin pressure, lower NatWest Markets income and higher Treasury funding costs.
- Balance sheet: Total assets were £723.0bn, up 4% from £694.2bn. Customer loans at amortised cost rose 7% to £326.9bn, while customer deposits increased 2% to £369.2bn.
- Credit: Gross loans within the IFRS 9 framework were £340.0bn and ECL provisions were £3.8bn. The ECL loss rate increased to 20 basis points from 12 basis points but remained below management’s 30–40 basis-point long-term assumption.
- Capital: The CET1 ratio was 16.2%, unchanged from 2018 despite £2.7bn of shareholder distributions and a £0.4bn post-tax pension contribution charge. Total RWAs fell £9.5bn to £179.2bn.
- Leverage: The CRR leverage ratio declined to 5.1% from 5.4%; the UK leverage ratio declined to 5.8% from 6.2%.
- Liquidity: The liquidity portfolio increased to £199bn, including £125bn of primary liquidity. The liquidity coverage ratio was 152%, the stressed outflow coverage ratio was 149% and the net stable funding ratio was 141%.
- Funding: RBSG issued approximately £4bn of MREL-compliant senior debt and £0.6bn of Tier 2 debt during 2019. Total MREL senior debt issued reached approximately £20bn against estimated end-state requirements of £24bn.
- Cash flow: Net cash flow from operating activities was an outflow of £3.1bn, compared with an outflow of £6.8bn in 2018. Net cash and cash equivalents decreased £8.3bn to £100.6bn, mainly reflecting balance-sheet movements, dividends, debt activity and foreign-exchange effects.
Material changes versus 2018
- Reported profitability improved substantially, but the increase was heavily affected by non-recurring merger and FX recycling gains.
- Net interest income and margins declined in the low-rate, highly competitive environment. Bank NIM excluding NatWest Markets fell to 1.99% from 2.09%.
- Operating expenses fell £320m, including a £310m reduction excluding strategic, litigation and conduct costs. Strategic costs rose to £1.381bn from £1.004bn.
- Litigation and conduct costs decreased to £895m from £1.282bn, but included an additional £900m PPI provision following high complaint volumes before the FCA deadline.
- Impairment losses increased by 75% to £696m, reflecting a move from exceptionally benign credit conditions toward more normalised conditions and several material commercial exposures.
- NatWest Markets reduced RWAs by £7.0bn to £37.9bn and reduced its operating loss to £25m from £70m, but core income declined 14% and management announced a substantially smaller, simpler franchise.
- RBS completed the Alawwal Bank/SABB merger-related restructuring, generating a £444m NatWest Markets gain and reducing group RWAs by approximately £4.7bn.
- Goodwill remained £5.6bn after the disposal of goodwill associated with the legacy Alawwal-related structure; no goodwill impairment was recorded.
Guidance, outlook and management commentary
- 2020 costs: Management targeted a further £250m reduction in operating expenses excluding strategic, litigation and conduct costs and operating lease depreciation.
- Strategic costs: Management expected £0.8bn–£1.0bn of strategic costs in 2020, including approximately £0.6bn of NatWest Markets exit, restructuring and disposal costs.
- Lending: Retail and commercial lending growth was targeted at more than 3%.
- Credit: Management expected the impairment loss rate to remain below the 30–40 basis-point through-the-cycle assumption, while warning that political uncertainty and single-name or sector events could change outcomes.
- RWAs: 2020 RWAs were expected to be approximately £185bn–£190bn, including an estimated £10.5bn impact from Bank of England mortgage floors. NatWest Markets RWAs were expected to decline by £6bn–£8bn during 2020 and to approximately £20bn over the medium term.
- Capital and distributions: Management targeted a CET1 ratio of approximately 14% at the end of 2021 and 13%–14% over the medium to long term, with ordinary dividends of approximately 40% of attributable profit. Buybacks of up to 4.99% of issued share capital remained subject to HM Treasury’s intentions and regulatory approvals.
- Medium-term returns: Management targeted return on tangible equity of 9%–11%.
- Strategy: The group adopted a purpose-led strategy focused on enterprise, learning and climate. It targeted net-zero operations in 2020, climate-positive operations by 2025 and at least a 50% reduction in the climate impact of financing activity by 2030.
Risks, contingencies and unusual items
- Key risks include Brexit and UK political uncertainty, low interest rates, economic weakness, competition, cyber and IT resilience, operational risk, financial crime, conduct risk, climate-related financial risk, model risk and regulatory change.
- The filing identifies significant legal and regulatory uncertainty, including PPI, LIBOR and other benchmark litigation, foreign-exchange and government-securities investigations, securities trading investigations, RMBS matters, IRHP litigation, anti-money-laundering reviews and Ulster Bank tracker-mortgage remediation.
- Provisions for liabilities and charges were £2.7bn at year-end, including approximately £1.9bn for conduct and litigation claims. PPI provisions totalled £6.2bn to date, of which £5.0bn had been utilised by 31 December 2019.
- Management disclosed an ongoing US criminal investigation concerning alleged spoofing by former NatWest Markets traders and warned of possible further provisions, costs and collateral consequences.
- The 2019 Bank of England stress test produced a low-point CET1 ratio of 9.9%, or 10.3% after management actions, versus a 7.2% hurdle. The transitional Tier 1 leverage low point was 4.7% versus a 3.56% hurdle.
- The filing states that internal control over financial reporting was effective, with an unqualified auditor opinion. However, financial crime controls, operational resilience and remediation of known control issues remain areas of continuing focus.
- Post-balance-sheet disclosures included an expected approximately £0.6bn of NatWest Markets exit, restructuring and disposal costs in 2020.
Important facts for investors to verify
- Separate recurring profitability from the £444m merger gain, £1.459bn FX recycling gain and other notable items; reported 9.4% ROTE was 4.7% excluding the FX recycling gain.
- Progress against the £250m 2020 cost-reduction target and the £0.8bn–£1.0bn strategic-cost estimate.
- Execution of the NatWest Markets restructuring, including RWA reductions, disposal losses, capital release and customer retention.
- Actual impairment trends relative to the 20-basis-point 2019 loss rate and the 30–40-basis-point long-term assumption.
- Final and special dividends of 3p and 5p per ordinary share, which were subject to shareholder approval at the 29 April 2020 AGM, and any subsequent buyback activity.
- Development of PPI, spoofing, LIBOR, FX, anti-money-laundering, tracker-mortgage and other litigation or regulatory exposures beyond recorded provisions.
- Whether the group can maintain strong CET1, liquidity and MREL positions while reducing capital toward its 13%–14% target and funding lending growth.
- Progress on Brexit-related permissions, LIBOR transition, climate targets and the operational resilience of critical technology systems.