NatWest Group plc: FY2020 Form 20-F Summary
Business context and reporting period
NatWest Group plc, formerly The Royal Bank of Scotland Group plc, filed its annual Form 20-F for the fiscal year ended 31 December 2020. The Group is a UK-focused banking and financial services group serving approximately 19 million customers, including about one in four UK businesses. Financial statements are prepared under IFRS as issued by the IASB.
2020 results were significantly affected by the COVID-19 pandemic, government support schemes, lower interest rates, reduced customer activity and elevated forward-looking expected credit losses. The group also began a phased withdrawal from Ulster Bank in the Republic of Ireland and continued to refocus NatWest Markets.
Financial performance and key metrics
| Metric | FY2020 | Prior comparable period |
|---|---|---|
| Total income | Approximately £10.8 billion | £14.3 billion in 2019; down £3.457 billion, or 24.3% |
| Income excluding notable items | Notable items of £384 million | 2019 notable items of £2.115 billion; underlying income decreased 7.9% |
| Attributable loss | £753 million | £3.133 billion attributable profit in 2019 |
| Operating profit before impairments | £2.9 billion | Not clearly stated in the filing text provided |
| Impairment loss | £3.242 billion | Increased £2.546 billion from 2019 |
| Operating expenses | £9.325 billion on a statutory basis | Decreased 15.2%; underlying costs excluding specified items fell 4.0% |
| Net interest margin | 1.57%; bank NIM 1.71% | Down 22 basis points and 28 basis points, respectively |
| Customer loans, amortised cost | £360.5 billion | £326.9 billion; up 10% |
| Customer deposits | £431.7 billion | £369.2 billion; up 17% |
| Total assets | £799.5 billion | £723.0 billion; up 11% |
| Risk-weighted assets | £170.3 billion | £179.2 billion; down £8.9 billion |
| CET1 ratio | 18.5% | 16.2% |
| CRR leverage ratio | 5.2% | 5.1% |
| Liquidity coverage ratio | 165% | 152% |
| Liquidity portfolio | £262 billion | £199 billion |
| Loss-absorbing capital | £63.9 billion | £59.7 billion |
The filing text supplied does not provide a clear consolidated net cash flow figure. It reports interest received of £10.007 billion and interest paid of £2.414 billion within the cash flow disclosures.
Material changes versus the prior period
- COVID-19 drove a substantial increase in IFRS 9 impairment charges, mainly through Stage 1 and Stage 2 expected credit losses. Total ECL provisions increased to £6.2 billion from £3.8 billion, while actual Stage 3 impairment remained comparatively contained at £616 million.
- Customer deposits increased by £62.5 billion, reflecting precautionary savings, lower spending and government and central-bank support. Cash and balances at central banks rose by £43.5 billion to £124.5 billion.
- Retail and commercial net lending increased to £328.8 billion, supported by mortgage growth and government-backed lending. Approximately £14.1 billion of government-scheme lending was approved and £12.9 billion drawn.
- NatWest Markets RWAs decreased by £11.0 billion to £26.9 billion as the Group reduced market and counterparty exposures.
- Operating expenses declined, but strategic costs were £1.013 billion, including property, redundancy and technology-related charges.
- Litigation and conduct costs were £113 million, including £473 million of additional charges partly offset by a £277 million Payment Protection Insurance release.
- NatWest Group acquired a £3.0 billion prime UK mortgage portfolio from Metro Bank in December 2020. The transaction produced a £58 million acquisition loss and increased RWAs by £1.2 billion.
- The Group changed its name to NatWest Group plc and announced a phased withdrawal from the Republic of Ireland after concluding that Ulster Bank RoI was unlikely to generate sustainable long-term returns.
Guidance, outlook, commentary and unusual items
- Management expects the pandemic, government-support withdrawal, unemployment and the economic recovery to remain significant drivers of credit losses. The 2020 impairment loss rate was 88 basis points of gross customer loans; 2021 guidance was for a loss rate at or below the through-the-cycle range of 30–40 basis points, subject to economic conditions.
- The Group targets above-market lending growth across UK and RBS International retail and commercial businesses, excluding government support schemes.
- Medium-term targets include 9%–10% return on tangible equity, a 13%–14% CET1 ratio by 2023, annual cost reductions of approximately 4%, and continued reduction of NatWest Markets RWAs toward £20 billion.
- NatWest Group intended to pay a 3 pence per ordinary share final dividend for 2020, subject to shareholder and regulatory requirements. It targeted at least £800 million of annual distributions from 2021 through 2023, subject to economic conditions and regulatory permission.
- The Group planned to issue approximately £3–5 billion of MREL-compliant instruments in 2021, including approximately £1 billion of AT1 and £2 billion of Tier 2 instruments.
- Key risks include prolonged COVID-19 effects, further credit deterioration after support schemes expire, low or negative interest rates, Brexit-related regulatory uncertainty, cyber and operational resilience, financial crime, litigation and conduct matters, climate transition risk, execution of the NatWest Markets refocus and the Ulster Bank RoI withdrawal.
- Commercial Banking reported a £399 million operating loss, primarily because of £1.927 billion of impairment losses. Ulster Bank RoI reported a £226 million operating loss, while NatWest Markets reported a £227 million operating loss.
Most important facts an investor should verify
- Reconcile the consolidated income statement, including total income, operating expenses, impairment, tax and the £753 million attributable loss, to the audited financial statements.
- Assess the sensitivity of the £6.2 billion ECL provision to unemployment, GDP, property prices and the withdrawal of government support; the filing states that an extreme downside scenario could increase Stage 1 and Stage 2 ECL by more than 60%.
- Verify the basis and sustainability of the 18.5% CET1 ratio, including the £1.7 billion IFRS 9 transitional relief and other COVID-19-related regulatory reliefs.
- Review deposit concentration, liquidity portfolio composition, wholesale funding maturities, MREL requirements and the ability to refinance upcoming debt.
- Evaluate the execution risk, stranded-cost risk and potential disposal losses associated with the phased Ulster Bank RoI withdrawal and the non-binding proposal for a potential sale of approximately €4 billion of performing commercial loans.
- Review the status and potential financial impact of LIBOR transition, money-laundering investigations, spoofing investigations, FX and benchmark-rate litigation, VAT disputes and customer-redress programmes.
- Confirm approval and regulatory treatment of the proposed 3 pence dividend and the planned future capital-distribution framework.
- Assess whether the Group can achieve its 2023 targets despite persistent low interest rates, elevated credit risk, strategic costs and the continuing NatWest Markets restructuring.