Business context and reporting period
NatWest Group plc filed its annual Form 20-F for the fiscal year ended 31 December 2021, prepared under IFRS as issued by the IASB. The filing is not a standalone quarterly report, although management discusses fourth-quarter items. Results are presented in pounds sterling. Continuing operations exclude activities classified as discontinued following the planned sale of parts of Ulster Bank Ireland DAC. The accounts received an unqualified audit opinion, and the auditors also concluded that internal control over financial reporting was effective.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total income | £10,512m | £10,508m | Broadly stable |
| Net interest income | £7,614m | £7,476m | +1.8% |
| Non-interest income | £2,898m | £3,032m | -4.4% |
| Operating expenses | £7,758m | £7,858m | -1.3% |
| Operating profit before tax | £4,032m | (£481m) | +£4,513m |
| Profit for the year | £3,312m | (£434m) | Returned to profit |
| Profit attributable to ordinary shareholders | £2,950m | (£753m) | +£3,703m |
| Basic EPS | 25.4p | (6.2p) | +31.6p |
| Return on tangible equity | 9.4% | (2.4%) | +11.8 percentage points |
| Net impairment release | £1,278m | £3,131m charge | £4,409m improvement |
| Bank net interest margin | 2.39% | 2.46% | -7 basis points |
| Cost:income ratio | 73.4% | 74.4% | Improved by 1.1 points |
The reported profit benefited materially from the £1.3 billion impairment release. Excluding notable items, go-forward group income declined 5.6% to £10,074 million, while UK and RBSI retail and commercial income increased 1.4%.
Balance sheet, capital and liquidity
- Total assets were £782.0 billion, down 2% year over year, principally due to lower derivatives, trading assets and other financial assets.
- Customer deposits increased 11% to £479.8 billion; go-forward group deposits increased 12% to £461.4 billion.
- Net loans to customers were £359.0 billion, down slightly overall. Net lending in UK and RBSI retail and commercial businesses, excluding government support schemes, increased 2.6% to £305.7 billion.
- Cash and balances at central banks rose 43% to £177.8 billion.
- CET1 ratio was 18.2%, or 17.8% excluding IFRS 9 transitional relief. Pro forma CET1 was 15.9% on 1 January 2022 after regulatory changes.
- Risk-weighted assets declined to £157.0 billion from £170.3 billion. Regulatory changes subsequently increased RWAs by £18.8 billion, including £14.8 billion from mortgage risk-weight changes.
- Liquidity coverage ratio was 172%, with £89.9 billion of headroom above the 100% minimum. Wholesale funding increased to approximately £76.7 billion.
- Net cash flows from operating activities were £53.7 billion, compared with £29.1 billion in 2020. Cash and cash equivalents ended at £190.7 billion.
- Gross loans subject to the IFRS 9 ECL framework were £369.8 billion, with £3.8 billion of ECL provisions and a 1.03% coverage ratio, down from 1.66%.
Material changes versus the prior comparable period
- The Group moved from a 2020 attributable loss to a 2021 attributable profit, primarily because 2020 included substantial COVID-19-related impairment charges while 2021 benefited from low realised losses and provision releases.
- Operating expenses fell £100 million, while management-defined costs excluding litigation and conduct costs, operating lease depreciation and Ulster Bank Ireland direct costs fell £256 million, or 4.0%, meeting the 2021 cost-reduction target.
- Net interest income rose despite a lower margin, supported by balance-sheet growth and lower interest expense. Fees and commissions increased 6.2%, but trading income fell 71.3% because NatWest Markets did not repeat 2020’s exceptional market activity.
- NatWest Markets income fell 63% to £415 million and generated a £711 million operating loss, reflecting weak Fixed Income activity and ongoing business reshaping.
- Retail Banking operating profit rose to £1,968 million from £849 million, supported by mortgage growth and impairment releases. Commercial Banking operating profit rose to £2,594 million from a £399 million loss, principally because of a £1,073 million impairment release.
- Commercial Banking net loans declined 6% to £101.2 billion as the Group reduced targeted sector exposures, including real estate, retail and leisure, and customers repaid government-supported facilities.
- Ulster Bank Ireland continued its phased withdrawal. Assets of disposal groups were £9.0 billion, and discontinued operations contributed £276 million of post-tax profit.
- Shareholders received £3.8 billion of paid and proposed capital distributions, including ordinary dividends, the directed buyback of HM Treasury shares and an on-market buyback. A final dividend of 7.5p per share was proposed.
Guidance, outlook, commentary and unusual items
- Management described 2021 as a strong operating performance, but noted continuing pressure from low interest rates, reduced structural hedge income, yield-curve movements and lower unsecured balances.
- The Group targets a CET1 ratio of approximately 13% to 14% by the end of 2023. The filing also identifies a 2021 target of £100 billion of Climate and Sustainable Funding and Financing between 1 July 2021 and the end of 2025.
- On 27 January 2022, NatWest announced a new Commercial and Institutional franchise combining Commercial Banking, NatWest Markets and RBS International. Reporting was expected to follow the new structure from the first quarter of 2022.
- Ulster Bank Ireland sales to Allied Irish Banks and Permanent TSB remained subject to regulatory, competition and other approvals. Transfers were expected to occur in phases during 2022 and the first quarter of 2023, with timing and final outcomes uncertain.
- Unusual 2021 items included a £54 million gain related to the sale of Adam & Company’s investment management business, £219 million of Business Growth Fund associate profit, £120 million of liquidity asset bond-sale gains, a £138 million loss on redemption of own debt, a £44 million property strategy charge and an £85 million goodwill impairment in Retail Banking.
- Litigation and conduct costs were £466 million, including the resolution of the FCA investigation into breaches of UK Money Laundering Regulations. National Westminster Bank plc was fined £264.8 million, funded from existing provisions with a small additional provision in the fourth quarter.
- NatWest Markets plc pleaded guilty in the US to wire fraud and securities fraud relating to historical spoofing. It paid approximately US$25.2 million in criminal fines, US$2.8 million in forfeiture and US$6.8 million in restitution, and became subject to a three-year probation and independent corporate monitoring.
- Significant risks include COVID-19 and macroeconomic deterioration, interest-rate and property-price movements, credit losses after the withdrawal of government support schemes, regulatory capital and MREL requirements, liquidity and funding access, HM Treasury ownership, Brexit-related operating-model changes, litigation, cyber and IT resilience, LIBOR transition, climate risk and execution of the Ulster Bank and NatWest Markets strategic changes.
- The filing states that forward-looking targets and guidance are subject to substantial uncertainty and should not be relied upon as guarantees of future performance.
Important facts an investor should verify
- Reconcile statutory results with management’s non-IFRS measures, particularly go-forward income excluding notable items and the return on tangible equity calculation.
- Assess how much of 2021 profitability came from the £1.3 billion impairment release and whether ECL coverage of 1.03% remains adequate under weaker economic scenarios.
- Verify the effect of the 1 January 2022 regulatory changes on CET1, RWAs, mortgage risk weights, software capital treatment and IFRS 9 transitional relief.
- Track completion, pricing, capital effects and stranded-cost implications of the Ulster Bank Ireland disposals.
- Monitor NatWest Markets’ ability to return to profitability after its 2021 operating loss and the effect of the new Commercial and Institutional structure.
- Review the sustainability of proposed dividends and buybacks against the 2023 CET1 target, pension contribution obligations and regulatory restrictions on discretionary distributions.
- Review provisions of £0.8 billion for customer redress, litigation and regulatory matters, as well as unresolved LIBOR, FX, RMBS, antitrust, tax and other proceedings for potential additional losses.
- Evaluate sensitivity to UK interest rates, inflation, unemployment and residential and commercial property prices, given the Group’s substantial mortgage and property exposure.
- Confirm remaining IBOR exposures and contractual transition arrangements, including the disclosed £1,155.6 billion of derivative notional exposure without explicit or agreed conversion provisions at 31 December 2021.
- Consider the impact of HM Treasury’s 52.96% ownership at year-end and its planned future sell-downs on governance, capital actions and share-price volatility.