UPDATE: NATWEST GROUP PLC - NATWEST GROUP - INVESTORS
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Update: NatWest Group PLC Primary Credit Analyst: William Edwards, London + 44 20 7176 3359; william.edwards@spglobal.com Secondary Contact: Richard Barnes, London + 44 20 7176 7227; richard.barnes@spglobal.com Table Of Contents Rating Score Snapshot Credit Highlights Key Metrics Outlook Key Statistics Related Criteria Related Research Appendix WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 15, 2022 1
Update: NatWest Group PLC
Rating Score Snapshot
Issuer Credit Rating
BBB/Stable/A-2
Credit Highlights
Overview
Key strengths Key risks
A market leader in U.K. retail and corporate banking. Geographic concentration in the U.K., with its idiosyncratic pressures and
macroeconomic volatility.
Rising rates propel NWG's revenues and should deliver a Even with its disciplined risk appetite we expect increased pressure on debt
return on tangible equity comfortably above 12% in 2023. affordability amid higher borrowing costs and slowing economic growth in the U.K.
Solid funding and liquidity.
NatWest's franchise is anchored by a broad and deep domestic business. NatWest is one of the leading competitors in
U.K. retail and commercial banking. Its commercial banking franchise, in particular, is in peer leading--with diverse
commercial lending franchise across small, midsize, and large U.K. corporates, as well as institutional banking services
through its NatWest Markets business. While the commercial and institutional franchise sits at the core of NatWest,
recent asset growth has been driven by its mortgage business, which grew by 18% between 2018 and half-year 2022.
This has broadened the scope of its retail franchise, and further anchored NatWest's position in the U.K. market.
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 15, 2022 2Update: NatWest Group PLC Chart 1 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 15, 2022 3
Update: NatWest Group PLC Chart 2 NatWest's reshaping of its business is coming to an end. NatWest continues to manage down its cost base and expects a 3% annual reduction in costs in 2022, despite ongoing business investment particularly in technology, and broad inflationary pressures. While it now expects modest cost growth in 2023, the extensive restructuring of its cost base over the past few years should give it a degree of resilience to elevated wage inflation and ensure increases in costs are containable. To this end, its cost to income, excluding restructuring and one-off costs, has moved below 60% through 2022, and we expect it to remain at this level over the next 24 months. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 15, 2022 4
Update: NatWest Group PLC Chart 3 NWG's phased withdrawal from the Republic of Ireland is on track. NatWest expects the majority of assets to have been or be in the process of being transferred by year-end 2022. To this end, at Sept. 30, 2022, net loans to customers at an amortized cost totalled less than €500 million after NatWest began, or completed, the transfer of its commercial and residential mortgage loans to AIB and Permanent TSB. One-off expenses linked to the Irish exit are expected to be €900 million, with the majority incurred in 2022. Despite this material cost, the UBI DAC exit should be capital-accretive for NatWest once complete. Rising interest rates are a tailwind to earnings. Like its deposit-funded U.K. peers, rising interest rates benefit NatWest's revenue materially--driven in particular by its unhedged deposits and structural hedge, gains on which are partly offset by strong mortgage market competition. For instance, by our measures, the net interest margin increased to 1.93% in the first nine months of 2022, from 1.56% for full year 2021. We forecast it to move to around 2% for full year 2022, and comfortably above 2% thereafter, even as deposit betas rise, and deposit balances normalize--whether through price competition between U.K. banks, or through the gradual tapering of the BoE's balance sheet. Interest rates and strong strategic execution will propel earnings in the next 24 months. The end of the prolonged restructuring program and the strong interest rate tailwind lead us to forecast a return on tangible equity (RoTE) above 12% in 2022 (go-forward group RoTE was 12.1% for the first nine months of 2022) and we expect a further improvement in 2023. NatWest guides to a RoTE of 14%-16% in 2023, although we see the potential for a material rise in impairment charges and a moderation of interest rate tailwinds, resulting in earnings coming in at the lower end of this range. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 15, 2022 5
Update: NatWest Group PLC NatWest will continue to distribute earnings to shareholders, consistent with its capital targets. NatWest plans to lower its Common Equity Tier 1 (CET1) ratio to 13%-14% at year-end 2023 from 14.3% at Sept. 30, 2022. This will be achieved primarily through continued dividends and buybacks, likely including further share repurchases from the U.K. government. In the nine months to September 2022, NWG had completed or announced £3.7 billion of shareholder returns across an ordinary dividend of £750 million, extraordinary dividends of £1.75 billion, and a buyback of £1.2 billion. We would expect a broadly similarly absolute level of distributions across our base case. Asset quality remains robust, but NatWest is positioning its loan book for greater stress. NatWest's provisioning is broadly in line with U.K. peers', with conservative positioning of its loan book in anticipation of increasing stress, even as nonperforming assets remain contained. Chart 4 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 15, 2022 6
Update: NatWest Group PLC Chart 5 NWG's funding and liquidity profiles will remain sound. We expect the bank will maintain robust funding and liquidity metrics, even as retail and commercial deposits begin to normalize after an exceptional period of growth throughout the pandemic, and as central banks begin to taper their balance sheets. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 15, 2022 7
Update: NatWest Group PLC
Chart 6
Key Metrics
NatWest Group plc Key Ratios And Forecasts
--Fiscal year ended Dec. 31 --
(%)
2020a 2021a 2022f 2023f 2024f
Growth in operating revenue -7 -4.6 18-20 5-7 3-7
Growth in customer loans 5.7 -3.3 2-4 0-2 0-2
Net interest income/average earning assets (NIM) 1.6 1.6 2.0-2.1 2.1-2.2 2.1-2.3
Cost to income ratio 60.6 61.1 56-58 54-56 52-54
Return on average common equity -2.9 6.9 7-9 8-10 9-11
New loan loss provisions/average customer loans 0.9 -0.4 0.15-0.2 0.25-0.35 0.3-0.4
Gross nonperforming assets/customer loans 1.9 1.7 1.8-1.9 1.9-2.0 2.0-2.1
Risk-adjusted capital ratio 10.7 10.5 10-10.2 9.8-10.0 9.5-9.7
All figures are S&P Global Ratings-adjusted. a--Actual. f--Forecast. NIM--Net interest margin.
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 15, 2022 8Update: NatWest Group PLC
Outlook
The stable outlook indicates that we expect NatWest's credit profile to remain robust over our two-year horizon.
We anticipate that its earnings will strengthen in line with management's guidance and it will maintain solid
funding and liquidity profiles. Loan arrears and defaults are likely to increase from the current benign levels, but we
do not foresee a material deterioration. Consistent with the CET1 ratio trajectory, we anticipate that our
risk-adjusted capital (RAC) ratio will fall to 9.5%-10.0% at year-end 2024.
Downside scenario
We could lower the ratings if macroeconomic pressures and geopolitical uncertainties appear likely to challenge
asset quality and earnings materially.
Upside scenario
We could raise the ratings during our two-year outlook horizon if economic and geopolitical conditions stabilize
and NatWest demonstrates a sustained competitive advantage in line with higher-rated global peers, continued
stability in strategy, and healthy, consistent earnings generation.
Key Statistics
Table 1
NatWest Group PLC Key Figures
--Year-ended Dec. 31--
(Mil. £) 2022* 2021 2020 2019 2018
Adjusted assets 799,609.0 775,269.0 792,836.0 716,417.0 687,619.0
Customer loans (gross) 356,453.0 350,295.0 362,090.0 342,616.0 328,792.0
Adjusted common equity 25,510.0 28,133.7 28,753.0 30,462.0 32,565.0
Operating revenues 6,235.0 10,648.0 11,165.0 12,009.0 12,931.0
Noninterest expenses 3,502.0 6,505.0 6,768.0 7,005.0 7,322.0
Core earnings 1,877.5 3,849.7 N/A 3,466.7 2,777.1
*Data as of June 30.
N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful.
Table 2
NatWest Group PLC Business Position
--Year-ended Dec. 31--
(%) 2022* 2021 2020 2019 2018
Total revenues from business line (currency in millions) 6,425.0 10,978.0 11,178.0 14,333.0 13,474.0
Commercial banking/total revenues from business line 45.7 35.3 35.4 30.1 25.0
Trading and sales income/total revenues from business line N/A 3.8 10.0 9.4 10.7
Other revenues/total revenues from business line 6.8 18.4 12.6 22.6 13.1
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 15, 2022 9Update: NatWest Group PLC
Table 2
NatWest Group PLC Business Position (cont.)
--Year-ended Dec. 31--
(%) 2022* 2021 2020 2019 2018
Investment banking/total revenues from business line N/A 3.8 10.0 9.4 10.7
Return on average common equity 9.8 6.9 (2.9) 6.8 2.8
*Data as of June 30.
N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful.
Table 3
NatWest Group PLC Capital And Earnings
--Year-ended Dec. 31--
(%) 2022* 2021 2020 2019 2018
Tier 1 capital ratio 16.4 21.0 21.9 19.3 19.2
S&P Global Ratings’ RAC ratio before diversification N/A 10.5 10.7 10.4 10.9
S&P Global Ratings’ RAC ratio after diversification N/A 11.4 11.7 11.3 11.9
Adjusted common equity/total adjusted capital 86.8 86.6 84.0 87.0 87.8
Net interest income/operating revenues 69.5 71.5 69.4 67.0 66.9
Fee income/operating revenues 18.0 19.9 18.0 20.9 18.2
Market-sensitive income/operating revenues 11.1 4.3 10.9 9.0 10.6
Cost to income ratio 56.2 61.1 60.6 58.3 56.6
Preprovision operating income/average assets 0.7 0.5 0.6 0.7 0.8
Core earnings/average managed assets 0.5 0.5 N/A 0.5 0.4
*Data as of June 30.
N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful.
Table 4
NatWest Group PLC Risk Position
--Year-ended Dec. 31--
(%) 2022* 2021 2020 2019 2018
Growth in customer loans 3.5 (3.3) 5.7 4.2 0.5
Total diversification adjustment/S&P Global Ratings’ RWA before diversification N/A (8.4) (9.0) (8.2) (8.1)
Total managed assets/adjusted common equity (x) 31.6 27.8 27.8 23.7 21.3
New loan loss provisions/average customer loans (0.0) (0.4) 0.9 0.2 0.1
Net charge-offs/average customer loans 0.1 0.2 0.3 0.2 0.5
Gross nonperforming assets/customer loans + other real estate owned 1.9 1.7 1.9 2.0 2.5
Loan loss reserves/gross nonperforming assets 51.9 65.3 91.7 54.4 41.0
*Data as of June 30.
N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful.
Table 5
NatWest Group PLC Funding And Liquidity
--Year-ended Dec. 31--
(%) 2022* 2021 2020 2019 2018
Core deposits/funding base 75.9 76.9 77.5 74.9 74.7
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 15, 2022 10Update: NatWest Group PLC
Table 5
NatWest Group PLC Funding And Liquidity (cont.)
--Year-ended Dec. 31--
(%) 2022* 2021 2020 2019 2018
Customer loans (net)/customer deposits 71.7 71.5 78.8 86.7 85.8
Long-term funding ratio 84.6 86.0 87.0 86.3 86.7
Stable funding ratio 128.6 138.6 131.3 120.1 124.7
Short-term wholesale funding/funding base 16.1 14.8 13.8 14.7 14.4
Regulatory net stable funding ratio 153.0 157.0 N/A N/A N/A
Broad liquid assets/short-term wholesale funding (x) 2.4 2.8 2.8 2.2 2.5
Broad liquid assets/total assets 30.9 33.6 27.8 23.7 26.0
Broad liquid assets/customer deposits 50.7 54.3 49.2 43.9 47.5
Net broad liquid assets/short-term customer deposits 29.5 35.5 33.0 25.9 29.9
Regulatory liquidity coverage ratio (LCR) (x) 1.7 1.7 N/A N/A N/A
Short-term wholesale funding/total wholesale funding 65.4 62.2 59.0 56.5 55.0
*Data as of June 30.
N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful.
Related Criteria
• Criteria | Financial Institutions | Banks: Banking Industry Country Risk Assessment Methodology And
Assumptions, Dec. 9, 2021
• Criteria | Financial Institutions | General: Financial Institutions Rating Methodology, Dec. 9, 2021
• General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
• General Criteria: Group Rating Methodology, July 1, 2019
• General Criteria: Hybrid Capital: Methodology And Assumptions, July 1, 2019
• Criteria | Financial Institutions | General: Risk-Adjusted Capital Framework Methodology, July 20, 2017
• General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
• General Criteria: Guarantee Criteria, Oct. 21, 2016
• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
Related Research
• U.K. Banks' Funding And Liquidity Are On A Solid Footing As They Navigate A Turn In The Cycle, Dec 01, 2022
• Economic Outlook U.K. Q1 2023: A Moderate Yet Painful Recession, Nov 29, 2022
• Robust Earnings And Balance Sheets Keep The U.K. Banking Industry In BICRA Group 3 Despite Deepening
Economic Woes, Oct. 25, 2022
• United Kingdom Outlook Revised To Negative On Rising Fiscal Risks; 'AA/A-1+' Ratings Affirmed, Oct. 1, 2022
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 15, 2022 11Update: NatWest Group PLC • U.K. Banks Face The Weakening Macroeconomy From A Resilient Balance Sheet Position, Sept. 22, 2022 • NatWest Group PLC, June 15, 2022 Appendix Ratings Detail (As Of December 15, 2022)* NatWest Group PLC Issuer Credit Rating BBB/Stable/A-2 Commercial Paper Foreign Currency A-2 Junior Subordinated B+ Junior Subordinated BB Preference Stock BB- Senior Unsecured A- Senior Unsecured BBB Short-Term Debt A-2 Subordinated BB+ Issuer Credit Ratings History 24-Jun-2021 BBB/Stable/A-2 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 15, 2022 12
Update: NatWest Group PLC Ratings Detail (As Of December 15, 2022)*(cont.) 23-Apr-2020 BBB/Negative/A-2 16-May-2019 BBB/Stable/A-2 31-May-2018 BBB-/Positive/A-3 Sovereign Rating United Kingdom AA/Negative/A-1+ Related Entities National Westminster Bank PLC Issuer Credit Rating A/Stable/A-1 Resolution Counterparty Rating A+/--/A-1 Commercial Paper Local Currency A-1 Junior Subordinated BB Junior Subordinated BB+ Preference Stock BB Senior Unsecured A Short-Term Debt A-1 Subordinated BBB- NatWest Markets N.V. Issuer Credit Rating A-/Stable/A-2 Resolution Counterparty Rating A/--/A-1 Commercial Paper Local Currency A-2 Senior Unsecured A- Short-Term Debt A-2 Subordinated BB+ NatWest Markets PLC Issuer Credit Rating A-/Stable/A-2 Resolution Counterparty Rating A/--/A-1 Commercial Paper Foreign Currency A-2 Junior Subordinated BB Resolution Counterparty Liability A Senior Unsecured A- Short-Term Debt A-2 Subordinated BB+ NatWest Markets Securities Inc. Issuer Credit Rating A-/Stable/A-2 Resolution Counterparty Rating A-/--/A-2 Senior Unsecured A- Royal Bank of Scotland International Ltd. Issuer Credit Rating A-/Stable/A-2 Commercial Paper Foreign Currency A-2 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 15, 2022 13
Update: NatWest Group PLC Ratings Detail (As Of December 15, 2022)*(cont.) Royal Bank of Scotland PLC (The) Issuer Credit Rating A/Stable/A-1 Resolution Counterparty Rating A+/--/A-1 Ulster Bank Ireland DAC Issuer Credit Rating A-/Stable/A-2 Resolution Counterparty Rating A/--/A-1 *Unless otherwise noted, all ratings in this report are global scale ratings. S&P Global Ratings’ credit ratings on the global scale are comparable across countries. S&P Global Ratings’ credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 15, 2022 14
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