National Westminster Bank Plc 16
February 2024
Annual Report and Accounts
2023
A copy of the Annual Report and
Accounts 2023 for National Westminster Bank
plc will shortly be submitted to the National
Storage Mechanism and will be available for inspection
at https://data.fca.org.uk/#/nsm/nationalstoragemechanism.
The document will be available on NatWest Group
plc's website at https://investors.natwestgroup.com/reports-archive
For further information, please
contact: Media Relations
+44 (0) 131 523 4205
Investor relations, Claire
Kane
+44 (0) 207 672 1758
For the purpose of compliance with
the Disclosure Guidance and Transparency Rules, this announcement
also contains risk factors extracted from the Annual Report and
Accounts 2023 in full unedited text. Page references in the text
refer to page numbers in the Annual Report and Accounts
2023.
Principal Risks and
Uncertainties
Set out below are certain risk
factors that could have a material adverse effect on NWB Group's
future results, its financial condition and/or prospects and cause
them to be materially different from what is forecast or expected,
and directly or indirectly impact the value of its securities.
These risk factors are broadly categorised and should be read in
conjunction with other risk factors in this section and other parts
of this annual report, including the forward-looking statements
section, the strategic report and the risk and capital management
section. They should not be regarded as a complete and
comprehensive statement of all potential risks and uncertainties
facing NWB Group.
Economic and political risk
NWB Group, its customers and its
counterparties face continued economic and political risks and
uncertainties in the UK and global markets, including as a result
of inflation and interest rates, supply chain disruption, and
geopolitical developments.
As a principally UK-focused banking
group, NWB Group is affected by global economic and market
conditions, and is particularly exposed to those conditions in the
UK. Uncertain and volatile economic conditions can create a
challenging operating environment for financial services companies
such as NWB Group. The outlook for the UK and the global economy is
affected by many factors including: GDP growth, inflation and
changing interest rates, changing asset prices (including
residential and commercial property), energy prices, supply chain
disruption, and changes to monetary and fiscal policy.
These conditions could be
exacerbated by a number of factors including: instability in the UK
and/or global financial systems, market volatility and change,
fluctuations in the value of the pound sterling, new or extended
economic sanctions, economic volatility in the UK or globally,
volatility in commodity prices, political uncertainty or
instability (for example the upcoming US presidential election and
the UK general election to take place before February 2025), or
concerns regarding sovereign debt or sovereign credit ratings,
changing demographics in the markets that NWB Group and its
customers serve, increasing social and other inequalities, or rapid
changes to the economic environment due to the adoption of
technology, automation, artificial intelligence, or due to climate
change, and/or other sustainability-related risks. See also
'Changes in interest rates will continue to affect NWB Group's
business and results' and 'Fluctuations in currency exchange rates
may adversely affect NWB Group's results and financial
condition'.
NWB Group is also exposed to risks
arising out of geopolitical events or political developments that
may hinder economic or financial activity levels. Political,
military or diplomatic events, geopolitical tensions, armed
conflict (for example the Russia-Ukraine and Israel-Hamas
conflicts), terrorist acts or threats, protectionist policies or
trade barriers, widespread public health crises, related potential
adverse effects on supply chains, and the responses to any of the
above scenarios by various governments and markets, could
negatively affect the business and performance of NWB Group,
including as a result of the direct or indirect impact on UK,
regional or global trade and/or NWB Group's customers and
counterparties.
In recent years, the UK has
experienced significant political uncertainty and a general
election will take place before February 2025. Heightened political
uncertainty could lead to a loss of confidence in the UK that
could, in turn, negatively impact the economy and companies
operating in the UK. NWB Group also faces political uncertainty in
Scotland as a result of a possible Scottish independence
referendum. Scottish independence may adversely affect NWB Group
both in relation to its entities incorporated in Scotland and in
other jurisdictions. Any changes to Scotland's relationship with
the UK or the EU may adversely affect the environment in which
NatWest Group plc and its subsidiaries operate and may require
further changes to NatWest Group's (including NWB Group's)
structure, independently or in conjunction with other mandatory or
strategic structural and organisational changes, any of which could
adversely affect NWB Group. See also 'Continuing uncertainty
regarding the effects and extent of the UK's post Brexit divergence
from EU laws and regulation, and NWB Group's post Brexit EU
operating model may adversely affect NWB Group and its operating
environment'.
The value of NWB Group's own and
other securities may be materially affected by economic and market
conditions. Market volatility, illiquid market conditions and
disruptions in the financial markets may make it very difficult to
value certain of NWB Group's own and other securities, particularly
during periods of market displacement. This could cause a decline
in the value of NWB Group's own and other securities, or inaccurate
carrying values for certain financial instruments.
In addition, financial markets are
susceptible to severe events evidenced by, or resulting in, rapid
depreciation in asset values, which may be accompanied by a
reduction in asset liquidity. Under these conditions, hedging and
other risk management strategies may not be as effective at
mitigating losses as they would be under more normal market
conditions. Moreover, under these conditions, market participants
are particularly exposed to trading strategies employed by many
market participants simultaneously (and often automatically) and on
a large scale, increasing NWB Group's counterparty risk. NWB
Group's risk management and monitoring processes seek to quantify
and mitigate NWB Group's exposure to extreme market moves. However,
market events have historically been difficult to predict, and NWB
Group, its customers and its counterparties could realise
significant losses if extreme market events were to
occur.
Any of the above may have a material
adverse effect on NWB Group's future results, financial condition,
prospects, and/or reputation.
Changes in interest rates will
continue to affect NWB Group's business and results.
NWB Group's performance is affected
by changes in interest rates. Benchmark overnight interest rates,
such as the UK base rate, increased in 2023, although forward rates
at 31 December 2023 suggested interest rates may begin to fall in
2024.
Stable interest rates support
predictable income flow and less volatility in asset and liability
valuations, although persistently low and negative interest rates,
are generally expected to be less favourable for banks.
Volatility in interest rates may
result in unexpected outcomes both for interest income and asset
and liability valuations which may adversely affect NWB Group. For
example, unexpected movements in spreads between key benchmark
rates such as sovereign and swap rates may in turn affect liquidity
portfolio valuations. In addition, unexpected sharp rises in rates
may also have negative impacts on some asset and derivative
valuations. Furthermore, customer and investor responses to rapid
changes in interest rates can have an adverse effect on NWB Group.
For example, customers may make deposit choices that provide them
with higher returns than those then being offered by NWB Group, and
NWB Group may not respond with competitive products as rapidly, for
example following an interest rate change, which may in turn
decrease NWB Group's net interest income.
Movements in interest rates also
influence and reflect the macroeconomic situation more broadly,
affecting factors such as business and consumer confidence,
property prices, default rates on loans, customer behaviour (which
may adversely impact the effectiveness of NWB Group's hedging
strategy) and other indicators that may indirectly affect NWB
Group.
Any of the above may have a material
adverse effect on NWB Group's future results, financial condition,
prospects, and/or reputation.
Fluctuations in currency exchange
rates may adversely affect NWB Group's results and financial
condition.
Decisions of central banks
(including the Bank of England, the European Central Bank (ECB) and
the US Federal Reserve) and political or market events which are
outside NWB Group's control, may lead to sharp and sudden
fluctuations in currency exchange rates.
Although NWB Group is principally a
UK-focused banking group, it is subject to structural foreign
exchange risk from capital deployed in NatWest Group's foreign
subsidiaries and branches. NWB Group also issues internal
instruments in non-sterling currencies, such as USD, that assist in
meeting NWB Group's MREL requirements. In addition, NWB Group
conducts banking activities in non-sterling currencies (for example
loans and deposits) which affect its revenue. NWB Group also uses
service providers based outside of the United Kingdom for certain
services and as a result certain operating results are subject to
fluctuations in currency exchange rates.
NWB Group maintains policies and
procedures designed to manage the impact of its exposure to
fluctuations in currency exchange rates. Nevertheless, changes in
currency exchange rates, particularly in the sterling-US dollar and
sterling-euro rates, may adversely affect various accounting and
financial metrics including, the value of assets, liabilities
(including the total amount of MREL-eligible instruments), income
and expenses, RWAs and hence the reported earnings and financial
condition of NWB Plc.
Any of the above may have a material
adverse effect on NWB Group's future results, financial condition,
prospects, reputation and/or its ability to meet regulatory capital
adequacy requirements.
Continuing uncertainty regarding the
effects and extent of the UK's post Brexit divergence from EU laws
and regulation, and NWB Group's post Brexit EU operating model may
adversely affect NWB Group and its operating
environment.
As a result of the UK's withdrawal
from the EU, certain aspects of the services provided by NWB Group
require local licences or individual equivalence decisions
(temporary or otherwise) by relevant regulators.
In late 2021 the European Commission
proposed legislation that would require non-EU firms to establish a
branch or subsidiary in the EU before providing 'banking services'
in the EU. When these proposals become law all 'banking services'
provided by NatWest Group (of which NWB Group forms part) in the EU
may be licensable activities in each EU member state in which it
provides such services and member states may not be permitted to
offer bilateral permissions to financial institutions outside the
EU allowing them to provide such 'banking services', except in
limited circumstances.
NatWest Group continues to evaluate
its EU operating model, making adaptations as necessary. Changes to
NatWest Group's EU operating model have been, and may continue to
be, costly and failure to receive regulatory permissions and/or
further changes to its business operations, product offering,
customer engagement, and regulatory requirements could result in
further costs and/or regulatory sanction.
The long-term effects of Brexit and
the uncertainty regarding NWB Group's EU operating model may
adversely affect NWB Group and its customers and counterparties who
are themselves dependent on trading with the EU or personnel from
the EU. The long-term effects of Brexit may also be exacerbated by
wider UK and global macroeconomic trends and events.
Uncertainties remain as to the
extent to which EU/EEA laws will diverge from UK law. For example,
bank regulation in the UK may diverge from European bank regulation
following the enactment of the Financial Services and Markets Act
2023 ('FSMA 2023') and the Retained EU Law (Revocation and Reform)
Act 2023. In particular, FSMA 2023 provides for the revocation of
Retained EU Law relating to financial services regulation but sets
out that this process will likely take a number of years and that
the intention is that specific retained EU laws will not be revoked
until such time as replacement regulatory rules are in place. The
actions taken by regulators in response to any new or revised bank
regulation and other rules affecting financial services, may
adversely affect NWB Group, including its business, non-UK
operations, group structure, compliance costs, intragroup
arrangements and capital requirements.
Any of the above may have a material
adverse effect on NWB Group's future results, financial condition,
prospects, and/or reputation.
HM Treasury (or UKGI on its behalf)
could exercise a significant degree of influence over NatWest Group
and NWB Group is controlled by NatWest Group.
In its Autumn Statement 2023
(presented on 22 November 2023), the UK Government confirmed its
commitment to exiting its shareholding in NatWest Group plc,
subject to market conditions. It also stated that it "intends to
fully exit by 2025-26 utilising a range of disposal methods" and
"will explore options to launch a share sale to retail investors in
the next twelve months, subject to supportive market
conditions".
NatWest Group plc has most recently:
(i) carried out a directed buyback of NatWest Group plc ordinary
shares from HM Treasury in May 2023, and (ii) made purchases under
NatWest Group plc's on-market buyback programmes announced in July
2023 and February 2024. NatWest Group plc may participate in
similar directed or on-market buybacks in the near- and medium-term
future. As at 8 January 2024, HM Treasury held 36.94% of the
ordinary share capital with voting rights of NatWest Group plc.
Achievement of the UK Government's Autumn Statement 2023 objective
is likely to entail it selling a significant number of NatWest
Group plc's shares.
The precise timing, method and
extent of further HM Treasury's disposal of NatWest Group plc's
shares may be driven by economic as well as other considerations
and is uncertain, which could result in a prolonged period of price
volatility for NatWest Group plc's ordinary shares and its (and
NatWest Group's) other securities.
Any offers or sales of a substantial
number of ordinary shares in NatWest Group plc by HM Treasury
(including at a discount or with other incentives), market
expectations about these offers or sales, or perceptions about the
success or failure of any offers or sales (including for example,
media or public attention on any such offering or post-offer share
price performance), and any directed, on- or off-market buyback
activity by NatWest Group plc, could affect the prevailing market
price for the outstanding ordinary shares of NatWest Group plc,
and, in the case of a directed, on- or off-market buyback, could
reduce NatWest Group plc's capital and liquidity, which may have an
adverse effect on NWB Group.
HM Treasury has indicated that it
intends to respect the commercial decisions of NatWest Group and
that NatWest Group entities (including NWB Group) will continue to
have their own independent board of directors and management team
determining their own strategy. However, for as long as HM Treasury
remains NatWest Group plc's largest single shareholder, HM Treasury
and UK Government Investments Limited ('UKGI') (as manager of HM
Treasury's shareholding) could exercise a significant degree of
influence over NatWest Group (including NWB Group) including: the
election or removal of directors, the appointment or removal of
senior management, NatWest Group's (including NWB Group's) capital
strategy, dividend policy, remuneration policy or the conduct of
NatWest Group's (including NWB Group's) operations.
HM Treasury or UKGI's approach
largely depends on government policy, which could change. The
manner in which HM Treasury or UKGI exercises HM Treasury's rights
as the largest single shareholder of NatWest Group could give rise
to conflicts between the interests of HM Treasury and the interests
of other shareholders, including as a result of a change in
government policy. The exertion of such influence over NatWest
Group may in turn adversely affect the governance, business
strategy, future results, financial condition and/or prospects of
NWB Group.
In addition, NWB Plc is a wholly
owned subsidiary of NatWest Group plc, and NatWest Group plc
therefore controls NWB Group's board of directors, corporate
policies and strategic direction. The interests of NatWest Group
plc as an equity holder and as NWB Group's parent may differ from
the interests of NWB Group or of potential investors in NWB Group's
securities.
Any of the above may have a material
adverse effect on NWB Group's future results, financial condition,
prospects, and/or reputation.
Strategic risk
NatWest Group (of which NWB Group
forms part) continues to implement its strategy, which carries
significant execution and operational risks and it may not achieve
its stated aims and targeted outcomes.
NatWest Group (of which NWB Group
forms part) continues to implement its strategy, which is intended
to reflect the rapidly shifting environment and backdrop of
significant disruption in society driven by technology and changing
customer expectations. Further, shifting trends include
digitalisation, decarbonisation, automation, artificial
intelligence, e-commerce and hybrid working, each of which has
resulted in significant market volatility and change.
There is also increasing investor,
employee, stakeholder, regulatory and customer scrutiny regarding
how businesses address these changes and related environmental
challenges, including climate change, biodiversity and other
sustainability issues, including how NatWest Group supports its
customers' transition to net zero, is tackling inequality, working
conditions, workplace health, safety and wellbeing, diversity and
inclusion, data protection and management, workforce management,
human rights and supply chain management.
In recent years, as part of its
strategy, NatWest Group has refocused its NatWest Markets business,
and has also created the Commercial & Institutional business
segment. This business segment combines the previously separately
reporting Commercial, NatWest Markets and RBS International
businesses to form a single business segment, which focuses on
serving Commercial & Institutional customers. It was created to
promote closer operational and strategic alignment to support
growth, with more integrated services to customers across NatWest
Group entities within and outside the ring-fenced banks, with the
potential increased risk of breach of the UK ring-fencing regime
requiring effective conflicts of interest policies. In December
2023, a transfer pricing arrangement between NWB Group and NWM
Group allowing a sharing of certain Commercial & Institutional
business segment profits through payment from NWB Group to NWM
Group was approved. As a result, NWB Group may suffer from reduced
profitability if the relevant Commercial & Institutional
profits are reduced because of weaker performance in NWM
Group
Many factors may adversely impact
the successful implementation of NatWest Group's strategy and the
delivery of its intended benefits, including:
-
macroeconomic challenges including GDP growth,
inflation, changing interest rates, changing asset prices
(including residential and commercial property), energy prices,
supply chain disruption, changes to monetary and fiscal policy, and
the impact of armed conflict, which may adversely affect NWB
Group's customers and which could in turn impact adversely certain
strategic initiatives and new venture opportunities for NWB
Group;
-
changing customer expectations and behaviour in
response to macroeconomic conditions or developments, technology
and other factors which could reduce the profitability,
competitiveness, or volume of the services NWB Group
offers;
-
the rapid emergence and rapid deployment of new
technologies (such as artificial intelligence, quantum computing,
blockchain and digital currencies) resulting in a potential shift
across the market, towards products and services that are not part
of NWB Group's core offering today;
-
increased competitive threats from incumbent
banks, fintech companies, large technology conglomerates and other
new market entrants (including those that emerge from mergers and
consolidations) who may have competitive advantages in terms of
scale, technology and customer engagement;
-
uncertainties regarding, or changes by, the senior
leadership of NatWest Group; and
-
changes to the regulatory environment and
associated requirements which could lead to shifts in operating
cost and regulatory capital requirements, that impact NWB Group's
product offerings and business models; (see also 'NWB Group's
businesses are subject to substantial regulation and oversight,
which are constantly evolving and may adversely affect NWB Group';
and NWB Group could incur losses or be required to maintain higher
levels of capital as a result of limitations or failure of various
models)
Delivery of NWB Group's strategy
will require:
-
maintaining effective governance, procedures,
systems and controls giving effect to NatWest Group's
strategy;
-
managing a broad range of risks and opportunities
related to changes in the macroeconomic environment, customer
expectations and behaviour, technology, regulation and competition
alongside the emerging risks and opportunities associated with
climate and other sustainability-related areas;
-
achieving a number of financial, capital and
operational targets and expectations within the relevant timeframe,
or at all; and
-
continued cost-controlling measures, which may
result in provisions in connection to a lower NatWest Group's (and
NWB Group's) cost base, may divert investment from other areas, and
may vary considerably from year to year.
In pursuing NatWest Group's
strategy, NWB Group may not be able to successfully: (i) implement
some or all aspects of its strategy; (ii) meet any or all of the
related targets or expectations of its strategy and otherwise
realise the anticipated benefits of its strategy, in a timely
manner, or at all; or (iii) realise the intended strategic
objectives of any other future strategic or growth initiative. The
scale and scope of NatWest Group's (and NWB Group's) strategy and
the intended changes continue to present material business,
operational and regulatory (including compliance with the UK
ring-fencing regime), conflicts, legal, execution, IT system,
cybersecurity, internal culture, conduct and people risks.
Implementing changes and strategic actions, including in respect of
any growth initiatives, requires the effective application of
robust governance and controls frameworks and robust IT systems;
and there is a risk that NatWest Group (and NWB Group) may not be
successful in all these respects. The ongoing implementation of NatWest Group's strategy could result in
materially higher costs than initially contemplated (including due
to material uncertainties and factors outside of NatWest Group's
control) and may not be completed as planned (both in terms of
substantive targets and timing), or at all. This could lead to
additional management actions by NatWest Group (or NWB
Group).
Each of these risks, and others
identified in these Principal Risks and Uncertainties, individually
or collectively could jeopardise the implementation and delivery of
NatWest Group's strategy, impact NWB Group's products and services
offering, its reputation with customers or business model and
adversely affect NWB Group's ability to deliver its strategy and
meet its targets and guidance, each of which could have a material
adverse effect on NWB Group's future results, financial condition,
prospects, and/or reputation.
Acquisitions, divestments or other
strategic transactions by NatWest Group (and/or NWB Group) may not
be successful, and consolidation or fragmentation of the financial
services industry may adversely affect NatWest Group.
The financial services industry is
experiencing continued competitive pressure resulting from
technological advancement that disrupts traditional business models
and from incumbent banks, fintech companies, large technology
conglomerates and other new market entrants. To compete
effectively, NatWest Group may decide (of which NWB Group forms
part), as part of its strategy, to undertake acquisitions,
investments, the purchase of assets and liabilities, divestments,
restructurings, reorganisations, joint ventures and other strategic
partnerships, as well as other transactions and initiatives. In
addition, NatWest Group (of which NWB Group forms part), may decide
to grow its business through these transactions and initiatives to,
amongst others, : (i) enhance capabilities that may lead to better
productivity or cost efficiencies; (ii) acquire talent; (iii)
pursue new products or expand existing products; and/or (iv) enter
new markets or enhance its presence in existing markets.
In pursuing its strategy, NWB Group
may not fully realise the expected benefits and value from the
above-mentioned transactions and initiatives in the time, or to the
degree anticipated, or at all. In particular, NatWest Group (and
NWB Group) may: (i) fail to realise the business rationale for the
transaction or initiative, or rely on assumptions underlying the
business plans supporting the valuation of a target transaction or
initiative that may prove inaccurate, for example, regarding
synergies and expected commercial demand; (ii) fail to successfully
integrate any acquired businesses, investment, joint-venture or
assets (including in respect of technologies, existing strategies,
products, governance, systems and controls, and human capital) or
to successfully divest or restructure a business; (iii) fail to
retain key employees, customers and suppliers of any acquired or
restructured business; (iv) be required or wish to terminate
pre-existing contractual relationships, which could prove costly
and/or be executed at unfavourable terms and conditions; (v) fail
to discover certain contingent or undisclosed liabilities in
businesses that it acquires, or its due diligence to discover any
such liabilities may be inadequate; (vi) not obtain necessary
regulatory and other approvals or onerous conditions may be
attached to such approvals, and (vii) compete with existing larger
banks or financial institutions (and those that emerge from mergers
and consolidations) or other larger entities offering financial
services products that may have more bargaining power in
negotiations than NatWest Group (or NWB Group). Accordingly,
NatWest Group (or NWB Group) may not be successful in changing its
business and any particular transaction may not succeed, may be
limited in scope or scale (including due to NatWest Group's current
ownership structure) and may not conclude on the terms
contemplated, or at all.
Continued competitive pressure in
the financial services industry from both established and new
market entrants such as technology companies, may have a negative
impact on NWB Group's business. Existing larger banks or financial
institutions (and those that emerge from mergers and
consolidations) or other larger entities offering financial
services products may have more bargaining power in negotiations
than NatWest Group (and NWB Group) and therefore may be in a
position to extract more advantageous terms than NatWest Group (and
NWB Group). See also, 'NWB Group operates in markets that are
highly competitive, with competitive pressures and technology
disruption'.
Any of the above may have a material
adverse effect on NWB Group's future results, financial condition,
prospects, and/or reputation.
The transfer of NatWest Group's
Western European corporate portfolio involves certain
risks.
To improve efficiencies and best
serve customers following Brexit, NWB Group expects that certain of
NatWest Group's assets, liabilities, transactions and activities
(including NatWest Group's Western European corporate portfolio,
principally consisting of term funding and revolving credit
facilities), may be: (i) transferred from the ring-fenced subgroup
of NatWest Group, to NWM Group and/or (ii) transferred to the
ring-fenced subgroup of NatWest Group from NWM Group, subject to
regulatory and customer requirements. The timing, success and
quantum of any of these transfers remain uncertain as is the impact
of these transactions on its results of operations. As a result,
this could have a material adverse effect on NatWest Group's
(including NWB Group's) future results, financial condition,
prospects, and/or reputation.
Financial resilience risk
NWB Group may not achieve its
ambitions, targets and guidance it communicates or generate
sustainable returns.
As part of NatWest Group's strategy,
it has set a number of financial, capital and operational targets
for NWB Group including in respect of: MREL targets, funding plans
and requirements, employee engagement, diversity and inclusion as
well as climate strategy (including its climate and sustainable
funding and financing targets) and customer satisfaction
targets.
NWB Group's ability to meet NatWest
Group and NWB Group's respective ambitions, targets and guidance
and make discretionary capital distributions are subject to various
internal and external factors, risks and uncertainties. These
include, but are not limited to: market, regulatory, macroeconomic
and political uncertainties, developments relating to litigation,
governmental actions, investigations and regulatory matters, and
operational risks and risks relating to NWB Group's business model
and strategy (including risks associated with climate and other
sustainability-related issues), competitive pressures, litigation,
governmental actions, investigations and regulatory matters. If
assumptions, judgements and estimates (for example about future
economic conditions) prove to be incorrect, NatWest Group may not
achieve any or all or its targets or meet its ambitions, targets,
or guidance. A number of factors may impact NWB Group's ability to
maintain its current CET1 ratio, including impairments, limited
organic capital generation or unanticipated increases in RWAs. In
addition, the run-down of RWAs may be accompanied by the
recognition of disposal losses which may be higher than
anticipated. See also 'NatWest Group (NWB Plc's parent company)
continues to implement its strategy, which carries significant
execution and operational risks and may not achieve its stated aims
and targeted outcomes.'
Any failure of NWB Group to achieve
NatWest Group and NWB Group's respective ambitions, targets or
guidance may have a material adverse effect on NatWest Group's
future results, financial condition, prospects, and/or
reputation.
NWB Group has significant exposure
to counterparty and borrower risk including credit losses, which
may have an adverse effect on NWB Group.
NWB Group has exposure to many
different sectors, customers and counterparties, and risks arising
from actual or perceived changes in credit quality and the
recoverability of monies due from borrowers and other
counterparties are inherent in a wide range of NWB Group's
businesses. NWB Group's lending strategy and associated processes
and systems may fail to identify, anticipate or quickly react to
weaknesses or risks in a particular sector, market, borrower or
counterparty, or NatWest Group's credit risk appetite relative to
competitors, or fail to appropriately value physical or financial
collateral. This may result in increased default rates or a higher
loss given default for loans, which may, in turn, impact NWB
Group's profitability. See also 'Risk and capital management -
Credit Risk'.
The credit quality of NWB Group's
borrowers and other counterparties may be affected by UK and global
macroeconomic and political uncertainties, prevailing economic and
market conditions. These include factors relating to interest rates
and inflation, changing asset prices (including residential and
commercial property), energy prices, supply chain disruption,
changes to monetary and fiscal policy, the impact of armed
conflict, and the legal and regulatory landscape in the UK and
countries where NWB Group is exposed to credit risk. Any further
deterioration in these conditions or changes to legal or regulatory
landscapes could worsen borrower and counterparty credit quality or
impact the enforcement of contractual right, increasing credit
risk.
Any increase in drawings upon
committed credit facilities may also increase NWB Group's RWAs. In
addition, the level of household indebtedness in the UK (on a per
capita basis) remains high. The ability of households and
businesses to service their debts could be worsened by a period of
high unemployment, or high interest rates or inflation,
particularly if prolonged.
NWB Group may be affected by
volatility in property prices (including as a result of UK
political or economic conditions) given that NWB Group's mortgage
loan and wholesale property loan portfolios as at 31 December 2023,
amounted to £214.8 billion, representing 66% of NWB Group's total
loan exposure. If property prices in the UK were to weaken this
could lead to higher impairment charges, particularly if default
rates also increase. In addition, NWB Group's credit risk may be
exacerbated if the collateral that it holds cannot be realised as a
result of market conditions, regulatory intervention, or other
applicable laws, or if it is liquidated at prices not sufficient to
recover the net amount outstanding to NWB Group after accounting
for any IFRS 9 provisions already made. This is most likely to
occur during periods of illiquidity or depressed asset
valuations.
Concerns about, or a default by, a
financial institution or intermediary could lead to significant
liquidity problems and losses or defaults by other financial
institutions or intermediaries, since the commercial and financial
soundness of many financial institutions and intermediaries is
closely related and interdependent as a result of credit, trading,
clearing and other relationships. Any perceived lack of
creditworthiness of a counterparty or borrower may lead to
market-wide liquidity problems and losses for NWB Group. This
systemic risk may also adversely affect financial intermediaries,
such as clearing agencies, clearing houses, banks, securities firms
and exchanges with which NWB Group interacts on a regular basis.
See also, 'NWB Group may not meet the prudential regulatory
requirements for liquidity and funding or may not be able to
adequately access sources of liquidity and funding, which could
trigger the execution of certain management actions or recovery
options.'
As a result, adverse changes in
borrower and counterparty credit risk may cause additional
impairment charges under IFRS 9, increased repurchase demands,
higher costs, additional write-downs and losses for NWB Group and
an inability to engage in routine funding transactions. If NWB
Group experiences losses and a reduction in profitability, this is
likely to affect the recoverable value of fixed assets, including
goodwill and deferred taxes, which may lead to
write-downs.
NWB Group has applied an internal
analysis of multiple economic scenarios (MES) together with the
determination of specific overlay adjustments to inform its IFRS 9
ECL (Expected Credit Loss). The recognition and measurement of ECL
is complex and involves the use of significant judgement and
estimation. This includes the formulation and incorporation of
multiple forward-looking economic scenarios 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.
Going forward, NWB Group anticipates observable credit
deterioration of a proportion of assets resulting in a systematic
uplift in defaults, which is mitigated by those economic assumption
scenarios being reflected in the Stage 2 ECL across portfolios,
along with a combination of post model overlays in both wholesale
and retail portfolios reflecting the uncertainty of credit
outcomes. See also, 'Risk and capital management - Credit Risk'. A
credit deterioration would also lead to RWA increases. Furthermore,
the assumptions and judgements used in the MES and ECL assessment
at 31 December 2023 may not prove to be adequate resulting in
incremental ECL provisions for NWB Group.
In line with certain mandated
COVID-19 pandemic support schemes, NWB Group assisted customers
with a number of initiatives including NWB Group's participation in
BBLS, CBILS and CLBILS products. NWB Group sought to manage the
risks of fraud and money laundering against the need for the fast
and efficient release of funds to customers and businesses. NWB
Group may be exposed to fraud, conduct and litigation risks arising
from inappropriate approval (or denial) of BBLS, CBILS or CLBILS or
the enforcing or pursuing repayment of BBLS, CBILS and CLBILS (or a
failure to exercise forbearance), which may have an adverse effect
on NWB Group's reputation and results of operations. The
implementation of the initiatives and efforts mentioned above may
result in litigation, regulatory and government actions and
proceedings. These actions may result in judgements, settlements,
penalties, fines, or removal of recourse to the government
guarantee provided under those schemes for impacted
loans.
Any of the above may have a material
adverse effect on NWB Group's future results, financial condition,
prospects, and/or reputation.
NWB Group operates in markets that
are highly competitive, with competitive pressures and technology
disruption.
The market for UK financial services
is highly competitive. NWB Group expects competition to continue
and intensify in response to various changes including; evolving
customer behaviour, technological changes (including digital
currencies and other instruments, stablecoins and the growth of
digital banking, such as from fintech entrants), competitor
behaviour, new entrants to the market (including non-traditional
financial services providers such as retail or technology
conglomerates, who may have competitive advantages in scale,
technology and customer engagement), competitive foreign-exchange
offerings, industry trends resulting in increased disaggregation or
unbundling of financial services or conversely the
re-intermediation of traditional banking services, and the impact
of regulatory actions and other factors. In particular,
developments in the financial sector resulting from new (or more
competitive) banking, lending and payment products and services
offered by rapidly evolving incumbents, challengers (including
shadow banks and alternative lenders, i.e. entities which carry out
activities of a similar nature to banks but without the same
regulatory oversight) and new entrants such as technology companies
(which may result in a shift in customer behaviour) and the
introduction of disruptive technology, may impede NWB Group's
ability to grow or retain its market share and impact its revenues
and profitability, particularly in its key UK retail and commercial
and institutional banking segments. Moreover, innovations such as biometrics, artificial
intelligence (including generative artificial intelligence),
automation, the cloud, blockchain, cryptocurrencies and quantum
computing may rapidly facilitate industry
transformation.
Some of these trends have been
catalysed by various regulatory and competition policy
interventions, including the UK initiative on Open Banking, 'Open
Finance' and other remedies imposed by the Competition and Markets
Authority ('CMA') which are designed to further promote competition
within the financial sector (including banking). The competition
enhancing measures under NatWest Group's independently administered
Alternative Remedies Package ('ARP') benefits grant recipients and
eligible competitors. The ARP may be more costly than anticipated
and may adversely affect NWB Group's competitive position and/or
reputation. Failure to comply with the terms of the ARP scheme
could result in the imposition of additional measures or
limitations on NWB Group's operations, additional supervision by
NWB Group's regulators, and loss of investor confidence.
Increasingly, many of the products
and services offered by NWB Group are, and will become, more
technology intensive, including through digitalisation and the use
of artificial intelligence. For example, NWB Group has invested in
a number of fintech ventures, including Mettle, FreeAgent, Tyl,
Rapid Cash, Rooster Money, Vodeno and Cushon. NWB Group's ability
to develop or acquire such digital solutions (which also need to
comply with applicable and evolving regulations) and their
integration in NWB Group's systems and controls has become
increasingly important to retaining and growing NWB Group's
competitiveness, market share and customer facing businesses in the
UK or elsewhere. There is a risk that NWB Group's innovation
strategy, which includes investment in its IT capability intended
to address the material increase in customer and merchant use of
online and mobile technology for banking as well as selective
acquisitions, which carry associated risks will be successful, or
that it will allow NWB Group to successfully offer
innovative products and
services in the future. For example, NWB Group's current or future
competitors may be more successful than NWB Group in implementing
technologies for delivering products or services to their
customers, which may adversely affect its competitive position. NWB
Group may also fail to identify future opportunities or fail to
derive benefits from technologies in a context of technological
innovation, changing customer behaviour and changing regulatory
demands resulting in increased competition from traditional banking
businesses as well as new providers of financial services,
including technology conglomerates with strong brand recognition,
that may be able to develop financial services at a lower cost
base.
NWB Group's competitors may also be
better able to attract and retain customers and key employees, may
have more effective IT systems, and may have access to lower cost
funding and/or be able to attract deposits on more favourable terms
than NWB Group. Although NWB Group invests in new technologies and
participates in industry and research-led initiatives aimed at
developing new technologies, such investments may be insufficient
or ineffective, especially given NWB Group's focus on cost
efficiencies. This could affect NWB Group's ability to offer
innovative products or technologies for delivering products or
services to customers and its competitive position.
Furthermore, the development of
innovative products depends on NWB Group's ability to effectively
produce, acquire, or manage underlying high-quality data, failing
which its ability to offer innovative products may be compromised.
If NWB Group is unable to offer competitive, attractive and
innovative products that are also profitable and rolled out in a
timely manner, it will lose market share, incur losses on some or
all of its initiatives and lose opportunities for growth. In this
context, NWB Group is investing in the automation of certain
solutions and interactions within its customer-facing businesses,
including through automated processes and artificial intelligence.
Such initiatives may result in operational, reputational and
conduct risks if the technology used is not used appropriately, is
defective, inadequate or is not fully integrated into NWB Group's
current solutions, systems and controls. There can be no certainty
that such initiatives will deliver the expected cost savings and
investment in technology (including automated processes and
artificial intelligence) will likely also result in increased costs
for NWB Group.
In addition, the implementation of
NatWest Group's strategy (including in relation to acquisitions,
divestments, reorganisations and/or partnerships), delivery on its
climate ambition, cost-controlling measures, as well as employee
remuneration constraints, may also have an impact on NWB Group's
ability to compete effectively. Intensified competition from
incumbents, challengers and new entrants as well as
disintermediation by large technology companies could affect NWB
Group's ability to maintain satisfactory returns.
Moreover, activist investors have
increasingly become engaged and interventionist in recent years,
which may pose a threat to NatWest Group's (including NWB Group's)
strategic initiatives. Furthermore, continued consolidation or
technological or other developments in the financial services
industry could result in NWB Group's competitors gaining greater
capital and other resources, including the ability to offer a
broader and more attractive or better value range of products and
services and geographic diversity, or the emergence of new
competitors.
Any of the above may have a material
adverse effect on NWB Group's future results, financial condition,
prospects, and/or reputation.
NWB Group may not meet the
prudential regulatory requirements for liquidity and funding or may
not be able to adequately access sources of liquidity and funding,
which could trigger the execution of certain management actions or
recovery options.
Liquidity and the ability to raise
funds continues to be a key area of focus for NWB Group and the
industry as a whole. NatWest Group and NWB Plc (as a member of the
Domestic Liquidity sub-group) are required by regulators in the UK,
the EU and other jurisdictions in which they undertake regulated
activities to maintain adequate liquidity and funding resources. To
satisfy its liquidity and funding requirements, NWB Group may
therefore access sources of liquidity and funding through retail
and wholesale deposits, as well as through the debt capital
markets. As at 31 December 2023, NWB Plc held £ 294.3 billion in
deposits from banks and customers. The level of deposits may
fluctuate due to factors outside NWB Group's control, such as a
loss of customers, loss of customer and/or investor confidence
(including in individual NatWest Group entities and as a result of
volatility in the financial sector), changes in customer behaviour,
changes in interest rates, government support, increasing
competitive pressures for retail and corporate customer deposits or
the reduction or cessation of deposits by wholesale depositors,
which could result in a significant outflow of deposits within a
short period of time. An inability to grow, or any material
decrease in NWB Group's deposits could, particularly if accompanied
by one or more of the other factors mentioned above, adversely
affect NWB Group's ability to satisfy its liquidity or funding
needs, or comply with its related regulatory requirements. In turn,
this could require NWB Group to adapt its funding plans or change
its operations.
Macroeconomic developments,
political uncertainty, changes in interest rates, and market
volatility could affect NWB Group's ability to access sources of
liquidity and funding on satisfactory terms, or at all. This may
result in higher funding costs and failure to comply with
regulatory capital, funding and leverage requirements. As a result,
NWB Group could be required to change its funding
plans. This
could exacerbate funding and liquidity risk, which may adversely
affect NWB Group.
As at 31 December 2023, NWB Plc's
liquidity coverage ratio was 138% and net stable funding ratio was
126%. If NWB Plc's liquidity position were to come under stress,
and if NWB Group were unable to raise funds through deposits, in
the debt capital markets or through other reliable funding sources,
on acceptable terms, or at all, its liquidity position would likely
be adversely affected and it might be unable to meet deposit
withdrawals on demand or at their contractual maturity, to repay
borrowings as they mature, to meet its obligations under committed
financing facilities, to comply with regulatory funding
requirements, to undertake certain capital and/or debt management
activities, and/or to fund new loans, investments and businesses,
or make capital distributions to NatWest Group.
If, under a stress scenario, the
level of liquidity falls outside of NWB Group's risk appetite,
there are a range of recovery management actions that NWB Group
could take to manage its liquidity levels, but any such actions may
not be sufficient to restore adequate liquidity levels and the
related implementation may have adverse consequences for NWB
Group's operations. Under the EU Bank Recovery and Resolution
Directives I and II ('BRRD'), as implemented in the UK, NatWest
Group must maintain a recovery plan acceptable to its regulator,
such that a breach of NWB Group's applicable liquidity requirements
may trigger the application of NatWest Group's recovery plan to
attempt to remediate a deficient liquidity position.
NWB Group may need to liquidate
assets to meet its liabilities, including disposals of assets not
previously identified for disposal to reduce its funding
commitments or trigger the execution of certain management actions
or recovery options. In a time of reduced liquidity, NWB Group may
be unable to sell its assets, at attractive prices, or at all,
which may have a material adverse effect on NWB Group's
liquidity.
Any of the above may have a material
adverse effect on NWB Group's future results, financial condition,
prospects, and/or reputation.
NWB Group may not meet the
prudential regulatory requirements for regulatory capital and MREL,
or manage its capital effectively, which could trigger the
execution of certain management actions or recovery
options.
NatWest Group and NWB Plc (via the
Domestic Liquidity sub-group) are required by regulators in the UK,
the EU and other jurisdictions in which they undertake regulated
activities to maintain adequate financial resources. Adequate
levels of capital provide NatWest Group (including NWB Group) with
financial flexibility specifically in its core UK operations in the
face of turbulence and uncertainty in the UK and the global
economy.
As at 31 December 2023, NWB Plc's
CET1 ratio was 11.6%. A number of subsidiaries and sub-groups
within NWB Group, principally banking entities, are subject to
various individual regulatory capital requirements in the UK and
overseas. NatWest Group plc currently targets a CET1 ratio of
13-14% by 31 December 2024. NatWest Group plc's target CET1 ratio
is based on a combination of its views on the appropriate level of
capital and its actual and expected regulatory requirements and
internal modelling, including stress scenarios and management's
and/or the Prudential Regulation Authority's ('PRA') views on
appropriate buffers above minimum required operating
levels.
NatWest Group's current capital
strategy for NWB Plc is based on: the expected accumulation of
additional capital through the accrual of retained earnings over
time; the receipt of assets and resultant RWAs from other NatWest
Group entities; RWA growth in the form of regulatory uplifts and
lending growth and other capital management initiatives which focus
on improving capital efficiency through improved data and
upstreaming of dividends from NWB Plc to NatWest Group plc and
ensuring NatWest Group meets its medium to long term
targets.
A number of factors may impact NWB
Group's ability to maintain its CET1 ratio target and achieve its
capital strategy. These include:
-
a depletion of its capital resources through
increased costs or liabilities or reduced profits (for example, due
to an increase in provisions due to a deterioration in UK economic
conditions);
-
an increase in the quantum of RWAs/Leverage
Exposure in excess of that expected, including due to regulatory
changes (including their interpretation or application) or a
failure in internal controls or procedures to accurately measure
and report RWAs/Leverage Exposure;
-
changes in prudential regulatory requirements/
Leverage Requirement including NWB Plc's Total Capital Requirement
set by the PRA, including Pillar 2 requirements, as applicable, and
regulatory buffers as well as any applicable scalars; and reduced
upstreaming of dividends from NWB Group plc's subsidiaries because
of changes in their financial performance and/or the extent to
which local capital requirements exceed NWB Plc's target ratio; and
limitations on the use of double leverage (i.e., NWB Group's use of
debt to invest in the equity of its subsidiaries, as a result of
the Bank of England's and/or NWB Group's evolving views on
distribution of capital within groups).
In addition to regulatory capital,
NWB Plc is required to maintain a set quantum of internal MREL set
as the higher of its RWAs or applicable leverage-based minimum
capital requirement. The Bank of England has identified single
point-of-entry at NatWest Group plc, as the preferred resolution
strategy for NatWest Group. As a result, NatWest Group plc is the
only entity that can externally issue securities that count towards
its MREL, the proceeds of which can then be downstreamed to meet
the internal MREL of its operating entities, including NWB Plc. NWB
Plc is therefore dependent not only on NatWest Group plc to fund
NWB Plc's internal MREL targets over time, but also on NatWest
Group plc's ability to issue and maintain sufficient amounts of
external MREL liabilities to support this. In turn, NWB Plc is
required to fund the internal capital requirements and MREL of its
subsidiaries. See also, 'NWB Group is reliant on NatWest Group for
capital and funding support, and is substantially reliant on
NatWest Group plc's ability to issue sufficient amounts of capital
and external MREL securities and downstream the proceeds to NWB
Group. The inability to do so may adversely affect NWB
Group.'
If, under a stress scenario, the
level of regulatory capital or MREL falls outside of NWB Group's
risk appetite, there are a range of recovery management actions
(focused on risk reduction and mitigation) that NWB Group could
seek to take to manage its capital levels, but any such actions may
not be sufficient to restore adequate capital levels. Under the
BRRD, as implemented in the UK, NatWest Group must maintain a
recovery plan acceptable to its regulator, such that a breach of
NWB Group's applicable capital or leverage requirements may trigger
the application of NatWest Group's recovery plan to remediate a
deficient capital position.
NatWest Group's regulator may
request that NWB Group carry out certain capital management actions
or, if NatWest Group plc's CET1 ratio falls below 7%, certain
regulatory capital instruments issued by NatWest Group plc will be
written-down or converted into equity and there may be an issue of
additional equity by NatWest Group plc, which could result in the
reduction in value of the holdings of
NatWest Group plc's existing shareholders. The success of such
issuances will also be dependent on favourable market conditions
and NatWest Group may not be able to raise the amount of capital
required on acceptable terms or at all. Separately, NatWest Group
may address a shortage of capital by taking action to reduce
leverage exposure and/or RWAs via asset or business disposals.
These actions may, in turn, affect: NWB Group's product offering,
credit ratings, ability to operate its businesses, pursue its
current strategy and strategic opportunities. See also, 'NatWest
Group (including NWB Group) may become subject to the application
of UK statutory stabilisation or resolution powers which may result
in, for example, the write-down or conversion of NWB Group's
eligible liabilities.'; and also 'NWB Group may be adversely
affected if NatWest Group fails to meet the requirements of
regulatory stress tests'.
Any of the above may have a material
adverse effect on NWB Group's future results, financial condition,
prospects, and/or reputation.
NWB Group is reliant on NatWest
Group for capital and funding support, and is substantially reliant
on NatWest Group plc's ability to issue sufficient amounts of
capital and external MREL securities and downstream the proceeds to
NWB Group. The inability to do so may adversely affect NWB
Group.
NWB Plc receives capital and funding
from NatWest Group. NWB Plc has set target levels for different
tiers of capital and for the internal MREL, as percentages of its
RWAs. The level of capital and funding required for NWB Plc to meet
its internal targets is therefore a function of the level of RWAs
and its leverage exposure in NWB Plc and this may vary over
time.
NWB Plc's internal MREL comprises
the capital value of regulatory capital instruments and
loss-absorbing senior funding issued by NWB Plc to its ultimate
parent, NatWest Group plc. The Bank of England has identified that
the preferred resolution strategy for NatWest Group is as a single
point of entry at NatWest Group plc. As a result, only NatWest
Group plc is able to issue Group MREL eligible liabilities to
third-party investors, using the proceeds to fund the internal MREL
targets and/or requirements of its operating entities, including
NWB Plc.
NWB Plc is therefore dependent on
NatWest Group plc to fund its internal capital targets and its
ability to source appropriate funding at NatWest Group plc level to
support this. NWB Plc is also dependent on NatWest Group plc to
fund its internal MREL target over time and its ability to raise
and maintain sufficient amounts of external MREL liabilities to
support this.
If NatWest Group plc is unable to
issue adequate levels of MREL securities such that it is unable to
downstream sufficient amounts to NWB Plc, this could lead to a
failure of NWB Group to meet its own individual internal MREL as
well as the internal MREL of subsidiaries within NWB Group, which
in either case may have a material adverse effect on NWB Group's
future results, financial condition, prospects, and reputation. See
also, 'NWB Group may not meet the prudential regulatory
requirements for capital and MREL, or manage its capital
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 NWB Plc or other NWB Group subsidiaries) or
any of their respective debt securities could adversely affect the
availability of funding for NWB Group, reduce NWB Group's liquidity
position and funding and increase the cost of funding.
Rating agencies regularly review
NatWest Group plc, NWB Plc and other NatWest Group entities' credit
ratings and outlooks. NWB Group entities' credit ratings and
outlooks could be negatively affected (directly and indirectly) by
a number of factors that can change over time, including without
limitation: credit rating agencies' assessment of NWB Group's
strategy and management's capability; its financial condition
including in respect of profitability, asset quality, capital,
funding and liquidity, and risk management practices; the level of
political support for the sectors and regions in which NWB Group
operates; the implementation of structural reform; the legal and
regulatory frameworks applicable to NWB Group's legal structure;
business activities and the rights of its creditors; changes in
rating methodologies; changes in the relative size of the
loss-absorbing buffers protecting bondholders and depositors; the
competitive environment; political, geopolitical and economic
conditions in NWB Group's key markets (including inflation and
interest rates, supply chain disruptions and the outcome of any
further Scottish independence referendum); any reduction of the
UK's sovereign credit rating and market uncertainty.
In addition, credit ratings agencies
are increasingly taking into account sustainability-related
factors, including climate, environmental, social and governance
related risk, as part of the credit ratings analysis, as are
investors in their investment decisions. See also 'A reduction in
the ESG ratings of NWB Group could have a negative impact on NWB
Group's reputation and on investors' risk appetite and customers'
willingness to deal with NWB Group.'
Any reductions in the credit ratings
of NatWest Group plc, NWB Plc or of certain other NatWest Group
entities, including, in particular, any downgrade below investment
grade, or a deterioration in the capital markets' perception of NWB
Group's financial resilience could significantly affect NWB Group's
access to capital markets, reduce the size of its deposit base and
trigger additional collateral or other requirements in its funding
arrangements or the need to amend such arrangements, which could
adversely affect NWB Group's (and, in particular, NWB Plc's)
liquidity and funding position, cost of funding and its access to
capital markets and could limit the range of counterparties willing
to enter into transactions with NWB Group (and, in particular, with
NWB Plc) on favourable terms, or at all. This may in turn adversely
affect NWB Group's competitive position and threaten its
prospects.
Any of the above may have a material
adverse effect on NWB Group's future results, financial condition,
prospects, and/or reputation.
NWB Group may be adversely affected
if NatWest Group fails to meet the requirements of regulatory
stress tests.
NatWest Group is subject to annual
and other stress tests by its regulator in the UK. Stress tests are
designed to assess the resilience of banks such as NWB Group to
potential adverse economic or financial developments and ensure
that they have robust, forward-looking capital planning processes
that account for the risks associated with their business profile.
If the stress tests reveal that a bank's existing regulatory
capital buffers are not sufficient to absorb the impact of the
stress, then it is possible that the NWB Group may need to take
action to strengthen its capital position.
Failure by NatWest Group to meet the
quantitative and qualitative requirements of the stress tests as
set forth by its UK regulator may result in: NatWest Group's
regulators requiring NatWest Group to generate additional capital,
reputational damage, increased supervision and/or regulatory
sanctions, restrictions on capital distributions and loss of
investor confidence, all of which may have a material adverse
effect on NatWest Group's future results, financial condition,
prospects, and/or reputation and, in turn, NWB Group.
NWB Group could incur losses or be
required to maintain higher levels of capital as a result of
limitations or failure of various models.
Given the complexity of NWB Group's
business, strategy and capital requirements, NWB Group relies on
analytical and other models for a wide range of purposes, including
to manage its business, assess the value of its assets and its risk
exposure, as well as to anticipate capital and funding requirements
(including to facilitate NatWest Group's mandated stress testing).
In addition, NWB Group utilises models for valuations, credit
approvals, calculation of loan impairment charges on an IFRS 9
basis, financial reporting and for financial crime (criminal
activities in the form of money laundering, terrorist financing,
bribery and corruption, tax evasion and sanctions as well as
external or internal fraud (collectively, 'financial crime'). NWB
Group's models, and the parameters and assumptions on which they
are based, are periodically reviewed.
As model outputs are imperfect
representations of real-world phenomena or simplifications of
complex real-world systems and processes, and are based on a
limited set of observations, model outputs therefore remain
uncertain. NWB Group may face adverse consequences as a result of
actions or decisions based on models that are poorly developed,
incorrectly implemented, outdated or used inappropriately. This
includes models that are based on inaccurate or non-representative
data (for example, where there have been changes in the micro or
macroeconomic environment in which NWB Group operates) or as a
result of the modelled outcome being misunderstood, or by such
information being used for purposes for which it was not designed.
This could result in findings of deficiencies by NatWest Group's
(and in particular, NWB Group's) regulators (including as part of
NatWest Group's mandated stress testing) and increased capital
requirements, may render some business lines uneconomic, may
require management action or may subject NWB Group to regulatory
sanction, any of which in turn may also have an adverse effect on
NWB Group and its customers.
Any of the above may have a material
adverse effect on NWB Group's future results, financial condition,
prospects, and/or reputation.
NWB Group's financial statements are
sensitive to underlying accounting policies, judgements, estimates
and assumptions.
The preparation of financial
statements requires management to make judgements, estimates and
assumptions that affect the reported amounts of assets,
liabilities, income, expenses, exposures and RWAs. While estimates,
judgements and assumptions take into account historical experience
and other factors (including market practice and expectations of
future events that are believed to be reasonable under the
circumstances), actual results may differ due to the inherent
uncertainty in making estimates, judgements and assumptions
(particularly those involving the use of complex models). Further,
accounting policy and financial statement reporting requirements
increasingly require management to adjust existing judgements,
estimates and assumptions for the effects of climate-related,
sustainability and other matters that are inherently uncertain and
for which there is little historical experience which may affect
the comparability of NWB Group's future financial results with its
historical results. Actual results may differ due to the inherent
uncertainty in making climate-related and sustainability estimates,
judgements and assumptions.
Accounting policies deemed critical
to NWB Group's results and financial position, based upon
materiality and significant judgements and estimates, involve a
high degree of uncertainty and may have a material impact on its
results. For 2023, these include loan impairments, fair value,
deferred tax and conduct and litigation provisions. These are set
out in 'Critical accounting policies'.
Any of the above may have a material
adverse effect on NWB Group's future results, financial condition,
prospects, and/or reputation.
Changes in accounting standards may
materially impact NWB Group's financial results.
NWB Group prepares its consolidated
financial statements in conformity with the requirements of the
Companies Act 2006 and in accordance with IFRS as issued by the
International Accounting Standards Board. Changes in accounting
standards or guidance by accounting bodies or in the timing of
their implementation, whether immediate or foreseeable, could
result in NWB Group having to recognise additional liabilities on
its balance sheet, or in further write-downs or impairments to its
assets, and could also have an adverse effect on NWB
Group.
From time to time, the International
Accounting Standards Board may issue new accounting standards or
interpretations that could materially impact how NWB Group
calculates, reports and discloses its financial results and
financial condition, and which may affect NWB Group capital ratios,
including the CET1 ratio. New accounting standards and
interpretations that have been issued by the International
Accounting Standards Board but which have not yet been adopted by
NWB Group are discussed in 'Future accounting
developments'.
Any of the above may have a material
adverse effect on NWB Group's future results, financial condition,
prospects, and/or reputation.
NatWest Group (including NWB Group)
may become subject to the application of UK statutory stabilisation
or resolution powers which may result in, for example, the
write-down or conversion of NWB Group's eligible
liabilities.
HM Treasury, the Bank of England,
the PRA and the FCA (together, the 'Authorities') are granted
substantial powers to resolve and stabilise UK-incorporated
financial institutions. Five stabilisation options exist: (i)
transfer of all of the business of a relevant entity or the shares
of the relevant entity to a private sector purchaser; (ii) transfer
of all or part of the business of the relevant entity to a 'bridge
bank' wholly-owned by the Bank of England; (iii) transfer of part
of the assets, rights or liabilities of the relevant entity to one
or more asset management vehicles for management of the
transferor's assets, rights or liabilities; (iv) the write-down,
conversion, transfer, modification, or suspension of the relevant
entity's equity, capital instruments and liabilities; and (v)
temporary public ownership of the relevant entity. These options
may be applied to NatWest Group plc as the parent company or to NWB
Group, as a subsidiary, where certain conditions are met (such as,
whether the firm is failing or likely to fail, or whether it is
reasonably likely that action will be taken (outside of resolution)
that will result in the firm no longer failing or being likely to
fail). Moreover, there are modified insolvency and administration
procedures for relevant entities within NatWest Group, and the
Authorities have the power to modify or override certain
contractual arrangements in certain circumstances and amend the law
for the purpose of enabling their powers to be used effectively and
may promulgate provisions with retrospective
applicability.
Under the UK Banking Act 2009, the
Authorities are generally required to have regard to specified
objectives in exercising the powers provided for by the UK Banking
Act. One of the objectives (which is required to be balanced as
appropriate with the other specified objectives) refers to the
protection and enhancement of the stability of the financial system
of the UK. Moreover, the 'no creditor worse off' safeguard provides
that where resolution action is taken, the Authorities are required
to ensure that no creditor is in a worse position than if the bank
had entered into normal insolvency proceedings. Although, this
safeguard may not apply in relation to an application of the
separate write-down and conversion power relating to capital
instruments under the Banking Act 2009 in circumstances where a
stabilisation power is not also used, the UK Banking Act still
requires the Authorities to respect the hierarchy on insolvency
when using the write-down and conversion power. Further, holders of
debt instruments which are subject to the power may, however, have
ordinary shares transferred to or issued to them by way of
compensation.
Uncertainty exists as to how the
Authorities may exercise their powers including the determination
of actions undertaken in relation to the ordinary shares and other
securities issued by NatWest Group (including NWB Group), which may
depend on factors outside of NWB Group's control. Moreover, the UK
Banking Act provisions remain largely untested in practice,
particularly in respect of resolutions of large financial
institutions and groups.
If NatWest Group is at or is
approaching the point such that regulatory intervention is
required, there may be a corresponding material adverse effect on
NWB Group's future results, financial condition, prospects, and/or
reputation.
NatWest Group is subject to Bank of
England and PRA oversight in respect of resolution, and NWB Group
could be adversely affected should the Bank of England in the
future deem NatWest Group's preparations to be
inadequate.
NatWest Group is subject to
regulatory oversight by the Bank of England and the PRA and is
required (under the PRA rulebook) to carry out an assessment of its
preparations for resolution, submit a report of the assessment to
the PRA, and disclose a summary of this report. NatWest Group has
dedicated significant resources towards the preparation of NatWest
Group for a potential resolution scenario. In June 2022 the Bank of
England communicated its assessment of NatWest Group's preparations
and did not identify any shortcomings, deficiencies or substantive
impediments although two areas were highlighted as requiring
further enhancements. NatWest Group, and in turn NWB, could be
adversely affected should future Bank of England assessments deem
NatWest Group's preparations to be inadequate.
If future Bank of England
assessments identify a significant gap in NatWest Group's ability
to achieve the resolvability outcomes, or reveals that NatWest
Group is not adequately prepared to be resolved, or does not have
adequate plans in place to meet resolvability requirements, NatWest
Group may be required to take action to enhance its preparations to
be resolvable, resulting in additional costs and the dedication of
additional resources. Such a scenario may have an impact on NatWest
Group (and NWB Group) as, depending on the Bank of England's
assessment, potential action may include, but is not limited to,
restrictions on maximum individual and aggregate exposures, a
requirement to dispose of specified assets, a requirement to change
its legal or operational structure, a requirement to cease carrying
out certain activities, and/or to maintain a specified amount of
MREL. This may also impact NatWest Group's (and NWB Group's)
strategic plans and may have a material adverse effect on NWB
Group's future results, financial condition, prospects, reputation,
and/or lead to a loss of investor confidence.
Climate and sustainability-related risks
NWB Group and its value chain face
climate-related and sustainability-related risk that may adversely
affect NWB Group.
NWB Group and its value chain
(including its investors, customers, counterparties (including its
suppliers) and employees) may face financial and non-financial
risks arising from sustainability-related risks, including
climate-related risks.
Climate and sustainability-related
risks may:
-
adversely affect asset pricing and valuations of
NWB Group's own and other securities and, in turn, the wider
financial system;
-
adversely affect economic activities directly (for
example through lower corporate profitability or the devaluation of
assets) or indirectly (for example through macro-financial
changes);
-
adversely affect the viability or resilience of
business models over the medium to longer term, particularly those
business models most vulnerable to climate and
sustainability-related risks;
-
trigger losses stemming directly or indirectly
from liability risks and/or reputational damage, including as a
result of adverse media coverage, activists, the public, customers,
counterparties (including suppliers) and/or investors associating
NWB Group or its customers with adverse climate and
sustainability-related issues;
-
adversely affect NWB Group's ability to contribute
to deliver on NatWest Group's strategy, including contributing to
achieve NatWest Group's climate ambitions and targets;
-
exacerbate other risk categories to which NWB
Group is exposed, including credit risk, operational risk
(including business continuity), market risk (both traded and
non-traded), liquidity and funding risk (for example, net cash
outflows or depletion of liquidity buffers), reputational risk,
pension risk, regulatory compliance risk and conduct risk;
and
-
may have a material adverse effect on NWB Group's
reputation, future results, financial condition, and/or prospects
(including cash flows, access to finance or cost of capital over
the short, medium or long term).
Climate and sustainability matters
are becoming increasingly political and polarised. Some customers,
counterparties (including suppliers) and investors may decide not
to do business with NWB Group because, according to their own
assessment, NatWest Group's (including NWB Group) strategy,
ambitions and targets related to climate and sustainability do not
meet their expectations, whereas others may decide not to do
business with NWB Group for failing to progress to contribute to
NatWest Group's climate and sustainability-related strategy,
ambitions and targets or if they are of the view that they lack
credibility.
If NWB Group fails to identify,
assess, prioritise, monitor and react appropriately to climate and
sustainability-related risks, in a timely manner, or at all,
climate and sustainability-related physical, transition and
liability risks and opportunities, changing regulatory and market
expectations and societal preferences that NWB Group, its
customers, counterparties (including suppliers) face, this may have
a material adverse effect on NWB Group's business, future results,
financial condition, prospects, reputation or the price of its
securities.
Climate-related risks may adversely
affect the global financial system, NWB Group or its value
chain.
Climate-related risks represent a
source of systemic risk in the global financial system. The
financial impacts of climate-related risks are expected to be
widespread and may disrupt the orderly functioning of financial
markets and have an adverse effect on financial institutions,
including NWB Group.
There are significant uncertainties
as to the location, extent and timing of the manifestation of the
physical impacts of climate change, such as more severe and
frequent extreme weather events (storms, flooding, subsidence, heat
waves, droughts and wildfires), rising average global temperatures
and sea levels, nature loss, declining food yields, destruction of
critical infrastructure, supply chain disruption and resource
scarcity. Damage to NWB Group customers' and counterparties'
(including suppliers') properties and operations could disrupt
business, result in the deterioration of the value of collateral or
insurance shortfalls, impair asset values and negatively impact the
creditworthiness of customers and their ability and/or willingness
to pay fees, afford new products or repay their debts, leading to
increased default rates, delinquencies, write-offs and impairment
charges in NWB Group's portfolios. In addition, NWB Group's
premises and operations, or those of its critical outsourced
functions may experience damage or disruption leading to increased
costs. Any of these may have a material adverse effect on NWB
Group's future results, financial condition, prospects, and/or
reputation.
To meet the goals of the UK's Net
Zero Strategy will require a net-zero transition across all sectors
of the UK economy. The impacts of the extensive social, commercial,
technological, policy and regulatory changes required to achieve
this transition remain uncertain but are expected to be
significant, subject to continuous changes and developments and may
be disruptive across the global economy and markets, especially if
these changes do not occur in an orderly or timely manner, or are
not effective in reducing emissions sufficiently in a timely
manner, or at all. NWB Group's business and customers in some
sectors, including but not limited to, residential mortgages,
commercial real estate, agriculture (primary farming), automotive
manufacturing, aviation, shipping, land transport and logistics
(freight road, passenger rail and road), electricity generation and
oil and gas are expected to be particularly impacted. The timing
and pace of the net-zero transition is also uncertain, will depend
on many factors and uncertainties and may be near-term, gradual and
orderly, or delayed, rapid and disorderly, or a combination of
these.
Climate-related risks may exacerbate
the impact of financial and non-financial risks and they may have a
material adverse effect on NWB Group's future results, financial
condition, prospects, and/or reputation, including as a result of
financial losses caused directly or indirectly by climate-related
litigation and conduct matters (referred to as 'liability risk').
See also, 'NWB Group may be subject to potential climate and other
sustainability-related litigation, enforcement proceedings,
investigations and conduct risk.'
NWB Group and its value chain may
face other sustainability-related risks that may adversely affect
NWB Group.
NWB Group and its value chain
(including its investors, customers, counterparties (including its
suppliers) and employees) may face financial and non-financial
risks arising from broader (i.e. non-climate-related)
sustainability issues. These include: (i) risks relating to nature
loss (such as the loss and/or decline of the state of nature
including but not limited to, the reduction of any aspect of
biological diversity and other forms of environmental degradation
such as air, water and land pollution, soil quality degradation and
water stress); (ii) risks related to societal (including human
rights) matters, for example, climate change and environmental
degradation negatively impacting people's standard of living and
health, geopolitical tensions and conflict endangering people's
lives and security, the displacement of communities, the violation
of indigenous people's rights, unjust working conditions and labour
rights breaches (including discrimination, lack of diversity and
inclusion, inequality, gender/ethnicity pay gap and payments under
the minimum wage), modern slavery, financial crime, data privacy
breaches and lack of support for the vulnerable; and (iii)
governance-related risks (including board diversity, ethics,
executive compensation and management structure).
NWB Group is directly and indirectly
exposed to multiple types of nature-related risks through the
breadth of its activities, products and services offering,
including through the risk of default by customers whose businesses
are exposed to nature-related risks. In 2021, NatWest Group
(including NWB Group) first classified 'Biodiversity and Nature
Loss' as an emerging risk for NatWest Group (including NWB Group)
within its Risk Management Framework. From January 2024, NatWest
Group (including NWB Group) has expanded its key risk definition
from climate risk to climate and nature risk and updated its
climate risk policy to reflect emerging nature-related risks and to
capture requirements that go beyond climate risk.
NatWest Group (including NWB Group)
supports the aims of the Task Force on Nature Related Financial
Disclosure and continues to enhance its reporting and measurement
capabilities, acknowledging challenges associated with data
availability, while continuing to review evolving disclosure
standards and framework. NatWest Group's (including NWB Group)
approach is to integrate nature its existing strategy on climate,
recognising there is still, much to do in understanding its impacts
and dependencies on nature as well as our nature-related risks and
opportunities.
There is also increased scrutiny
from NWB Group's investors, customers, counterparties (including
its suppliers), employees, communities, regulators, the media and
other stakeholders on how NWB Group addresses societal and
governance related matters, including unjust working conditions and
labour rights breaches, resilience in the workplace, safety and
wellbeing, data protection and management, workforce management,
human rights and value chain management. For example, NatWest
Group's (including NWB Group) ambition is to support
decarbonisation while promoting energy security, may lead to
continued exposure to carbon-intensive activities and sectors
regarded as posing high climate and nature-related and societal
(including human rights) risks, (such as the textiles, agriculture
and mining sectors) each of which may impact NWB Group's employees,
customers, counterparties (including suppliers) and stakeholders,
and their business activities and/or the communities in which they
operate and, in turn, result in reputational risk for NWB
Group.
There is also growing expectation of
the need for a 'just transition' and 'energy justice' - in
recognition that the transition to net zero should happen in a way
that is as fair and inclusive as possible to everyone
concerned.
Although NatWest Group (including
NWB Group) continues to evaluate and assess how it integrates 'just
transition' considerations into its climate and sustainability
strategy, a failure (or perception of failure) by NatWest Group
(including NWB Group) to sufficiently factor these considerations
into existing products and service offerings may adversely affect
NatWest Group's (including NWB Group) reputation.
In 2023, NatWest Group (including
NWB Group) published its initial assessment of its 'salient human
rights issues'. Human rights saliency assessments are high-level
scoping exercises based on internal and external stakeholder
engagement and involve subjective materiality and other judgements
including as to severity and likelihood of human rights impacts.
Failure by NatWest Group (including NWB Group) to identify, assess,
prioritise and monitor any actual or potential adverse human rights
issues that NatWest Group (including NWB Group) contributes to, or
is directly linked to, may adversely impact people and communities,
which in turn may have a material adverse effect on NWB Group's
future results, financial condition, prospects and/or reputation.
Sustainability-related risks may have the potential to cause or
stress other financial and non-financial risks, including
climate-related risks, and they may have a material adverse effect
on NWB Group's future results, financial condition, prospects,
and/or reputation including as a result of financial losses caused
directly or indirectly by sustainability-related litigation and
conduct matters (referred to as 'liability risk'). See also, 'NWB
Group may be subject to potential climate and other
sustainability-related litigation, enforcement proceedings,
investigations and conduct risk'.
NatWest Group's climate change
related strategy, ambitions, targets and transition plan entail
significant execution and/or reputational risks and are unlikely to
be achieved without significant and timely government policy,
technology and customer behavioural changes.
NatWest Group has an ambition to
become a leading bank in the UK, helping to address the climate
challenge. At NatWest Group's Annual General Meeting in April 2022,
ordinary shareholders passed an advisory 'Say on Climate'
resolution endorsing NatWest Group's previously announced strategic
direction on climate change, including its ambitions to at least
halve the climate impact of its financing activity by 2030, achieve
alignment with the 2015 Paris Agreement and reach net zero across
its financed emissions, assets under management and operational
value chain by 2050. Further, in December 2022, NatWest Group
published its science-based targets validated by Science Based
Target Initiative for 79% of its lending book as at 31 December
2019 and 57% of debt securities and equity shares, excluding
sovereign debt securities.
NatWest Group has also announced and
in the future it may also announce other climate ambitions, targets
and initiatives which support its aim to help addressing the
climate challenge.
Making the changes necessary to
contribute to achieving NatWest Group's strategic direction on
climate change, including contributing to achieve NatWest Group's
climate ambitions and targets and contributing to the execution to
NatWest Group's transition plan, together with the active
management of climate and sustainability-related risks and other
regulatory, policy and market changes, is likely to necessitate
material changes to NWB Group's business, operating model, its
existing exposures and the products and services NWB Group provides
to its customers (potentially on accelerated timescales). NWB Group
may be required to (i) significantly reduce its financed emissions
and its exposure to customers that do not align with a transition
to net zero or do not have a credible transition plan in place, and
(ii) divest or discontinue certain activities for regulatory or
legal reasons or in response to the transition to a less
carbon-dependent economy. Increases in lending and financing
activities may wholly or partially offset some or all these
reductions, which may increase the extent of changes and reductions
necessary.
Making the necessary changes (or not
making the necessary changes in a timely manner, or at all) may
have a material adverse effect on NWB Group's business and
operations, financial condition, prospects and competitive position
and NWB Group's ability to contribute to achieving NatWest Group's
climate and financial ambitions and targets, take advantage of
climate change-related opportunities and generate sustainable
returns.
NWB Group's ability to contribute to
achieving NatWest Group's strategy, including contributing to
achieve NatWest Group's climate ambitions and targets, will
significantly depend on many factors and uncertainties beyond NWB
Group's control. These include (i) the extent and pace of climate
change, including the timing and manifestation of physical and
transition risks; (ii) the macroeconomic environment; (iii) the
effectiveness of actions of governments, legislators, regulators
and businesses; (iv) the response of the wider society, investors,
customers, suppliers and other stakeholders to mitigate the impact
of climate and sustainability-related risks; (v) changes in
customer behaviour and demand; (vi) appetite for new markets,
credit appetite, concentration risk appetite, lending
opportunities; (vii) developments in the available technology;
(viii) the roll-out of low carbon infrastructure; and (ix) the
availability of accurate, verifiable, reliable, auditable,
consistent and comparable data. These external factors and other
uncertainties will make it challenging for NWB Group to contribute
to achieving NatWest Group's climate ambitions and targets and
there is a significant risk that all or some of these ambitions and
targets will not be achieved or not achieved within the intended
timescales.
NWB Group's ability to contribute to
achieving NatWest Group's climate ambitions and targets depends to
a significant extent on the timely implementation and integration
of appropriate government policies. The UK CCC June 2023 Progress
Report to the UK Parliament states that the rate of emissions
reduction will need to significantly increase for the UK to meet
its 2030 commitments and continued delays in policy development and
implementation mean achievement is increasingly
challenging. On 20 September 2023, the UK Government announced its revised
plans on reducing emissions to reach net zero, including (i)
delaying the proposed ban on the sale of petrol and diesel cars to
2035; (ii) not proceeding with new policies forcing landlords to
upgrade the energy efficiency of their properties; and (iii)
delaying the ban on new fossil fuel boilers for certain
households.
Accordingly, NatWest Group
(including NWB Group) considers achievement of the following
ambitions increasingly challenging (i) 50% of NatWest Group's
mortgage portfolio to have an EPC rating of C or above by 2030; and
(ii) to at least halve the climate impact of NatWest Group's
financing activity by 2030, against a 2019 baseline.
NatWest Group (including NWB Group)
has also stated that it plans to phase-out coal for UK and non-UK
customers who have UK coal production, coal fired generation and
coal related infrastructure by 1 October 2024, with a full global
phase-out by 1 January 2030. Data challenges, particularly the lack
of granular customer information, creates challenges in
identifying customers with 'coal related
infrastructure' (e.g. transportation and storage) and other
customers with 'coal- related operations' within NatWest Group's
(including NWB Group) large and diversified customer portfolios.
Therefore, there is a risk that some customers with UK-based coal
activities may not have been identified and that NatWest Group
(including NWB Group) will not be able to identify all relevant
activities to achieve these coal phase-out plans.
Any delay or failure by NWB Group in
contributing to set, make progress against or meet NatWest Group's
climate-related ambitions, targets and plans may have a
material adverse effect on NWB Group's future results, financial
condition, prospects, and/or reputation and may increase the
climate and sustainability-related risks NWB Group
faces.
There are significant limitations
related to accessing accurate, reliable, verifiable, auditable,
consistent and comparable climate and other sustainability-related
data that contribute to substantial uncertainties in accurately
modelling and reporting on climate and sustainability information,
as well as making appropriate important internal
decisions.
Meaningful reporting of climate and
sustainability-related risks and opportunities and their potential
impacts and related metrics depends on access to accurate,
reliable, verifiable, auditable, consistent and comparable climate
and sustainability-related data from counterparties (including
suppliers) or customers. Data may not be generally available or, if
available, may not be accurate, reliable, verifiable, auditable,
consistent, or comparable. Any failure of NWB Group to
proportionately collect or develop accurate, reliable, verifiable,
auditable, consistent and comparable counterparty (including
supplier) and customer data, may adversely affect NWB Group's
ability to prepare meaningful reporting which is relevant,
represented in an accurate, verifiable, comparable and
understandable way of the climate and sustainability-related risks
and opportunities which may adversely affect NWB Group's ability to
meet external disclosure obligations, and its reputation, business
and its competitive position.
In the absence of other sources,
reporting of financed emissions and other sustainability data by
financial institutions, including NWB Group, is necessarily based
on aggregated information developed by third parties that may be
prepared in an inconsistent way using
different methodologies, interpretations, or assumptions. NWB
Group's climate and sustainability-related disclosures use a
greater number and level of assumptions, judgements and estimates
than many of its financial disclosures. These assumptions,
judgements and estimates are highly likely to change materially
over time, and, when coupled with the longer timeframes used in
these climate and sustainability-related disclosures, make any
assessment of materiality inherently uncertain.
In particular, in the absence of
actual emissions monitoring and measurement, emissions estimates
are based on sector and other assumptions that may not be accurate
for a given counterparty (including supplier) or customer. There
may also be data gaps that are filled using proxy data, such as
sectoral averages or use of emissions estimated by a third party,
again developed in a variety of ways and in some cases not in a
timely manner causing data to be potentially outdated at the time
when they are used.
Significant risks, uncertainties and
variables are inherent in the assessment, measurement and
mitigation of climate and sustainability-related risks. These
include data quality gaps and limitations mentioned above, as well
as the pace at which climate science, greenhouse gas accounting
standards and various emissions reduction solutions develop. In
addition, there is significant uncertainty about how climate change
and the world's transition to a net-zero economy will unfold over
time and how and when climate and sustainability-related risks will
manifest. These timeframes are considerably longer than NWB Group's
historical and current strategic, financial, resilience and
investment planning horizons.
As a result, NWB Group's climate and
sustainability-related disclosures may be amended, updated or
restated in the future as the quality and completeness of NWB
Group's data and methodologies continue to improve. These data
quality challenges, gaps and limitations may have a material impact
on NWB Group's ability to make effective business decisions about
climate and sustainability-related risks and opportunities,
including risk management decisions, to comply with disclosure
requirements and to monitor and report progress in meeting
ambitions, targets and pathways.
Climate-related risks are
challenging to model due to their forward-looking nature, the lack
of and/or quality of historical testing capabilities, lack of
accuracy, standardisation and incompleteness of emissions and other
climate and sub-sector related data and the immature nature of risk
measurement and modelling methodologies. As a result, it is very
difficult to predict and model the impact of climate-related risks
into precise financial and economic outcomes.
The evaluation of climate-related
risk exposure and the development of associated potential risk
mitigation techniques largely depend on the choice of climate
scenario modelling methodology and the assumptions made which
involves a number of risks and uncertainties, for
example:
-
climate scenarios are not predictions of what is
likely to happen or what NWB Group would like to happen, rather
they explore the possible implications of different judgements and
assumptions by considering a series of scenarios;
-
climate scenarios do not provide a comprehensive
description of all possible future outcomes;
-
lack of specialist expertise in NWB Group that
needs to rely on third party advice, modelling, and data which is
also subject to many limitations and uncertainties;
-
immaturity of modelling of and data on
climate-related risks on financial assets which will presumably
evolve rapidly in the coming years;
-
the number of variables and the forward-looking
nature of climate scenarios which makes them challenging to back
test and benchmark;
-
the significant uncertainty as to how the climate
will evolve over time, how and when governments, regulators,
businesses, investors and customers respond and how those responses
impact the economy, asset valuations, land systems, energy systems,
technology, policy and wider society;
-
the assumptions will continue to evolve with more
data/information which may affect the baselines for comparability
across reporting periods and impact internal and external
verification processes; and
-
the pace of the development of the methodologies
across different sectors may be different and therefore it may be
challenging to report on the whole balance sheet with regard to
financed emissions.
Accordingly, these risks and
uncertainties coupled with significantly long timeframes make the
outputs of climate-related risk modelling, climate-related targets
(including emission reduction targets) and pathways, inherently
more uncertain than outputs modelled for traditional financial
planning cycles based on historical financial information.
Furthermore, there is a lack of scientific, industry and regulatory
consensus regarding the appropriate metrics, methodologies,
modelling and standardised reporting to enable the assessment of
the location, acuteness, and severity of climate-related risks and
the monitoring and mitigation of these risks in the economy and
financial system. There is increasing industry concern
(acknowledged by the Network for Greening the Financial System)
that model scenarios, including those provided by central banks and
supervisory bodies and are too benign and may not adequately
capture: (i) the financial implications of increasing frequency and
severity of acute physical risks as global temperatures increase;
(ii) second and third order impacts such as disruptions to supply
chains and increased geo-political risks; nor (iii) possible
'tipping points' that could lead to large, irreversible changes in
the climate system (for example the melting of permafrost or the
Greenland and Antarctic ice sheets).
Capabilities within NWB Group to
appropriately assess, model, report and manage climate-related
risks and impacts and the suitability of the assumptions required
to model and manage climate-related risks appropriately continue to
develop. But such development is still in its early stages. Even
when those capabilities are appropriately developed, the high level
of uncertainty regarding any assumptions modelled, the highly
subjective nature of risk measurement and mitigation techniques,
incorrect or inadequate assumptions and judgements and data quality
gaps and limitations may lead to inadequate risk management
information and frameworks, or ineffective business adaptation or
mitigation strategies or regulatory non-compliance, all of which
may have a material adverse effect on NWB Group's business, future
results, financial condition, prospects, reputation and the price
of its securities.
Failure to implement effective
governance, procedures, systems and controls in compliance with
legal, regulatory requirements and societal expectations to manage
climate and sustainability-related risks and opportunities could
adversely affect NWB Group.
The UK's prudential regulation of
climate-related risk management is an important driver in how
NatWest Group (including NWB Group) develops its associated risk
framework for financing activities or engaging with counterparties
(including suppliers). Legislative and regulatory authorities are
publishing expectations as to how banks should prudently manage and
transparently disclose climate and sustainability-related risks. In
the UK this includes the Bank of England's Supervisory Statement
3/19 on the management of climate-related financial risks, covering
governance, risk management, scenario analysis and disclosure which
sets out expectations that firms, such as NatWest Group (including
NWB Group), take a strategic approach to managing climate-related
financial risks, identifying current risks and those that can
plausibly arise in the future, and appropriate actions to mitigate
those risks.
In March 2023, the Bank of England
published a report setting out its latest thinking on
climate-related risks and regulatory capital frameworks. It found
there to be uncertainty over whether banks are sufficiently
capitalised for future climate-related losses and it stated that it
will undertake further analysis to explore whether changes to the
regulatory capital frameworks may be required.
Any failure of NatWest Group
(including NWB Group) to fully and timely embed climate and other
sustainability-related risks into its risk management practices and
framework to appropriately identify, assess, prioritise and monitor
the various climate-related physical and transition risks and other
sustainability-related risks and apply the appropriate product
governance process in line with applicable legal and regulatory
requirements and expectations, may adversely affect NWB Group's
regulatory compliance, prudential capital requirements, liquidity
position and this may have a material adverse effect on NWB Group's
business, future results, financial condition, prospects,
reputation or the price of its securities.
Increasing levels of climate and
other sustainability-related laws, regulation and oversight may
adversely affect NWB Group.
NatWest Group as well as its
subsidiaries in the UK, EU and elsewhere are increasingly becoming
subject to more extensive climate and sustainability-related legal
and regulatory requirements. In the UK, these include mandatory
requirements by the FCA and under the Companies Act 2006 to make
climate-related disclosures consistent with the recommendations of
the Task Force on Climate related Financial Disclosures. In
addition, in August 2023 the FCA set out its intention to consult
in 2024 on rules and guidance for listed companies to disclose in
line with the UK-endorsed ISSB standards and the Transition Plan
Taskforce Disclosure Framework published in October 2023 as a
complementary package. Further regulatory requirements may emerge
as part of the developing UK sustainability-related disclosure
requirements. In the EU, these climate and sustainability-related
legal and regulatory requirements include the EU Taxonomy, the EU
Corporate Sustainability Reporting Directive ('CSRD'), the EU Green
Bond Standard and proposed EU Corporate Sustainability Due
Diligence Directive ('CSDDD').
Certain non-UK subsidiaries of
NatWest Group in the EU and elsewhere may also be subject to EU,
national and other climate and sustainability laws and regulations
which in some cases may differ. For example, NatWest Group's Dutch
subsidiary, NWM N.V., is subject to the EU Taxonomy, CSRD, the
proposed CSDDD, and other legal, regulatory and supervisory
expectations relating to climate-related and environmental risk
management and disclosure. A failure of NatWest Group or any of its
subsidiaries, including NWM N.V., to comply with these regulations
(if applicable), whether through insufficient resources, expertise,
support, customer and counterparty data challenges or otherwise may
have an adverse effect on NWB Group's reputation and the successful
contribution to the implementation of NatWest Group's
strategy.
In some jurisdictions, particularly
the United States, regulatory and enforcement activity around
climate and sustainability initiatives is becoming increasingly
politicised. This has resulted in a polarisation between promoting
more extensive climate and sustainability-related requirements,
such as the proposed SEC climate disclosure rules, and challenging
climate and sustainability-related initiatives on the basis of
allegations that they could breach applicable laws.
Divergence between UK, EU,US and
other climate and sustainability-related legal and regulatory
requirements and their interpretation may increase the cost of
doing business (including increased operating costs), may result in
contentious regulatory and litigation risk, may require changes to
NWB Group's business and may restrict NWB Group's access to the
EU/EEA and US capital markets.
Failure to comply with these
divergent legal and regulatory requirements which are applicable to
NWB Group may result in NWB Group and/or its subsidiaries not
meeting applicable regulatory requirements or investors'
expectations. Compliance with these complex and evolving climate
and sustainability-related legal and regulatory requirements and
voluntary standards and initiatives is likely to require NWB Group
to implement significant changes to its business models, IT
systems, products, governance, internal controls over financial
reporting, disclosure controls and procedures, modelling capability
and risk management systems, which may increase the cost of doing
business, result in higher capital requirements, and entail
additional change risk and increased compliance, regulatory
sanctions, conduct and litigation (including settlements) costs.
Failure to implement and comply with these requirements, standards
and initiatives may also result in investigations and/or regulatory
sanctions, reputational damage and investor disapproval each of
which may have a material adverse effect on NWB Group's future
results, financial condition, prospects, and/or
reputation.
Increasing regulation of
"greenwashing" is likely to increase the risk of regulatory
enforcement and investigation
and litigation.
Misrepresenting or over-emphasising
the extent to which an investment or other type of product takes
into account 'green', 'environmentally friendly', 'sustainable' or
'ethical' features and concerns, using misleading labels and
language in relation to such products and/or omitting material
information about NWB Group's contribution to the climate crisis
(including its direct or indirect contribution to greenhouse gas
emissions), or other sustainability-related issues, could
potentially result in complaints, regulatory investigation and/or
sanction, claims and/or litigation and/or reputational
damage.
This risk is likely to increase as
the UK and other jurisdictions implement and enforce new
anti-greenwashing regulations. For example, the FCA's
Sustainability Disclosure Requirements and investment labels policy
statement (PS 23/16) published in November 2023 includes a general
anti-greenwashing rule that requires regulated firms (such as NWB
Plc) to ensure that sustainability claims in financial promotions
of their products and services are consistent with the
sustainability characteristics of the product or service and are
fair, clear and not misleading. The FCA has stated that it would
publish guidance as to how regulated firms should comply with its
anti-greenwashing rule including the requirements for
sustainability claims that will become effective on 31 May 2024
(currently the subject of FCA consultation paper (GC23/3)). In the
EU the European Commission has proposed a Green Claims Directive
which will address false environmental claims and the proliferation
of environmental labels by requiring certain claims to be
substantiated with scientific evidence and independently
verified.
NatWest Group (including NWB Group)
plans to invest in voluntary carbon credits to mitigate emissions
beyond its own value chain whilst transitioning towards a state of
net zero emissions by 2050. NatWest Group (including NWB Group) may
also be involved in trading voluntary carbon credits with its
clients, or facilitating clients to trade these credits. Financial
market and platform regulators are increasingly taking an interest
in the voluntary carbon market and voluntary carbon credits
retired, sold or traded by financial institutions or used by them
as part of their own emissions reduction plans. NWB Group could
potentially be exposed to financial, litigation, regulatory
enforcement and reputational risk where it retires, facilitates or
is otherwise associated with voluntary carbon credit transactions
or use (including use to offset own emissions).
This includes where voluntary carbon
credits are not of sufficient quality, potential issues or risks
with respect to such carbon credits (or projects through which they
are generated) are not adequately disclosed or stated benefits are
exaggerated or misleading and/or such carbon credits are used
either by NWB Group or by a third party organisation (such as a
customer) as a substitute for achieving appropriate emissions
reductions in their own operations.
Any failure of NWB Group to
implement robust and effective climate and sustainability-related
disclosure, communications and product governance policies,
procedures and controls to make accurate public statements and
claims about how environmentally friendly, sustainable or ethical
NWB Group's products and services are and to apply these in line
with applicable legal and regulatory requirements and expectations,
may adversely affect NWB Group's regulatory compliance and/or
reputation and could give rise to increased regulatory enforcement,
investigation and litigation.
NWB Group may be subject to
potential climate and other sustainability-related litigation,
enforcement proceedings, investigations and conduct
risk.
Due to increasing new climate and
sustainability-related jurisprudence, laws and regulations in the
UK and other jurisdictions, growing demand from investors and
customers for environmentally sustainable products and services,
and regulatory scrutiny, financial institutions, including NWB
Group, may through their business activities, face increasing
litigation, conduct, enforcement and contract liability risks
related to climate change, nature-related degradation, human rights
violations and other social, governance and sustainability-related
issues.
These risks may arise, for example,
from claims pertaining to:
-
failure to meet obligations, targets or
commitments relating to, or to disclose accurately, or provide
updates on material climate and/or sustainability-related risks, or
otherwise provide appropriate balanced, clear, complete, correct,
fair, meaningful, understandable, disclosure (which is capable of
being substantiated) to investors, customers, counterparties
(including suppliers) and other stakeholders;
-
conduct, mis-selling and customer protection
claims, including claims which may relate to alleged insufficient
product understanding, unsuitable product offering and /or reliance
upon information provided by NWB Group or claims alleging unfair
pricing of climate-related products, for example in relation to
products where limited liquidity or reliable market data exists for
benchmarking purposes or which may be impacted by future climate
policy uncertainty or other factors;
-
marketing that portrays products, securities,
activities or policies as having positive climate, nature-related
or sustainable outcomes to an extent that may not be the case, or
may not adequately be qualified and/or omits material information
about NWB Group's contribution to the climate crisis and/or its
direct / indirect contribution to greenhouse gas emissions or other
sustainability-related issues;
-
damages claims under various tort theories,
including common law public nuisance claims, or negligent
mismanagement of physical and/or transition risks;
-
alleged violations of officers', directors' and
other fiduciaries' duties, for example by financing various
carbon-intensive, environmentally harmful or otherwise highly
exposed assets, companies, and industries;
-
changes in the understanding of what constitutes
positive climate, nature-related or sustainable outcomes as a
result of developing climate science, leading to discrepancy
between current product offerings and investor and/or market and/or
broader stakeholder expectations;
-
any weaknesses or failures in specific systems or
processes associated particularly with climate, nature-related or
sustainability linked products, and/or human rights due diligence,
including any failure in the timely implementation, onboarding
and/or updating of such systems or processes;
-
counterparties, collaborators, customers to whom
NWB Group provides services and third parties in NWB Group's value
chain who act, or fail to act, or undertake due diligence, or apply
appropriate risk management and product governance in a manner that
may adversely affect NWB Group's reputation or sustainability
credentials; or
-
NWB Group's or its customers', counterparties'
(including suppliers') involvement in, or decision not to
participate in, certain industries or projects associated with
causing or exacerbating climate change and nature-related
degradation.
Furthermore, there is a risk that
shareholders, campaign groups, customers and activist groups could
seek to take legal action against NWB Group for financing or
contributing to climate change, nature-related degradation and
human rights violations, failure to implement or follow adequate
governance procedures and for not supporting the principles of
'just transition' (i.e. maximising the social benefits of the
transition, mitigating the social risks of the transition,
empowering those affected by the change, anticipating future shifts
to address issues up front and mobilising investments from the
public and private sectors).
There is an increase in the number
of legal, conduct and regulatory claims as well as an increase in
the variety of legal bases being alleged, remedies sought and
amount of damages awarded in legal, conduct and regulatory
proceedings, investigations, administrative actions and other
adversarial proceedings against financial institutions for climate
and sustainability matters. There is a risk that as climate,
nature-related and environmental science develop and societal
understanding of these issues increases and deepens, courts,
regulators and enforcement authorities may apply the then current
understandings of climate and the broader sustainability-related
matters retrospectively when assessing claims about historical
conduct or dealings of financial institutions, including NWB Group.
There is also an increase in enforcement and litigation focusing on
challenging public and private sector sustainability policies and
initiatives intended to address climate change and nature-related
degradation. See also, 'NWB Group is 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 NWB Group'. In addition, supervisors and
regulators are increasing their enforcement focus on climate and
sustainability-related matters. For example, the ECB has stated
that enforcement measures in the form of periodic penalty payments
may be imposed on banks that do not fully align with ECB
supervisory expectations of sound practices for managing climate
and environmental risks.
These potential litigation, conduct,
enforcement and contract liability risks may have a material
adverse effect on NWB Group's ability to contribute to achieving
NatWest Group's strategy, including NatWest Group's climate
ambitions and targets, and this may have a material adverse effect
on NWB Group's future results, financial condition, prospects,
and/or reputation.
A reduction in the ESG ratings of
NatWest Group (including NWB Group) could have a negative impact on
NatWest Group's (including NWB Group) reputation and on investors'
risk appetite and customers' willingness to deal with NatWest Group
(including NWB Group).
ESG ratings from agencies and data
providers which rate how NatWest Group (including NWB Group)
manages environmental, social and governance risks are increasingly
influencing investment decisions pertaining to NatWest Group's
and/or its subsidiaries' securities or being used as a basis to
label financial products and services as environmentally friendly
or sustainable. ESG ratings are often (i) unsolicited; (ii) subject
to the assessment and interpretation by the ESG rating agencies;
(iii) provided without warranty; (iv) not a sponsorship,
endorsement, or promotion of NatWest Group (including NWB Group) by
the relevant rating agency; and (v) may depend on many factors some
of which are beyond NatWest Group's and NWB Group's control (e.g.
any change in rating methodology). In addition, certain NatWest
Group entities offer and sell products and services to customers
and counterparties based exclusively or largely on a rating by an
unregulated ESG rating agency or data providers. ESG rating
agencies, at this stage, are not subject to any specific regulatory
or other regime or oversight (although there are proposals by
regulators in different jurisdictions to regulate rating agencies
and data providers).
Regulators have expressed concern
that harm may arise from potential conflicts of interest within ESG
rating and review or second party opinion providers and there is a
lack of transparency in methodologies and data points, which
renders ratings and reviews incomparable between agencies or
providers. Any material reduction in the ESG ratings of NatWest
Group (including NWB Group) may have a negative impact on NWB
Group's reputation, could influence investors' risk appetite for
NWB Group's and/or its subsidiaries' securities, particularly ESG
securities, could potentially affect the pricing of securities
issued by NWB Group and/or its subsidiaries and could affect a
customer's willingness to deal with NWB Group. A regulatory
sanction or enforcement action involving an ESG rating agency used
by a NatWest Group entity, could also have a negative impact on NWB
Group's reputation.
Operational and IT resilience risk
Operational risks (including
reliance on third party suppliers and outsourcing of certain
activities) are inherent in NWB Group's businesses.
Operational risk is the risk of loss
or disruption resulting from inadequate or failed internal
processes, procedures, people or systems, or from external events,
including legal and regulatory risks, third party processes,
procedures, people or systems. NWB Group offers a diverse range of
products and services supported directly or indirectly by third
party suppliers. As a result, operational risks or losses can arise
from a number of internal or external factors (including for
example, payment errors or financial crime and fraud), for which
there is continued scrutiny by third parties of NWB Group's
compliance with financial crime requirements; see 'NWB Group is
exposed to the risks 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 NWB
Group.'
These risks are also present when
NWB Group relies on critical service providers (suppliers) or
vendors to provide services to it or its customers, as is
increasingly the case as NWB Group outsources certain activities,
including with respect to the implementation of technologies,
innovation and responding to regulatory and market
changes.
Operational risks continue to be
heightened as a result of the implementation of NatWest Group's
strategy, and the organisational and operational changes involved,
including: NatWest Group's current cost-controlling measures; the
progression towards working as One Bank across NatWest Group (of
which NWB Group is part) to serve customers; the implementation of
the recommendations from the recent independent reviews by the law
firm Travers Smith LLP of customer account closures, as well as the
outcome of ongoing FCA and internal reviews with respect to certain
governance processes, policies, systems and controls of NatWest
Group entities including with respect to customer account closures;
and conditions affecting the financial services industry generally
(including macroeconomic and other geopolitical developments) as
well as the legal and regulatory uncertainty resulting from these
conditions. It is unclear as to how the future ways of working may
evolve, including in respect of how working practices may further
evolve, or how NWB Group will evolve to best serve its customers.
Any of the above may place significant pressure on NWB Group's
ability to maintain effective internal controls and governance
frameworks.
NWB Group increasingly provides
certain shared critical services and operations, including, without
limitation, property, finance, accounting, treasury, legal, risk,
regulatory compliance and reporting, financial crime, human
resources, and certain other support and administrative functions
to other entities within NatWest Group (in particular, NWM Plc) and
receives income in respect of these services. As a result, NWB
Group may be exposed to a loss of income if these services are not
required to the same extent, or are no longer required at
all.
The effective management of
operational risks is critical to meeting customer service
expectations and retaining and attracting customer business.
Although NWB Group has implemented risk controls and mitigation
actions, with resources and planning having been devoted to
mitigate operational risk, such measures may not be effective in
controlling each of the operational risks faced by NWB
Group.
Ineffective management of such risks
may have a material adverse effect on NWB Group's future results,
financial condition, prospects, and/or reputation.
NWB Group is subject to
sophisticated and frequent cyberattacks.
NatWest Group experiences a constant
threat from cyberattacks across the entire NatWest Group (including
NWB Group) and against NatWest Group and NWB Group's supply chain,
reinforcing the importance of due diligence of and close working
relationship with the third parties on which NWB Group relies. NWB
Group is reliant on technology, against which there is a constantly
evolving series of attacks that are increasing in terms of
frequency, sophistication, impact and severity. As cyberattacks
evolve and become more sophisticated, NWB Group is required to
continue to invest in additional capability designed to defend
against emerging threats. In 2023, NWB Group and its supply chain
were subjected to a small number of Distributed Denial of Service
('DDOS') and ransomware attacks, which are a pervasive threat to
the financial services industry. The focus is to manage the impact
of the attacks and sustain availability of services for NWB Group's
customers. Consequently, NWB Group continues to invest significant
resources in developing and evolving of cybersecurity controls that
are designed to minimise the potential effect of such
attacks.
Third parties continue to make
hostile attempts to gain access to, introduce malware (including
ransomware) into and exploit potential vulnerabilities of NWB
Group's IT systems. NWB Group has information and cybersecurity
controls that seek to minimise the impact of any such attacks,
which are subject to review on a regular basis, but given the
nature of the threat, there can be no assurance that such measures
will prevent the potential adverse effect of an attack from
occurring. See also, 'NWB Group's operations are highly dependent
on its complex IT systems and any IT failure could adversely affect
NWB Group.'
Any failure in NWB Group's
information and cybersecurity policies, procedures or controls, may
result in significant financial losses, major business disruption,
inability to deliver customer services, or loss of, or ability to
access, data or systems or other sensitive information (including
as a result of an outage) and may cause associated reputational
damage. Any of these factors could increase costs (including costs
relating to notification of, or compensation for customers, credit
monitoring or card reissuance), result in regulatory investigations
or sanctions being imposed, or may affect NWB Group's ability to
retain and attract customers. Regulators in the UK, US, Europe and
Asia continue to recognise cybersecurity as an important systemic
risk to the financial sector and have highlighted the need for
financial institutions to improve their monitoring and control of,
and resilience (particularly of critical services) to cyberattacks,
and to provide timely reporting or notification of them, as
appropriate (including, for example, the new SEC cybersecurity
requirements).
Furthermore, cyberattacks on NWB
Group's counterparties and suppliers may also have an adverse
effect NWB Group's operations. Additionally, third parties may
induce employees, customers, third party providers or other users
with access to NWB Group's systems to wrongfully disclose sensitive
information to gain access to NWB Group's data or systems or that
of NWB Group's customers or employees. Cybersecurity and
information security events can derive from groups or factors such
as: internal or external threat actors, human error, fraud or
malice on the part of NWB Group's employees or third parties,
including third party providers, or may result from technological
failure.
NWB Group expects greater regulatory
engagement, supervision and enforcement to continue in relation to
its overall resilience to withstand IT and IT-related disruption,
either through a cyberattack or some other disruptive event. Such
increased regulatory engagement, supervision and enforcement is
uncertain in relation to the scope, cost, consequence and the pace
of change, which may have a material adverse effect on NWB Group.
Due to NWB Group's reliance on technology and the increasing
sophistication, frequency and impact of cyberattacks, such attacks
may have an adverse effect on NWB Group's future results, financial
condition, prospects, and/or reputation.
In accordance with the Data
Protection Act 2018 and the European Union Withdrawal Act 2018, the
Data Protection, Privacy and Electronic Communications (Amendments
Etc.) (EU Exit) Regulations 2019, as amended by the Data
Protection, Privacy and Electronic Communications (Amendments Etc.)
(EU Exit) Regulations 2020 ('UK Data Protection Framework') and
European Banking Authority ('EBA') Guidelines on ICT and Security
Risk Management, NWB Group is required to ensure it implements
timely, appropriate and effective organisational and technological
safeguards against unauthorised or unlawful access to the data of
NWB Group, its customers and its employees. In order to meet this
requirement, NWB Group relies on the effectiveness of its internal
policies, controls and procedures to protect the confidentiality,
integrity and availability of information held on its IT systems,
networks and devices as well as with third parties with whom NWB
Group interacts.
A failure to monitor and manage data
in accordance with the UK Data Protection Framework and EBA
requirements of the applicable legislation may result in financial
losses, regulatory fines and investigations and associated
reputational damage.
Any of the above may have a material
adverse effect on NWB Group's future results, financial condition,
prospects, and/or reputation.
NWB Group operations and strategy
are highly dependent on the accuracy and effective use of
data.
NWB Group relies on the effective
use of accurate data to support, monitor, evaluate, manage and
enhance its operations, innovate its products offering, meet its
regulatory obligations, and deliver its strategy. Investment is
being made in data tools and analytics, including raising awareness
around ethical data usage (for example, in relation to the use of
artificial intelligence) and privacy across NWB Group. The
availability and accessibility of current, complete, detailed,
accurate and, wherever possible, machine-readable customer segment
and sub-sector data, together with appropriate governance and
accountability for data, is fast becoming a critical strategic
asset, which is subject to increased regulatory focus. Failure to
have or be able to access that data or the ineffective use or
governance of that data could result in a failure to manage and
report important risks and opportunities or satisfy customers'
expectations including the inability to deliver products and
services. This could also result in a failure to deliver NWB
Group's strategy and could place NWB Group at a competitive
disadvantage by increasing its costs, inhibiting its efforts to
reduce costs or its ability to improve its systems, controls and
processes, which could result in a failure to deliver NWB Group's
strategy. These data weaknesses and limitations, or the unethical
or inappropriate use of data, and/or non-compliance with data
protection laws could give rise to conduct and litigation risks and
may increase the risk of operational challenges, losses,
reputational damage or other adverse consequences due to
inappropriate models, systems, processes, decisions or other
actions.
Any of the above may have a material
adverse effect on NWB Group's future results, financial condition,
prospects, and/or reputation.
NWB Group's operations are highly
dependent on its complex IT systems and any IT failure could
adversely affect NWB Group.
NWB Group's operations are highly
dependent on the ability to process a very large number of
transactions efficiently and accurately while complying with
applicable laws and regulations. The proper functioning of NatWest
Group's (including NWB Group's) transactional and payment systems,
financial crime, fraud systems and controls, risk management,
credit analysis and reporting, accounting, customer service and
other IT systems (some of which are owned and operated by other
entities in NatWest Group or third parties), as well as the
communication networks between their branches and main data
processing centres, is critical to NWB Group's
operations.
Individually or collectively, any
system failure, loss of service availability or breach of data
security could potentially cause significant damage to: (i)
important business services and (ii) NWB Group's ability to provide
services to its customers, which could result in reputational
damage, significant compensation costs and regulatory sanctions
(including fines resulting from regulatory investigations), or a
breach of applicable regulations and could affect NWB Group's
regulatory approvals, competitive position, business and brands,
which could undermine its ability to attract and retain customers
and talent. NWB Group outsources certain functions as it innovates
and offers new digital solutions to its customers to meet the
demand for online and mobile banking. Outsourcing alongside remote
working heighten the above risks.NWB Group uses IT systems that
enable remote working interface with third-party systems, and NWB
Group could experience service denials or disruptions if such
systems exceed capacity or if NWB Group or a third-party system
fails or experiences any interruptions, all of which could result
in business and customer interruption and related reputational
damage, significant compensation costs, regulatory sanctions and/or
a breach of applicable regulations.
In 2023, NWB Group made considerable
investments to further simplify, upgrade and improve its IT and
technology capabilities (including migration of certain services to
cloud platforms). NWB Group also continues to develop and enhance
digital services for its customers and seeks to improve its
competitive position through enhancing controls and procedures and
strengthening the resilience of services including cybersecurity.
Any failure of these investment and rationalisation initiatives to
achieve the expected results, due to cost challenges or otherwise,
may adversely affect NWB Group's operations, its reputation and
ability to retain or grow its customer business or adversely affect
its competitive position.
Any of the above may have a material
adverse effect on NWB Group's future results, financial condition,
prospects, and/or reputation.
NWB Group relies on attracting,
retaining and developing diverse senior management and skilled
personnel, and is required to maintain good employee
relations.
NWB Group's success depends on its
ability to attract, retain through creating an inclusive
environment, and develop highly skilled and qualified diverse
personnel, including senior management, directors and key employees
(including technology and data focused roles), in a highly
competitive market and under internal cost efficiency
pressures.
NWB Group's ability to attract,
retain and develop highly skilled and qualified diverse senior
management (this may include a new permanent CEO in 2024) and
skilled personnel may be more difficult due to the cost-controlling
measures, a failure to pay employees competitive compensation,
heightened regulatory oversight of banks and the increasing
scrutiny of, and (in some cases) restrictions placed upon, employee
compensation arrangements (in particular those of banks that have
been in receipt of government support such as NatWest Group). In
addition, certain economic, market and regulatory conditions and
political developments may reduce the pool of candidates for key
management and non-executive roles, including non-executive
directors with the right skills, knowledge and experience, or may
increase the number of departures of existing employees. Moreover,
a failure to foster a diverse and inclusive workforce may adversely
affect NWB Group's employee engagement and the formulation and
execution of its strategy, and could also have an adverse effect on
its reputation with employees, customers, investors and
regulators.
Many of NWB Group's employees in the
UK, the ROI and continental Europe are represented by employee
representative bodies, including trade unions and works councils.
Engagement with its employees and such bodies is important to NWB
Group in maintaining good employee relations. Any failure to do so
may adversely affect NWB Group's ability to operate its business
effectively.
Any of the above may have a material
adverse effect on NWB Group's future results, financial condition,
prospects, and/or reputation.
A failure in NWB Group's risk
management framework could adversely affect NWB Group, including
its ability to achieve its strategic objectives.
Risk management is an integral part
of all of NWB Group's activities and delivery of its long-term
strategy. NatWest Group's Enterprise-Wide Risk Management Framework
sets out the approach for managing risk within the NWB Group
including in relation to risk governance and risk appetite. A
failure to adhere to this framework, or any material weaknesses or
deficiencies in the framework's controls and procedures, could
adversely affect NatWest Group's financial condition and strategic
delivery including in relation to inaccurate adherence to agreed
risk appetite statements and accurate risk reporting of risk
exposures.
In addition, financial crime risk
management is dependent on the use and effectiveness of financial
crime assessment, systems and controls. Weak or ineffective
financial crime processes and controls may risk NWB Group
inadvertently facilitating financial crime which may result in
regulatory investigation, sanction, litigation, fines and/or
reputational damage. Financial crime continues to evolve, whether
through fraud, scams, cyberattacks or other criminal activity.
These risks are exacerbated as NWB Group continues to innovate its
product offering and increasingly offers digital solutions to its
customers. NatWest Group (including NWB Group) has made and
continues to make significant, multi-year investments to strengthen
and improve its overall financial crime control framework with
prevention systems and capabilities. As part of its ongoing
programme of investment, there is current and future investment
planned to further strengthen financial crime controls over the
coming years, including investment in new technologies and
capabilities to further enhance customer due diligence, transaction
monitoring, sanctions and anti-bribery and corruption
systems.
Financial risk management is highly
dependent on the use and effectiveness of internal stress tests and
models and ineffective risk management may arise from a wide
variety of factors, including lack of transparency or incomplete
risk reporting, manual processes and controls, inaccurate data,
inadequate IT systems, unidentified conflicts or misaligned
incentives, lack of accountability control and governance,
incomplete risk monitoring and management or insufficient
challenges or assurance processes to commence or timely complete
risk remediation projects. Failure to manage risks effectively, or
within regulatory expectations, could adversely affect NWB Group's
reputation or its relationship with its regulators, customers,
shareholders or other stakeholders.
NWB Group's operations are
inherently exposed to conduct risks, which include business
decisions, actions or reward mechanisms that are not responsive to
or aligned with NWB Group's regulatory obligations, customers'
needs or do not reflect NWB Group's strategy, ineffective
product management, unethical or inappropriate use of data,
information asymmetry, implementation and utilisation of new
technologies, outsourcing of customer service and product delivery,
inappropriate behaviour towards customers, customer outcomes, the
possibility of mis-selling of financial products and mishandling of
customer complaints. Some of these risks
have materialised in the past and ineffective management and
oversight of conduct risks may lead to further remediation and
regulatory intervention or enforcement.
NWB Group's businesses are also
exposed to risks from employee, contractor or service providers
misconduct including non-compliance with policies and regulations,
negligence or fraud (including financial crimes and fraud), any of
which could result in regulatory fines or sanctions and serious
reputational or financial harm to NWB Group. Hybrid working
arrangements for NWB Group employees place heavy reliance on the IT
systems that enable remote working and may place additional
pressure on NWB Group's ability to maintain effective internal
controls and governance frameworks and increase operational
risk.
Hybrid working arrangements are also
subject to regulatory scrutiny to ensure adequate recording,
surveillance and supervision of regulated activities, and
compliance with regulatory requirements and expectations, including
requirements to: meet threshold conditions for regulated
activities; ensure the ability to oversee functions (including any
outsourced functions); ensure no detriment is caused to customers;
and ensure no increased risk of financial crime.
NWB Group seeks to embed a risk
awareness culture across the organisation and has implemented
policies and allocated new resources across all levels of the
organisation to manage and mitigate conduct risk and expects to
continue to invest in risk management, including the ongoing
development of a NatWest Group risk management strategy in line
with regulatory expectations. However, such efforts may not
insulate NWB Group from instances of misconduct and no assurance
can be given that NWB Group's strategy and control framework will
be effective. Any failure in NWB Group's risk management framework
may result in the inability to achieve its strategic objectives for
their customers, employees and wider stakeholders.
Any of the above may have a material
adverse effect on NWB Group's future results, financial condition,
prospects, and/or reputation.
NWB Group's operations are subject
to inherent reputational risk.
Reputational risk relates to
stakeholder and public perceptions of NWB Group arising from an
actual or perceived failure to meet stakeholder or the public's
expectations, including with respect to NatWest Group's strategy
and related targets, the progression towards working as One Bank
across NatWest Group (of which NWB Group is part) to serve
customers, or due to any events, behaviour, action or inaction by
NWB Group, its employees or those with whom NWB Group is
associated. See also, 'NWB Group's businesses are subject to
substantial regulation and oversight, which are constantly evolving
and may adversely affect NWB Group.' This includes harm to its
brand, which may be detrimental to NWB Group's business, including
its ability to build or sustain business relationships with
customers, stakeholders and regulators, and may cause low employee
morale, regulatory censure or reduced access to, or an increase in
the cost of, funding.
Reputational risk may arise whenever
there is, or there is perceived to be, a material lapse in
standards of integrity, compliance, customer or operating
efficiency, or regulatory or press scrutiny, and may adversely
affect NWB Group's ability to attract and retain customers. For
example, NWB Group's reputational risks were elevated during 2023
as a result of the departure of its CEO in connection with account
closures and related use of customer data that attracted
significant public and media attention.
In particular, NWB Group's ability
to attract and retain customers (particularly,
corporate/institutional and retail depositors), and talent, and
engage with counterparties may be adversely affected by factors
including: negative public opinion resulting from the actual or
perceived manner in which NWB Group or any other member of NatWest
Group conducts or modifies its business activities and operations,
media coverage (whether accurate or otherwise), employee
misconduct, NWB Group's financial performance, IT systems failures
or cyberattacks, data breaches, financial crime and fraud, the
level of direct and indirect
government support, or the actual or perceived
practices in the banking and financial industry in general, or a
wide variety of other factors.
Technologies, in particular online
social networks and other broadcast tools that facilitate
communication with large audiences in short timeframes and with
minimal costs, may also significantly increase and accelerate the
impact of damaging information and allegations.
Although NWB Group has implemented a
Reputational Risk Policy to identify, measure and manage material
reputational risk exposures, NWB Group cannot be certain that it
will be successful in avoiding damage to its business from
reputational risk.
Any of the above aspects of
reputational risk may have a material adverse effect on NWB Group's
future results, financial condition, prospects, and/or
reputation.
Legal, regulatory and conduct risk
NWB Group's businesses are subject
to substantial regulation and oversight, which are constantly
evolving and may adversely affect NWB Group.
NWB Group is subject to extensive
laws, regulations, guidelines, corporate governance practice and
disclosure requirements, administrative actions and policies in
each jurisdiction in which it operates, which represents ongoing
compliance and conduct risks. Many of these have been introduced or
amended recently and are subject to further material changes, which
may increase compliance and conduct risks, particularly as EU/EEA
and UK laws diverge as a result of Brexit. NWB Group expects
government and regulatory intervention in the financial services
industry to remain high for the foreseeable future.
Regulators and governments continue
to focus on reforming the prudential regulation of the financial
services industry and the manner in which the business of financial
services is conducted. Measures have included: enhanced capital,
liquidity and funding requirements, through initiatives such as the
Basel 3.1 standards implementation (and any resulting effect on
RWAs and models), the UK ring-fencing regime, the strengthening of
the recovery and resolution framework applicable to financial
institutions in the UK, the EU and the US, financial industry
reforms (including in respect of MiFID II and the FSM Act 2023),
LIBOR transition, corporate governance requirements, rules relating
to the compensation of senior management and other employees,
enhanced data protection and IT resilience requirements, financial
market infrastructure reforms, enhanced regulations in respect of
the provision of 'investment services and activities', and
increased regulatory focus in certain areas, including conduct,
consumer protection (such as the FCA's Consumer Duty) in retail or
other financial markets, competition and disputes regimes,
anti-money laundering, anti-corruption, anti-bribery, anti-tax
evasion, payment systems, sanctions and anti-terrorism laws and
regulations.
In addition, there is significant
oversight by competition authorities of the jurisdictions in which
NWB Group operates. The competitive landscape for banks and other
financial institutions in the UK, EU/EEA, Asia and the US is
rapidly changing. Recent regulatory and legal changes have and may
continue to result in new market participants and changed
competitive dynamics in certain key areas. Regulatory and
competition authorities, including the CMA, are currently also
looking at and focusing more on how they can support competition
and innovation in digital and other markets. Future competition
investigations, market reviews, or the regulation of mergers may
lead to the imposition of financial penalties or market remedies
that may adversely affect NatWest Group's competitive or financial
position.
Recent regulatory changes and
heightened levels of public and regulatory scrutiny in the UK, the
EU and the US have resulted in increased capital, funding and
liquidity requirements, changes in the competitive landscape,
changes in other regulatory requirements and increased operating
costs, and have impacted, and will continue to impact, product
offerings and business models.
Other areas in which, and examples
of where, governmental policies, regulatory and accounting changes,
and increased public and regulatory scrutiny could have an adverse
effect (some of which could be material) on NWB Group include, but
are not limited to, the following:
-
general changes in government, central bank,
regulatory or competition policy, or changes in regulatory regimes
that may influence investor decisions in the jurisdictions in which
NWB Group operates;
-
rules relating to foreign ownership,
expropriation, nationalisation and confiscation or appropriation of
assets;
-
increased scrutiny including from the CMA, FCA and
Payment Systems Regulator ('PSR') for the protection and resilience
of, and competition and innovation in, digital and other markets,
UK payment systems (with the development of the government's
National Payments Vision and Strategy) and retail banking
developments relating to the UK initiative on Open Banking, Open
Finance and the European directive on payment services;
-
the ongoing compliance by NatWest Group with CMA's
Market Orders including the Retail Banking Market Order 2017 (the
'Order') and SME Undertakings as well as legislation being drafted
to introduce penalties for breaches of such requirements (in
addition to the current customer remediation
requirements);
-
ongoing competition litigation in the English
courts around payment card interchange fees, combined with
increased regulatory scrutiny (from the PSR) of the Visa and
Mastercard card schemes;
-
increased risk of new class action claims being
brought against NWB Group in the Competition Appeal Tribunal for
breaches of competition law;
-
new or increased regulations relating to customer
data protection as well as IT controls and resilience, such as the
proposed UK Data Protection and Digital Information (No 2) Bill and
in India, the Digital Personal Data Protection Bill
2022;
-
the introduction of, and changes to, taxes, levies
or fees applicable to NWB Group's operations, changes in tax rates,
changes in the scope and administration of the Bank Levy, increases
in the bank corporation tax surcharge in the UK, restrictions on
the tax deductibility of interest payments or further restrictions
imposed on the treatment of carry-forward tax losses that reduce
the value of deferred tax assets and require increased payments of
tax;
-
the potential introduction by the Bank of England
of a Central Bank Digital Currency which could result in deposit
outflows, higher funding costs, and/or other implications for UK
banks including NWB Group;
-
regulatory enforcement in the form of PRA imposed
financial penalties for failings in banks' regulatory reporting
governance and controls, and ongoing regulatory scrutiny; the PRA's
thematic reviews of the governance, controls and processes for
preparing regulatory returns of selected UK banks, including
NatWest Group (of which NWB Group is a part of);
-
'Dear CEO' letters issued by the Bank of England
from time to time;
-
recent or proposed US regulations around
cybersecurity incidents, climate disclosures and other climate and
sustainability-related rules;
-
new or increased regulations relating to financial
crime (including the new criminal offence of failure to prevent
fraud)
-
any regulatory requirements relating to the use of
artificial intelligence and large language models across the
financial services industry (such as the European Union Artificial
Intelligence Act).
Any of these developments (including
any failure to comply with new rules and regulations) could also
have an adverse effect on NWB Group's authorisations and licences,
the products and services that NWB Group may offer, its reputation
and the value of its assets, NWB Group's operations or legal entity
structure, and the manner in which NWB Group conducts its
business.
Material consequences could arise
should NWB Group be found to be non-compliant with these regulatory
requirements. Regulatory developments may also result in an
increased number of regulatory investigations and proceedings and
have increased the risks relating to NWB Group's ability to comply
with the applicable body of rules and regulations in the manner and
within the timeframes required.
Changes in laws, rules or
regulations, or in their interpretation or enforcement, or the
implementation of new laws, rules or regulations, including
contradictory or conflicting laws, rules or regulations by key
regulators or policymakers in different jurisdictions, or failure
by NWB Group to comply with such laws, rules and regulations, may
adversely affect NWB Group's business, results of operations and
outlook. In addition, uncertainty and insufficient international
regulatory coordination as enhanced supervisory standards are
developed and implemented may adversely affect NWB Group's ability
to engage in effective business, capital and risk management
planning.
Any of the above may have a material
adverse effect on NWB Group's future results, financial condition,
prospects, and/or reputation.
NWB Group is exposed to the risks 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 NWB Group.
NWB Group's operations are diverse
and complex and it operates in legal and regulatory environments
that expose it to potentially significant civil actions (including
those following on from regulatory sanction), as well as criminal,
regulatory and governmental proceedings. NWB Group has resolved a
number of legal and regulatory actions over the past several years
but continues to be, and may in the future be, involved in such
actions in the US, the UK, Europe, Asia and other
jurisdictions.
NWB Group is, has recently been or
will likely be involved in a number of significant legal and
regulatory actions, including investigations, proceedings and
ongoing reviews (both formal and informal) by governmental law
enforcement and other agencies and litigation proceedings,
including in relation to the offering of securities, conduct in the
foreign exchange market, the setting of benchmark rates such as
LIBOR and related derivatives trading, the issuance, underwriting,
and sales and trading of fixed-income securities (including
government securities), product mis-selling, customer mistreatment,
anti-money laundering, antitrust, VAT recovery and various other
issues. Legal and regulatory actions are subject to many
uncertainties, and their outcomes, including the timing, amount of
fines, damages or settlements or the form of any settlements, which
may be material and in excess of any related provisions, are often
difficult to predict, particularly in the early stages of a case or
investigation. NWB Group's expectation for resolution may change
and substantial additional provisions and costs may be recognised
in respect of any matter.
Ongoing matters include the
implementation of recommendations made by the law firm Travers
Smith LLP following independent reviews into issues that had arisen
from treatment of a customer in connection with an account closure
decision that attracted significant public attention and related
interactions with the media, and certain account closures more
generally. NatWest Group plc has received reports in connection
with the Travers Smith reviews, and published summaries of the key
findings and recommendations in October and December 2023. In
addition, NatWest Group plc and the FCA are conducting reviews with
respect to certain governance processes, policies, systems and
controls of NatWest Group entities, including with respect to
customer account closures and the FCA is conducting supervisory
work into how the governance, systems and controls of NatWest Group
and Coutts & Company are working, to identify and address any
significant shortcomings. For additional information relating to
legal, regulatory proceedings and matters to which NWB Group is
exposed, see 'Litigation and regulatory matters' at Note 26 to the
consolidated accounts.
Recently resolved matters or adverse
outcomes or resolution of current or future legal, regulatory or
other matters, including conduct-related reviews, redress projects
or the subject matter and outcomes of any of the independent or
internal reviews described above, could increase the risk of
greater regulatory and third-party scrutiny and/or result in future
legal or regulatory actions, and could have material financial,
reputational, or collateral consequences for NWB Group's business
and result in restrictions or limitations on NWB Group's
operations. These may include consequences resulting from the need
to reapply for various important licences or obtain waivers to
conduct certain existing activities of NWB Group, which may take a
significant period of time and the results and implications of
which are uncertain.
Failure to obtain such licences or
waivers may adversely affect NWB Group's business, including if it
results in NWB Group being precluded from carrying out certain
activities. This in turn and/or any fines, settlement payments or
penalties may adversely affect NWB Group's capital position.
Similar consequences could result from legal or regulatory actions
relating to other parts of NatWest Group.
Failure to comply with undertakings
made by NWB Group to its regulators may result in additional
measures or penalties being taken against NWB Group. In addition,
any failure to administer conduct redress processes adequately, or
to handle individual complaints fairly or appropriately, could
result in further claims as well as the imposition of additional
measures or limitations on NWB Group's operations, additional
supervision by NWB Group's regulators, and loss of investor
confidence.
Any of the above may have a material
adverse effect on NWB Group's future results, financial condition,
prospects, and/or reputation.
Changes in tax legislation or
failure to generate future taxable profits may impact the
recoverability of certain deferred tax assets recognised by NWB
Group.
In accordance with the accounting
policies set out in 'Critical accounting policies', NWB Group has
recognised deferred tax assets on losses available to relieve
future profits from tax only to the extent it is probable that they
will be recovered. The deferred tax assets are quantified on the
basis of current tax legislation and accounting standards and are
subject to change in respect of the future rates of tax or the
rules for computing taxable profits and offsetting allowable
losses.
Failure to generate sufficient
future taxable profits or further changes in tax legislation
(including with respect to rates of tax) or accounting standards
may reduce the recoverable amount of the recognised tax loss
deferred tax assets, amounting to £362 million as at 31 December
2023. Changes to the treatment of certain deferred tax assets may
impact NWB Group's capital position. In addition, NWB Group's
interpretation or application of relevant tax laws may differ from
those of the relevant tax authorities and provisions are made for
potential tax liabilities that may arise on the basis of the
amounts expected to be paid to tax authorities. The amounts
ultimately paid may differ materially from the amounts provided
depending on the ultimate resolution of such matters.
Any of the above may have a material
adverse effect on NWB Group's future results, financial condition,
prospects, and/or reputation.
Legal Entity Identifier:
213800IBT39XQ9C4CP71
