Natwest Regulatory News (NWG)

NatWest Markets N.V.

Interim Results 2023

NatWest Markets N.V.

Results for the half year ended 30 June 2023

Overview of the half year

In H1 2023, we have continued to focus on our strengths to support our customers' evolving needs with financing and risk solutions. Our improved connectivity as part of the NatWest Group Commercial & Institutional segment is enabling us to unlock further opportunities for growth and to build even deeper relationships with NatWest Group customers.

We have delivered a strong performance in the first half of the year and maintained our robust capital and liquidity position. We continue to monitor the evolving economic outlook including the continued rise in cost of living and are mindful of the impact that rising inflation and higher interest rates are having on our customers.

As of 30 June 2023, NWM N.V. surpassed a balance sheet total of €30 billion at the regulatory consolidated level. By exceeding this threshold, NWM N.V. will most likely qualify as a "significant institution" in the foreseeable future, which may result in changes to supervision and regulations applicable to it. 

Climate and sustainable funding and financing have continued to perform well, and as at the end of H1 2023 we had delivered €14.7 billion towards the NatWest Group climate and sustainable funding and financing target(1)  of £100 billion between 1 July 2021 and the end of 2025.

Management Board and Supervisory Board update

In March 2023, Anne Snel stepped down as Supervisory Board Member following the conclusion of her term of appointment.

Outlook(2)

We retain the Outlook for the CET1 ratio and leverage ratio as set out in NatWest Markets N.V. 2022 Annual Report and Accounts. NWM N.V. Group intends to issue potentially up to €1 billion in 2023, subject to the evolution of asset origination, through a mix of public benchmark transactions and private placements.

(1) This comprises funding and financing for climate and sustainable finance to support transition towards a net-zero and climate-resilient economy. NatWest Group uses its climate and sustainable funding and financing inclusion criteria (CSFFI criteria) to determine the assets, activities and companies that are eligible to be counted towards its climate and sustainable funding and financing targets.

(2) The targets, expectations and trends discussed in this section represent management's current expectations and are subject to change, including as a result of the factors described in the Risk Factors section of NatWest Markets N.V. 2022 Annual Report and Accounts and the Summary Risk Factors set out in this announcement for H1 2023. These statements constitute forward-looking statements. Refer to Forward-looking statements in this announcement.

Financial review

Profit for the period was €61 million compared with €11 million in H1 2022. The total increase of €50 million was mainly due to net interest income of €50 million compared with a net interest expense of €1 million in H1 2022 and an impairment release of €3 million compared with an impairment loss of €7 million in H1 2022. This was partially offset by a €10 million decrease in non-interest income from €105 million to €95 million.

Net interest income was a net income of €50 million compared with a net expense of €1 million in H1 2022, primarily driven by rising interest rates and by changes in the lending portfolio and the funding book in H1 2023 in comparison with H1 2022.

Non-interest income decreased by €10 million to €95 million compared with a gain of €105 million in H1 2022. Net fees and commissions of €99 million (H1 2022 - €94 million) primarily related to transfer pricing income from NWM Plc of €61 million (H1 2022 - €60 million) and syndicate fee income of €39 million (H1 2022 - €34 million). Income from trading activities was a loss of €5 million compared with a gain of €10 million in H1 2022. Other operating income was a gain of €1 million in both H1 2023 and H1 2022.

Operating expenses were €82 million compared with €79 million in H1 2022. Staff costs increased by €1 million to €40 million in H1 2023. Premises and equipment costs were €3 million (H1 2022 - €3 million). Administrative expenses increased by €3 million to €38 million, compared with €35 million in H1 2022. Depreciation and amortisation was €1 million (H1 2022 - €2 million).

Impairments were a release of €3 million, compared with a loss of €7 million in H1 2022, mainly driven by improvements in economics and scenario weightings which were partially offset by post model adjustments.

Tax charge was €5 million compared with a tax charge of €7 million in H1 2022, largely driven by the utilisation of deferred tax assets.

Total assets and total liabilities increased by €4.0 billion and €4.1 billion to €30.4 billion and €28.2 billion respectively at 30 June 2023, compared with €26.4 billion and €24.1 billion at 31 December 2022.

- Cash and balances at central banks increased by €4.4 billion to €8.3 billion at 30 June 2023, with the full balance placed with the Dutch Central Bank.

- Trading assets decreased to €4.3 billion (31 December 2022 - €4.4 billion), driven by a decrease in collateral given of €0.5 billion, partially offset by an increase in loans subject to reverse repurchase agreements of €0.4 billion.

- Derivative assets decreased to €9.4 billion (31 December 2022 - €12.3 billion) and derivative liabilities decreased to €8.1 billion (31 December 2022 - €11.1 billion), primarily reflecting lower fair values of interest rate derivatives and FX derivatives.

- Settlement balance assets and liabilities were €2.4 billion (31 December 2022 - €0.7 billion) and €1.8 billion (31 December 2022 - €0.6 billion) respectively due to higher trading volume around June 2023 month end compared to December 2022 month end.

- Loans to banks - amortised cost increased by €0.1 billion to €0.3 billion at 30 June 2023, mainly due to the increase in nostro balances.

- Loans to customers - amortised cost increased by €0.1 billion to €1.1 billion, reflecting new deals.

- Amounts due from holding company and fellow subsidiaries increased to €2.4 billion compared with €2.0 billion at 31 December 2022, mainly due to an increase in settlement balances of €0.4 billion.

- Other financial assets increased by €0.4 billion to €2.1 billion, reflecting an increase in debt securities of €0.5 billion, partially offset by a decrease in treasury bills of €0.1 billion. 

- Customer deposits increased from €1.0 billion to €6.3 billion, in line with our strategy to increase customer deposits to match planned banking book asset growth.

- Amounts due to holding companies and fellow subsidiaries increased by €0.5 billion to €4.8 billion, mainly driven by an increase in settlement balances of €0.8 billion, which was partially offset by a decrease in trading liabilities of €0.3 billion.

- Trading liabilities increased to €4.5 billion (31 December 2022 - €4.0 billion), primarily reflecting an increase in deposits subject to repurchase agreements of €0.8 billion, partially offset by a decrease in collateral received of €0.2 billion.

- Other financial liabilities decreased by €0.1 billion to €2.3 billion (31 December 2022 - €2.4 billion), largely driven by maturities in the period, partially offset by new issuance.

- Subordinated liabilities decreased by €0.1 billion to €0.3 billion primarily due to maturities.

- Equity attributable to controlling interests decreased by €62 million to €2.2 billion, mainly driven by ordinary dividends paid of €0.1 billion, dividends paid on AT1 capital securities of €11 million and cash flow hedging movements of €11 million. This was partially offset by the profit for the period of €61 million.

Financial review

Capital and liquidity

Capital ratios and risk-weighted assets (RWAs) on the CRR transitional basis are set out below.

- The lower capital ratios are largely due to dividend payments in H1 2023.

- RWAs remained stable throughout H1 2023.

- The decrease in the LCR ratio is driven by an increase in short term funding.

Condensed consolidated income statement for the period ended 30 June 2023 (unaudited)

Condensed consolidated statement of comprehensive income

for the period ended 30 June 2023 (unaudited)

Condensed consolidated balance sheet as at 30 June 2023 (unaudited)

Condensed consolidated statement of changes in equity

for the period ended 30 June 2023 (unaudited)

Condensed consolidated cash flow statement for the period ended 30 June 2023 (unaudited)

Notes

1. Presentation of condensed consolidated financial statements

The condensed consolidated financial statements should be read in conjunction with NatWest Markets N.V.'s 2022 Annual Report and Accounts. The accounting policies are the same as those applied in the consolidated financial statements.

The directors have prepared the condensed consolidated financial statements on a going concern basis after assessing the principal risks, forecasts, projections and other relevant evidence over the twelve months from the date they are approved and in accordance with IAS 34 'Interim Financial Reporting', as adopted by the European Union.

Amendments to IFRS effective from 1 January 2023 had no material effect on the condensed consolidated financial statements.

2. Analysis of net fees and commissions

3. Tax

The actual tax charge differs from the expected tax charge computed by applying the statutory tax rate of the Netherlands of 25.8% (2022 - 25.8%) as follows:

Deferred tax assets of €52 million recognised at 31 December 2022 have decreased to €49 million at 30 June 2023 due to utilisations. NWM N.V. Group has considered the carrying value of this asset as at 30 June 2023 and concluded that it is recoverable based on future profit projections.

Notes

4. Derivatives

The table below shows third party derivatives by type of contract. The master netting agreements and collateral shown do not result in a net presentation on the balance sheet under IFRS.

(1) The notional amount of interest rate derivatives includes €828 billion (31 December 2022 - €1,865 billion) in respect of contracts cleared through central clearing counterparties.

(2) Transactions with certain counterparties with whom NWM N.V. has netting arrangements but collateral is not posted on a daily basis; certain transactions with specific terms that may not fall within netting and collateral arrangements; derivative positions in certain jurisdictions where the collateral agreements are not deemed to be legally enforceable.

(3) Includes transactions with securitisation vehicles and funds where collateral posting is contingent on NWM N.V.'s external rating.

(4) Mainly large corporates with whom NWM N.V. may have netting arrangements in place, but operational capability does not support collateral posting.

(5) Sovereigns and supranational entities with no collateral arrangements, collateral arrangements that are not considered enforceable, or one-way collateral agreements in their favour.

Notes

5. Financial instruments - classification

The following tables analyse financial assets and liabilities in accordance with the categories of financial instruments in IFRS 9.

(1) The cumulative own credit adjustment, representing an increase of the subordinated liability value, was €6 million (31 December 2022 - €38 million).

(2) Includes lease liabilities of €8 million (31 December 2022 - €7 million), held at amortised cost.

Notes

5. Financial instruments - classification continued

NWM N.V. Group's financial assets and liabilities include amounts due from/to holding companies and fellow subsidiaries as below:

(1) Intercompany derivatives are included within derivative classification on the balance sheet.

Notes

5. Financial instruments - valuation

Disclosures relating to the control environment, valuation techniques and related aspects pertaining to financial instruments measured at fair value are included in NWM N.V.'s 2022 Annual Report and Accounts. Valuation, sensitivity methodologies and input methodologies at 30 June 2023 are consistent with those described in Note 8 to NWM N.V.'s 2022 Annual Report and Accounts.

Fair value hierarchy

The table below shows the assets and liabilities held by NWM N.V. split by fair value hierarchy level. Level 1 are considered

the most liquid instruments, and level 3 the most illiquid, valued using expert judgment and hence carry the most significant price uncertainty.

(1) Level 1 - Instruments valued using unadjusted quoted prices in active and liquid markets, for identical financial instruments. Examples include government bonds, listed equity shares and certain exchange-traded derivatives.

Level 2 - Instruments valued using valuation techniques that have observable inputs. Observable inputs are those that are readily available with limited adjustments required. Examples include most government agency securities, investment-grade corporate bonds, certain mortgage products - including CLOs, most bank loans, repos and reverse repos, state and municipal obligations, most notes issued, certain money market securities, loan commitments and most OTC derivatives.

Level 3 - Instruments valued using a valuation technique where at least one input which could have a significant effect on the instrument's valuation, is not based on observable market data. Examples include non-derivative instruments which trade infrequently, certain syndicated and commercial mortgage loans, private equity, and derivatives with unobservable model inputs.

(2) Transfers between levels are deemed to have occurred at the beginning of the quarter in which the instruments were transferred.

Notes

5. Financial instruments - valuation

Level 3 sensitivities

The table below shows the high and low range of fair value of the level 3 assets and liabilities.

Alternative assumptions

Reasonably plausible alternative assumptions of unobservable inputs are determined based on a specified target level of certainty of 90%. Alternative assumptions are determined with reference to all available evidence including consideration of the following: quality of independent pricing information considering consistency between different sources, variation over time, perceived tradability or otherwise of available quotes; consensus service dispersion ranges; volume of trading activity and market bias (e.g. one-way inventory); day 1 profit or loss arising on new trades; number and nature of market participants; market conditions; modelling consistency in the market; size and nature of risk; length of holding of position; and market intelligence.

Movement in level 3 assets and liabilities

The following table shows the movement in level 3 assets and liabilities.