RBS.L Regulatory News (RBS)

NatWest Markets N.V.

Interim Results 2019

NatWest Markets N.V.

Results for the half year ended 30 June 2019

NatWest Markets N.V. reported an attributable profit of €527 million for H1 2019 compared with €34 million in H1 2018, primarily reflecting the impact of the Alawwal bank merger completed in H1 2019, the re-purposing of the NatWest Markets N.V. (NWM N.V.) banking licence and new business transferred to NWM N.V..

Income, balance sheet and RWAs

·; Total income was €590 million compared with €113 million in H1 2018, primarily reflecting the gain on the merger of Alawwal bank of €523 million.

·; Total assets and total liabilities increased to €17.7 billion compared with €5.3 billion and to €14.9 billion compared with €2.1 billion at 31 December 2018 respectively, reflecting the transfer of assets from NWM Plc and the transfer of new business from NatWest Bank Plc in relation to the Western European Corporate Portfolio.

·; RWAs reduced to €5.5 billion primarily reflecting a large reduction in exposures from investments in associates following the Alawwal bank merger.

Business developments

NWM N.V. began transacting new business on 25 March 2019 as part of preparations to ensure continuity of service to RBS Group European Economic Area (EEA) customers when the United Kingdom leaves the European Union.  The activities transferred primarily relate to Markets and Corporate Lending portfolios for EEA customers previously served from NWM Plc and the ring-fenced bank.

As part of the commencement of new business, €6.2 billion of assets and €6.6 billion of liabilities were transferred from NWM Plc to NWM N.V. over the weekend of 23/24 March 2019. Further transfers of €1.3 billion of assets and €1.8 billion of liabilities were undertaken in Q2 2019. During H1 2019 €0.4 billion of lending and €3.3 billion of contingent liabilities and commitments have also transferred from NatWest Bank Plc to NWM N.V. in relation to the Western European Corporate Portfolio.

Alawwal bank

On 16 June 2019, the merger of Alawwal bank and SABB was completed, with NWM N.V. receiving an aggregate 10.3% shareholding in SABB on behalf of itself and its consortium partners. The RBS Group's economic interest in the merged entity, amounting to 4.1%, was then sold to NWM Plc, and the balance of shares was transferred separately to RFS Holdings B.V. consortium partners, as part of the unwind of those arrangements. The completion of the Alawwal bank and SABB merger paves the way for NWM N.V. to become a subsidiary of NWM Plc in H2 2019, subject to regulatory approval.

During the period, NWM Plc and NWM N.V. have established limited risk-sharing arrangements that facilitate the smooth provision of services to Markets' customers. The arrangements include:

·; The provision of a funded guarantee of up to £3 billion by NWM Plc to NWM N.V. that limits NWM N.V.'s exposure to large individual customer credits to 10% of NWM N.V.'s capital. Funding is provided by NWM Plc deposits placed with NWM N.V. of not less than the guaranteed amount. At 30 June 2019 the deposits amounted to €0.2 billion and the guarantee fees in the period were €0.4 million.

·; The provision of a funded and an unfunded guarantee by NWM Plc in respect of NWM N.V.'s legacy portfolio. At 30 June 2019 the exposure at default covered by the guarantees was approximately €0.4 billion of which €0.2 billion was funded. The guarantee fees in the period were €2 million.

Presentation of Information

RBS Holdings N.V. is the parent company of one direct subsidiary, NatWest Markets N.V. (NWM N.V.), together with NWM N.V.'s other group of companies and associated companies, 'RBSH Group' and NWM N.V. Group respectively. NWM N.V. is a licenced bank regulated by the De Nederlandsche Bank. As the legal entity structure and activities of RBSH Group and NWM N.V. Group are very closely aligned, references and disclosures to each will apply equally to the other.

Outlook

Further changes are expected regarding the scope of the RBSH Group's activities in 2019 resulting from structural changes as part of the RBS Group's strategy. The volume and pace of changes will depend upon the terms and circumstances of the UK's exit from the EU, as well as the specific contractual terms of the affected products and agreement of certain customers, amongst other variables.

Financial review

Profit attributable to controlling interests was €527 million compared with €34 million in H1 2018. This increase was due to total income of €590 million compared with €113 million in H1 2018, reflecting the gain on the merger of Alawwal bank of €523 million.

Net interest income was a loss of €5 million compared with a loss of €1 million in H1 2018, reflecting higher interest receivable partially offset by an increase in interest payable.

Non-interest income increased by €481 million to €595 million compared with €114 million in H1 2018. Income from trading activities was €8 million (H1 2018 - €70 million). H1 2019 included €17 million (H1 2018 - €46 million) received in respect of a distribution to successful plaintiffs in the Madoff related class action. Net fees and commissions of €63 million (H1 2018 - nil) primarily related to the transfer of new business. Other operating income of €524 million, compared with €44 million in H1 2018 and included the gain on the merger of Alawwal bank of €523 million.

Operating expenses were €42 million in H1 2019 compared with €32 million in H1 2018. Staff costs increased by €17 million to €19 million in H1 2019 (H1 2018 - €2 million) and premises and equipment costs decreased by €3 million to €1 million (H1 2018 - €4 million). Administrative expenses decreased by €5 million to €21 million, compared with €26 million in H1 2018.

Impairments were a release of €1 million compared with a loss of €6 million in H1 2018.

Tax charge for H1 2019 was €22 million compared with €41 million in H1 2018.

Balance sheet

The balance sheet movements in the year are materially impacted by the re-purposing of the NatWest Markets N.V. banking licence and the transfer of new business from NatWest Bank Plc in relation to the Western European Corporate Portfolio. These are described where relevant below;

Financial review

Capital and liquidity

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

·; The CET1 ratio increased by 210 basis points in H1 2019 primarily due to the decrease in RWAs (€3.3 billion) which mainly reflected a large reduction in exposures from investments in associates following the Alawwal bank merger.

·; During H1 2019 €250 million AT1 capital notes were issued to RBSG plc (via RFS Holdings B.V.).

·; The markets and corporate lending portfolio transfers, completed in H1 2019 from NWM Plc, did not require any further additional capital actions.

Condensed consolidated income statement for the half year ended 30 June 2019 (unaudited) 

Note:

 (1) Gain of €523 million on completion of the Alawwal bank merger.

Condensed consolidated statement of comprehensive income for the half year ended 30 June 2019 (unaudited)

Condensed consolidated balance sheet as at 30 June 2019 (unaudited)

Condensed consolidated statement of changes in equity for the half year ended 30 June 2019 (unaudited)

Notes:

Condensed consolidated cash flow statement for the half year ended 30 June 2019 (unaudited)

Notes

1. Basis of preparation

The Group condensed consolidated interim financial statements have been prepared in accordance with IAS 34 'Interim

Financial Reporting'. They should be read in conjunction with the 2018 Annual Report and Accounts which were prepared in

accordance with International Financial Reporting Standards issued by the International Accounting Standards Board (IASB)

and interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) of the IASB, as adopted

by the European Union (EU) (together IFRS).

The condensed consolidated interim financial statements are unaudited. In the opinion of management, all relevant disclosures

necessary for an understanding of the changes in the consolidated financial position and performance of the Group since the end of the last annual reporting period have been made.

Going concern

Having reviewed the Group's forecasts and projections and considered the interim results of the RBS Group for the half year ended 30 June 2019, approved on 1 August 2019, which were prepared on a going concern basis, together with evidence that the RBS Group will continue to provide sufficient resources to the Group, the directors have a reasonable expectation that the Group will continue in operational existence for the foreseeable future. Accordingly, the interim financial statements for the half year ended 30 June 2019 have been prepared on a going concern basis.

Transfers

As part of the commencement of new business, €6.2 billion of assets and €6.6 billion of liabilities were transferred from NWM Plc to NWM N.V. over the weekend of 23/24 March 2019. Further transfers of €1.3 billion of assets and €1.8 billion of liabilities were undertaken in Q2 2019. On a cumulative basis, the H1 2019 transfers included:

·; Trading assets of €4.3 billion

·; Derivative assets of €3.0 billion

·; Trading liabilities of €4.1 billion

·; Derivative liabilities of €4.1 billion

The consideration was settled by balance due with NWM Plc.

During H1 2019 €0.4 billion of lending and €3.3 billion of contingent liabilities and commitment have also transferred from NatWest Bank Plc to NWM N.V. in relation to the Western European Corporate Portfolio.

2. Accounting policies

The RBSH Group's principal accounting policies are as set out on pages 46 to 49 of the 2018 Annual Report and Accounts and are unchanged other than as presented below.

Revised Accounting policy 8 - Leases

The Group has adopted IFRS 16 'Leases' with effect from 1 January 2019, replacing IAS 17 'Leases'. The Group has applied IFRS 16 on a modified retrospective basis without restating prior years. Accounting policy 8 presented in the 2018 Annual Report and Accounts has been updated as follows:

As lessor

Finance lease contracts are those which transfer substantially all the risks and rewards of ownership of an asset to a customer. All other contracts with customers to lease assets are classified as operating leases.

Loans to customers include finance lease receivables measured at the net investment in the lease, comprising the minimum lease payments and any unguaranteed residual value discounted at the interest rate implicit in the lease. Interest receivable includes finance lease income recognised at a constant periodic rate of return before tax on the net investment. Unguaranteed residual values are subject to regular review; if there is a reduction in their value, income allocation is revised and any reduction in respect of amounts accrued is recognised immediately.

Rental income from operating leases is recognised in other operating income on a straight-line basis over the lease term unless another systematic basis better represents the time pattern of the asset's use. Operating lease assets are included within Property, plant and equipment and depreciated over their useful lives.

Notes

2. Accounting policies continued

As lessee

On entering a new lease contract, the Group recognises a right of use asset and a liability to pay future rentals. The liability is measured at the present value of future lease payments discounted at the applicable incremental borrowing rate. The right of use assets is depreciated over the shorter of the term of the lease and the useful economic life, subject to review for impairment. Short term and low value leased assets are expensed on a systematic basis.

Adoption of IFRS 16 resulted in the right of use assets and lease liabilities of €3 million. For further details see page 49 of the 2018 Annual Report and Accounts.

Critical accounting policies and key sources of estimation uncertainty

The judgements and assumptions that are considered to be the most important to the portrayal of the Group's financial condition are those relating to fair value of financial instruments. This critical accounting policies and judgements is described on page 49 of the 2018 Annual Report and Accounts.

3. Segmental analysis

Geographical segments

The geographical analyses in the tables below have been compiled on the basis of location of office where the transactions are recorded.

Notes:

(1) Includes business originated from the NWM N.V. EU branches.

(2) Fees receivable primarily relate to support services provided to NWM Plc, refer to Note 11 for further details.

The Managing Board, as chief operating decision maker, manages the Group as a single reportable segment.

Notes

4. Tax

Future tax rates are expected to be low due to the losses carried forward, the actual tax (charge)/credit differs from the expected tax (charge)/credit computed by applying the standard Dutch corporation tax rate of 25% as follows:

5. Trading assets and liabilities

Trading assets and liabilities comprise assets and liabilities held at fair value in trading portfolios.

Notes

6. 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 9.

Notes:

(1) The notional amount of interest rate derivatives include €26 billion (31 December 2018 - nil) in respect of contracts cleared through central clearing counterparties.

(2) Transactions with certain counterparties with whom the Group 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 for example China where the collateral agreements are not deemed to be legally enforceable.

(3) Transactions with securitisation vehicles and funds where collateral posting is contingent on the Group's external rating.

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

(5) Sovereigns and supranational entities with one-way collateral agreements in their favour.

Notes

7. Financial instruments: classification

The following tables analyse the Group's financial assets and liabilities in accordance with the categories of financial instruments in IFRS 9. Assets and liabilities outside the scope of IFRS 9 are shown within other assets and other liabilities.

Notes:

Notes

7. Financial instruments: Classification continued

Financial instruments: carried at fair value - valuation hierarchy

Disclosures relating to the control environment, valuation techniques and related aspects pertaining to financial instruments measured at fair value are included in the 2018 Annual Report and Accounts. Valuation and input methodologies at 30 June 2019 are consistent with those described in Note 10 of the 2018 Annual Report and Accounts.

The following tables show financial instruments carried at fair value on the Group's balance sheet by valuation hierarchy - levels 1, 2 and 3.

Notes:

Notes

7. Financial instruments: Carried at fair value - valuation hierarchy continued

Notes:

Notes  

7. Financial instruments: Fair value of financial instruments not carried at fair value

The following table shows the carrying value and fair value of financial instruments carried at amortised cost on the balance sheet.

The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Quoted market values are used where available; otherwise, fair values have been estimated based on discounted expected future cash flows and other valuation techniques. These techniques involve uncertainties and require assumptions and judgements covering prepayments, credit risk and discount rates. Furthermore, there is a wide range of potential valuation techniques. Changes in these assumptions would significantly affect estimated fair values. The fair values reported would not necessarily be realised in an immediate sale or settlement.

Notes 

8. Loan impairment provisions

The table below summarises loans and related credit impairment measurements on an IFRS 9 basis.

Note:

(1) ECL provisions coverage is third party ECL provisions divided by third party loans - amortised cost.

Notes 

8. Loan impairment provisions (continued)

Flow statement 

The flow statement that follows shows the main ECL and related income statement movements. It also shows the changes in ECL as well as the changes in related financial assets used in determining ECL. Due to differences in scope, exposures may therefore differ from those reported in other tables, principally in relation to exposures in Stage 1 and Stage 2. These differences do not have a material ECL impact because they relate to balances at central banks. Other points to note:

·; Financial assets presented in the flow statement include treasury liquidity portfolios, comprising balances at central banks and debt securities, as well as loans. Both modelled and non-modelled portfolios are included.

·; Stage transfers (for example, exposures moving from Stage 1 to Stage 2) are a key feature of ECL movements, with the net re-measurement cost of transitioning to a worse stage being a primary driver of income statement charges. Similarly there is an ECL benefit for accounts improving stage.

·; Changes in risk parameters shows the reassessment of the ECL within a given stage, including any ECL overlays and residual income statement gains or losses at the point of write-off or accounting write-down.

·; Amounts written-off represent the gross asset written-down against accounts with ECL, including the net asset write-down for any debt sale activity.