Natwest Group PLC

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February 2022. By order of the Board Jan Cargill Chief Governance Officer and Company Secretary 17 February 2022 Chairman: Howard Davies Executive directors: Alison Rose (Group CEO) Katie Murray (Group CFO) Non-executive directors: Frank Dangeard Patrick Flynn Morten Friis Robert Gillespie Yasmin Jetha Mike Rogers Mark Seligman Lena Wilson Contents Our 2021 reporting suite brings together NatWest Group’s financial, non-financial and risk performance for the year. The reports are designed primarily to meet the expectations of our investors (including holders of bonds issued under our green, social and sustainability framework), as well as regulators, and our wider stakeholders, including customers, colleagues and society more broadly. The main reports within this suite and their focus are detailed below: Available within this report: Strategic report: an overview of our business, our 2021 financial and non-financial performance and progress against our purpose-led strategy to champion potential, helping people, families and businesses to thrive. Governance and remuneration report: a review of our corporate governance and remuneration, including the Report of the directors and Annual report on remuneration. Risk and capital management report: an overview of the management of key risks relating to our business operations and disclosures on our capital, liquidity and funding position. Financial statements: our financial statements and related notes, including the independent auditor’s report. Strategic report 2 Financial performance 3 Operational highlights 4 Chairman’s statement 6 Group Chief Executive’s review 12 Our purpose framework 14 Our stakeholders 18 Our strategy 20 Our strategy in action 28 Key performance indicators 30 Our purpose-led areas of focus 32 Market environment 34 How we create value 38 Business performance 40 Retail Banking 42 Private Banking 44 Commercial Banking 46 RBS International 48 NatWest Markets 50 Ulster Bank RoI 51 Outlook 52 Section 172(1) statement 54 Stakeholder focus areas 54 Customers 57 Investors 58 Colleagues 62 Communities 63 Regulators 63 Suppliers 64 Climate-related disclosures 72 Risk overview 74 Top and emerging risks 76 Viability statement 78 Non-financial information statement 80 Governance at a glance 82 Financial review 96 Governance 188 Risk and capital management 286 Financial statements 429 Additional information Company announcement and Financial supplement Our latest company information including our financial performance for the year with a focus on key metrics and measurement. Climate-related Disclosures Report Details our progress in 2021 on our climate ambitions including an overview of our approach to climate related governance, strategy (including scenario analysis), risk management, metrics and targets. ESG Supplement Provides an overview of our purpose in action and key environmental, social and governance matters including progress in 2021. Pillar 3 Report Focuses on our regulatory reporting requirements and provides an explanation of our risk profile, including our capital adequacy, risk appetite and risk management. Mica Johnson, Owner, Floral Glory Thrive T ogether NatWest Group champions potential, helping people, families and businesses to thrive. We are the UK’s leading business bank, and we serve 19 million customers across every region of the UK. As a relationship bank for a digital world, we are helping to break down barriers that hold back our customers and we are helping to build their financial confidence. Because when people, families and businesses thrive, we all… 1 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements 2021 (9,280) (7,858) (7,758) 2020 2019 2021 2.7 0.4 3.8 2020 2019 2021 3,983 (481) 4,032 2020 2019 2021 3,136 (753) 2,950 2020 2019 2021 4,707 2,650 2,754 2020 2019 Financial performance Financial strength enables our purpose Operating profit/(loss) before tax £m Operating expenses £m Profit/(loss) attributable to ordinary shareholders £m Total capital return to shareholders (paid and proposed) £bn 2021 1 Jan 2022 16.2 18.5 18.2 15.9 2020 2019 CET1 ratio % We have delivered a strong operating performance in 2021. Group RoTE was 9.4%, benefiting from a £1.3 billion net impairment release. We achieved our Group cost reduction target of 4.0% and lending growth across our UK and RBSI retail and commercial businesses was 2.6%, excluding UK Government financial support schemes. Our capital and liquidity position remains strong after returning £3.8 billion to shareholders, and default levels have remained low across all our portfolios. The CET1 ratio was 18.2%, reducing to 15.9% on 1 January 2022 following regulatory RWA and capital changes. We have made good progress on our phased withdrawal from the Republic of Ireland and will focus the financial commentary below on the Group excluding Ulster Bank RoI (Go-forward group). Total income, excluding notable items, in the Go-forward group was 5.6% lower than prior year. Across the UK and RBSI retail and commercial businesses income increased by 1.4% reflecting strong balance sheet growth, principally in our mortgage book. NWM income was below expectations, down by 61.5%, compared with 2020, reflecting continued weakness in Fixed Income, impacted by subdued levels of customer activity and ongoing reshaping of the business, and exceptional levels of market activity in the prior year. We delivered a cost reduction of £256 million, or 4.0%, in 2021, in line with our target for the year (1) . This has been achieved by transformation across our customer journeys and NWM business, in line with the strategic announcement made in February 2020 and a £68 million reduction in the bank levy charge. Strategic costs of £787 million included £237 million in NWM related to transformation, £124 million of redundancy charges, £88 million of technology spend, and an £85 million goodwill impairment. A net impairment release of £1,278 million reflects the low levels of realised losses we have seen across the year. Total impairment Operating profit before impairment losses £m provisions reduced by £2.4 billion to £3.8 billion during 2021 and as a result ECL coverage ratio decreased from 1.66% to 1.03%. We are pleased to report a 2021 attributable profit of £2,950 million, with earnings per share of 25.4 pence and a RoTE of 9.4%. A final dividend of 7.5 pence per share is proposed, bringing our total 2021 paid and proposed capital distributions to £3.8 billion through a combination of ordinary dividends, directed buybacks of the UK Government stake and our on-market buyback programme. Across the UK and RBSI retail and commercial businesses, and excluding UK Government support schemes, net lending increased by 2.6%. Mortgage growth exceeded the market, however commercial lending was behind market as we have sought to reduce certain exposures, through targeted sector reductions and capital actions, whilst continuing to focus on supporting customers through sustainable lending. During the second half of the year we completed £8.1 billion Climate and Sustainable Funding and Financing against our £100 billion target. The CET1 ratio remains strong at 18.2%, or 17.8% excluding IFRS 9 transitional relief. The 30 basis points reduction in the year includes capital distributions of c.240 basis points, partially offset by the reduction in RWAs, c.170 basis points, and the attributable profit net of IFRS 9 transitional relief and other capital movements. RWAs of £157.0 billion reduced by £13.3 billion in 2021 mainly reflecting business movements in Commercial Banking, including targeted sector reductions, improvement in risk parameters and active capital management. On 1 January 2022, the proforma CET1 ratio was 15.9% including the impact of regulatory RWA inflation, 200 basis points, the removal of the software development costs capital benefit, 20 basis points, and the tapering of IFRS 9 transitional relief, 10 basis points. RWAs increased by £18.8 billion, including £14.8 billion associated with mortgage risk weight changes. (1) Total expenses excluding litigation and conduct costs, strategic costs, operating lease depreciation (OLD) and Ulster Bank RoI direct costs. 2 NatWest Group 2021 Annual Report and Accounts Operational highlights Operational highlights 2021 2020 2019 Growth UK and RBSI retail and commercial businesses net lending excluding UK Government support schemes 305.7bn £297.9bn £289.7bn Gross new mortgage lending in Retail Banking 36.0bn £31.5bn £33.3bn AUM Net New Money (NNM) £3.0bn £1.5bn £0.6bn Percentage of customers using digital channels exclusively to interact with us Retail Banking 60% 58% 46% Commercial Banking 83% 82% 76% Simplification Reduction in other operating expenses £256m £277m £310m Artificial intelligence – retail banking Cora conversations 10.7m 8.4m 5.4m Video banking interactions per week 10,200 3,300 <100 Capital Directed buyback value £1,125m – – On-market buyback value £676m – – Dividend per share (paid and proposed) 10.5p 3p 14p Risk-weighted assets (RWAs) 157.0bn 170.3bn 179.2bn CET1 ratio 18.2% 18.5% 16.2% As at 1 Jan 2022 15.9% – – Return on tangible equity 9.4% (2.4%) 9.4% Read more about our strategic priorities on pages 18 and 19. 3 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Chairman’s statement For much of 2021, there was a growing sense of cautious optimism that we might finally have put the worst of the COVID-19 pandemic behind us. However, towards the end of the year, our resilience was put to the test once more as the spread of new variants necessitated the reintroduction of various restrictions. That brought particular challenges for our colleagues, our customers and for the bank itself. But it also presented opportunities and NatWest Group’s commitment to helping people, families and businesses to thrive has never been more important. We are building from extremely robust foundations as a bank which holds strong market positions, serving 19 million customers throughout the UK. For the moment, a number of the key economic indicators remain relatively positive – growth has returned, unemployment is low, and the bank is seeing little in the way of significant defaults among its customers. However, there is no doubt that the rising cost of living is making life difficult for many. It seems certain that inflation will continue to increase in the short term at least – especially as energy prices remain high. And we are yet to see the full impact that the end of government support schemes will have on the employment or housing markets. The uncertainty is not just COVID-19-related, with global, European and domestic political considerations also having an impact. The Bank of England’s response has been limited so far and while the market is anticipating a continued trajectory of rate rises over the next twelve months, the low interest rate environment is set to persist for some time to come. Building a purpose-led bank to champion potential We champion potential; breaking down barriers and building financial confidence so the 19 million people, families and businesses we serve in communities up and down the country can rebuild and thrive. Howard Davies Chairman 4 NatWest Group 2021 Annual Report and Accounts ‘The extensive support that the bank has provided to its customers, colleagues and communities throughout the pandemic was a key focus for the Board in 2021. We also spent a significant amount of time ensuring that the implementation of the bank’s strategy and transformation agenda was subject to rigorous oversight and scrutiny.’ Against that backdrop, NatWest Group delivered a strong financial performance in 2021, returning to profitability and writing-back some of our pandemic-related impairment provisions as the economic outlook improved. The bank’s share price also saw a sharp recovery throughout the year, increasing around 35% and outperforming our UK peers. As our economy recovers and is reshaped to reflect new and accelerating trends, we are focused on delivering sustainable growth by creating deeper relationships with our customers and giving them the support they need at every stage of their lives – whether that is buying a house, saving for retirement or setting up and growing their own business. The UK banking industry as a whole has held up well during the pandemic, remaining open for business and well capitalised. NatWest Group retains one of the strongest capital ratios among major European banks and we once again comfortably passed the Bank of England’s stress test in December 2021, further demonstrating the resilience of our balance sheet to future crises. This, combined with our continued capital generation, means our bank is well placed to support its customers, invest for growth and drive sustainable returns to shareholders. £3.8 billion shareholder distributions were announced for the financial year 2021, through buybacks – both directed and on-market – and dividends. We also announced that we would distribute at least £1 billion in dividends each year to 2023 as we continue to optimise our capital ratio. UK Government Investments (UKGI), which manages the government’s shareholding, announced three separate transactions during the course of 2021: the directed buyback by NatWest Group; an on-market placement of shares; and an ongoing trading plan. The government stake reduced from 62% at the start of 2021, to less than 53% by the end of the year. £3.8 billion (paid and proposed) shareholder distributions announced for 2021 Final dividend of 7.5p per share This was welcome progress. And we may take part in further directed buybacks at the next opportunity, subject to agreement from HM Treasury. Any transaction of this nature could take the government’s shareholding below 50% for the first time since the financial crisis. And while that would have little impact on our governance or operations, it would be an important symbolic moment for our bank. NatWest Group’s financial performance has also been reflected in the bonus pool for 2021, which has increased from the previous year, where a significant reduction was made to reflect our COVID-19-related losses. It is important to note, however, that the bonus pool is slightly down on pre-pandemic levels. It has been a period of relative stability in terms of Board composition, with no changes to our membership in 2021. As you would expect, we keep the composition, skills and experience of the Board under review, and over the next year or so we will need to recruit new members to cope with planned retirements. In the main, the Board continued to meet virtually throughout 2021. For 2022, we intend to adopt a hybrid calendar with some meetings being held virtually and some meetings in person, subject to relevant government guidelines. Our virtual meeting technology has served us well during the pandemic and we will continue to use it to support the efficient and effective running of the Board. The extensive support that the bank has provided to its customers, colleagues and communities throughout the pandemic was a key focus for the Board in 2021. We also spent a significant amount of time scrutinising the implementation of the bank’s strategy and transformation agenda as well as enhancing our oversight of the bank’s culture. The progress that Alison Rose and her strong and capable leadership team have delivered in the last two years has helped to ensure that NatWest Group is well placed to succeed and grow as the needs and expectations of our customers evolve. We are delivering on our purpose, underpinned by our strategic priorities, and as a result, generating long-term growth for our business, playing a positive role in our communities and driving sustainable returns to our shareholders. We know that by championing the potential of the 19 million people, families and businesses we serve, we will help them to thrive. And if they thrive, so will we. Howard Davies Chairman 5 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Group Chief Executive’s review We champion potential, helping people, families, and businesses to thrive Our future and our growth are built on this one, clear purpose. It’s what drives us, defines us, and guides us. Because getting this right means success – for ourselves and for everyone we serve. Alison Rose Group Chief Executive Officer NatWest Group’s execution is centred around our purpose, driving sustainable growth through our strategic priorities. We are a relationship bank for a digital world, building ever deeper and closer connections with our customers throughout their financial lives, enabling people, families and businesses to thrive. As I look back on 2021, I’m filled with admiration for the resilience and adaptability that our colleagues and customers have demonstrated during the pandemic. Faced with unprecedented and constantly evolving challenges to the UK’s public health and economy, the collective response has been nothing short of extraordinary. As it has been throughout the pandemic, the health and well-being of our colleagues and customers continues to be our highest priority. In particular, for the key workers who have remained in our offices and branches to provide the level of service and support our customers have needed to rebuild and thrive. NatWest Group is the UK’s leading business bank. It is also a truly regional bank, serving 19 million customers throughout the UK. We are proud of the role we play and the relationships we already have across every part of the country. And we are well positioned to deepen these relationships and to help our customers, our economy and our bank to grow because of the actions we have taken in recent years. Thrive together In spite of the difficult economic environment and the pressure this continues to place on people, families and businesses up and down the country, the UK remains an attractive and entrepreneurial market, with small and medium-sized enterprises (SMEs) driving around half of UK turnover and employing 60% of the private sector workforce. It is also an increasingly competitive market, where banks have to maintain their relevance to earn their growth. As the economy starts to recover and grow, customers’ expectations of banks are changing faster than ever. So too is the way people live and work. Customers want a simple, 6 NatWest Group 2021 Annual Report and Accounts Clima te L ea r nin g En te rp ris e Supporting customers at every stage of their lives Simple to deal with Sharpened capital allocation Powered by innovation and partnerships These help us make a meaningful contribution to society while balancing the needs of our customers, colleagues and shareholders Our initial areas of focus We champion potential, helping people, families and businesses to thrive Our purpose Our strategy engaging experience, designed to anticipate particular needs and reflect their priorities, just as they have in other areas of their lives. When I first took up my role as Chief Executive, we committed to a purpose that guides all of our decision-making – we champion potential, helping people, families and businesses to thrive. We also set out clear areas of strategic focus to deliver on this purpose in order to drive sustainable returns for our shareholders and build sustainable value in our bank. We are executing well against these areas of focus, delivering growth in key areas while controlling costs, better allocating our capital and accelerating our digital transformation. As a relationship bank for a digital world, our focus now is on the opportunities we see for future growth. It is a simple principle: if our customers and economy thrive, so will we. Sustainable growth will come from ever closer and deeper relationships with our customers at every stage of their lives. Relationships that are based on insight and shared goals, delivering a simpler customer experience that removes complexity and frustration. Relationships that reflect customers’ values and aspirations for themselves and society. Relationships that start earlier in our customers’ lives and which adapt to meet their evolving needs. All of which will be enabled by the strategic partnerships and acquisitions we have made, and by our efforts to simplify how customers interact with our bank so they can enjoy an easier, frictionless banking experience. It will also be driven by a better allocation of our capital – with £3 billion being invested in the business across a three-year period from 2021 to 2023, in addition to the sustainable returns we are delivering to shareholders. 7 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Chief Executive’s review continued Delivering on our strategy Of course, we are building from strong foundations. Our operating profit for 2021 of £4.0 billion (£4.3 billion including operating profit from discounted operations (1) ) increased from a loss of £481 million (£351 million loss including operating profit from discounted operations (1) ) the year before. This included impairment releases of £1.3 billion, which reflected the low levels of realised losses we have seen across the year. We also continued to make progress against our other financial targets. The bank’s net lending – excluding government schemes – grew by £7.8 billion in 2021, primarily driven by growth in mortgages. We removed a further £256 million of costs from the business and retain a capital ratio well above our target range. At the same time, our digital transformation accelerated as our customers chose to interact with us in different ways. Around 60% of our retail current account holders now only interact with us digitally (1) and we have seen further strong growth in mobile payments and video banking. This digitalisation of customer journeys is crucial to our future growth, and our Net Promoter Scores are improving in key segments as a result. For example, our much-improved online process for renewing mortgages now takes as little as 10 minutes. We are also using our digital capabilities to keep our customers safe and to build their financial capabilities, with credit scoring now available in our app, dedicated support lines available for customers in vulnerable situations and more than 1 million customers growing their savings with us by £100 or more for the first time. As the UK’s leading business bank and a committed champion of start-ups, we are removing barriers to enterprise, tackling inequality and supporting growth by helping entrepreneurs achieve their ambitions. We offer the UK’s largest fully funded business accelerator network, with accelerator hubs across the country providing support for high-growth businesses, especially those led by under-represented groups. During the pandemic, we pivoted this support for entrepreneurs to be delivered digitally, as we did with our ‘Dream Bigger’ programme which helps 16–18-year-old girls develop Committed to embedding ESG principles and leading on climate action. (1) Go-forward group excludes Ulster Bank RoI. (2) Income excluding notable items. (3) Between 1 July 2021 and the end of 2025. (4) Go-forward group other operating expenses defined as total expenses excluding litigation and conduct costs. (1) Refer to the Non-IFRS financial measures section for details of the basis of preparation and reconciliation of Non-IFRS financial and performance measures. (2) Retail Banking current account customers only based as at 31 December 2021 – metric is 87% of our retail customer needs are now met digitally, with 60% of our customers banking entirely digitally. Only activity in the last quarter is considered. A purpose-led company with clear strategic priorities, strong market positions and capacity to grow. Supporting 19 million customers throughout the UK. Investing in our digital proposition to better serve customers and reduce cost. Underpinned by a robust balance sheet and an intelligent approach to risk. Focused on generating long-term sustainable value and a return on tangible equity of comfortably above 10% for the Group in 2023. Income excluding notable items to be above £11.0 billion in 2022 in the Go-forward group. (1,2) Accelerating growth Provide an additional £100 billion of Climate and Sustainable Funding and Financing. (3) Simplification via digital and technology ~3% cost reduction per annum through to 2023. (1,4) Disciplined deployment of capital CET1 ratio of 13-14% by 2023, ~14% by the end of 2022. Long-term sustainable returns an d distributions Intention to distribute a minimum of £1 billion in each of 2022 and 2023. Capital generative business enabling us to reinvest for growth and return excess to investors. Our investment case: delivering against our strategic priorities to help our customers to thrive and drive sustainable returns for shareholders 8 NatWest Group 2021 Annual Report and Accounts transferable entrepreneurial skills. We also helped create the SME Transformation Taskforce to unlock the growth opportunity for the UK economy, identified in our ‘Springboard to Sustainable Recovery’ report. Turning to our own business, the capital restructuring of NatWest Markets has made substantial progress. It is simpler, less capital intensive and better able to create opportunities for our commercial customers by meeting their financing and risk management needs, and by providing access to global markets as well as leadership in high-growth areas, such as the green and sustainable bond markets. As a result, we are creating a new franchise called Commercial and Institutional by bringing together our Commercial Banking, NatWest Markets and RBS International businesses. The creation of this new franchise is a further step in removing complexity and becoming a simpler bank for customers to deal with. We continue to make good progress on our phased withdrawal from the Irish market, minimising job losses and protecting services while supporting our customers and colleagues to allow a smooth transition. During the year, we signed two agreements with Allied Irish Banks p.l.c. (AIB) and Permanent TSB p.l.c. (PTSB) which account for about 60% of the Ulster Bank loan book in the Republic of Ireland, including the transfer of colleagues, wholly or mainly supporting the relevant portfolios and 25 branch locations. These structural changes, along with our strong capital position and continued capital generation, mean that we are well placed to invest for growth, to provide the support our customers need as the economy recovers and to drive sustainable returns to shareholders, with £3.8 billion shareholder distributions announced for 2021 through dividends and buybacks. The bank’s financial performance in 2021 also included a fine following breaches of the Money Laundering Regulations 2007. NatWest Group takes its responsibility to prevent and detect financial crime extremely seriously. We deeply regret that we failed to adequately monitor one of our customers between 2012 and 2016 to prevent money laundering. And while the case has now come to an end, we continue to invest significant resources in the ongoing fight against financial crime and fraud. We are delivering our strategy through four strategic priorities, with the aim of driving long-term sustainable value and delivering on our 2023 targets, which we are now updating. In 2022, we expect to deliver income excluding notable items of above £11.0 billion in the Go-forward group (1,2) . We are amending our cost reduction target to around 3% per annum for 2022 and 2023 (2,3) , reflecting higher inflation and our ongoing investment in the business. Nevertheless, we maintain a strong focus on continued cost discipline. We retain our 2023 CET1 ratio of 13–14%, and we have upgraded our return on tangible equity target in 2023 to comfortably above 10% for the Group. Tackling climate change One key area where our bank has a critical role to play is in helping to tackle climate change. It is the biggest challenge we face as a society, requiring collaboration and co-operation on a global scale, and NatWest Group was proud to sponsor the COP26 global climate conference which took place in Glasgow in October/November 2021. Our industry has a responsibility to drive and influence positive change. As such, NatWest Group is committed to getting its own house in order, bringing to an end the most harmful activity and providing the support, advice and products our customers need in order to accelerate the transition to a net-zero economy. We are one of the few banks to offer a Green Mortgage product, with £728 million of lending to retail customers since its launch in Q4 2020, and we established the Sustainable Homes and Buildings Coalition with British Gas, Worcester Bosch and Shelter to improve the energy efficiency of buildings in the UK. Working with the fintech company CoGo, we were also the first bank to introduce a carbon-tracking feature in our mobile banking app. And we are helping colleagues and customers to move to electric vehicles through a collaboration with Octopus Energy. Our Springboard to Sustainable Recovery report found that the transition to net zero can create a huge opportunity for SMEs. Close to 40% of our accelerator hubs are dedicated to supporting sustainable businesses to help our most innovative start-ups to take advantage of this opportunity. There is a clear societal responsibility here, but also an obvious commercial imperative in helping our customers to thrive as we transition to net zero. Building a culture to champion potential In seeking to make a positive contribution to the communities we serve, we are also building an open, inclusive and progressive place to work, breaking down barriers for our customers and for our colleagues. We are a learning organisation and our culture is critical to our future success. We have worked with our colleagues as well as with our customers, suppliers and communities to create a new set of values that reflect the organisation we are today. Values that match the ambition, optimism and energy our purpose has given us, and that we can all believe in. This builds on the progress we have made in recent years as we consider the needs of all our colleagues and stakeholders. In 2021, we launched our global Talent Academy to help identify and develop colleague potential, with almost 4,000 accepted onto the programme. We also offered mental health workshops for our line managers and our 1,300 Wellbeing Champions, as well as seeing strong take up of our virtual GP and physiotherapy offers. (1) Income excluding notable items. (2) Go-forward group excludes Ulster Bank RoI. (3) Go-forward group other operating expenses defined as total of expenses less litigation and conduct 9 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Chief Executive’s review continued Alison Rose talks about the legacy of COP26 and NatWest Group’s continued commitment to help reach the 2015 Paris Agreement goals. Climate change in conversation What did it mean for NatWest Group to be a principal partner of COP26? Firstly, it was a huge honour. As one of the UK’s biggest banks – and indeed the biggest for business – we have both the ability and the responsibility to take a major role in the fight against climate change. We wanted to achieve two things at the conference: to demonstrate how we can support our customers; and to ensure that we play a leading role in the global coalition of financial services organisations tackling climate change. We know the financial sector is a key enabler in the drive towards net-zero emissions, so we invited our customers to COP26 and held events that explained the huge opportunity that climate change can bring to businesses. We formed alliances to help customers ‘green’ their homes, and collaborated with organisations such as CoGo to help our customers understand their carbon footprint. In this sense, we saw the conference as an incredible chance to showcase and develop the practical support we can offer our retail and business customers to lower their emissions. With regard to collaborative action, we signed up to the UK Government’s joint declaration on accelerating the transition to 100% zero emission vehicles, as well as announcing that we will be one of 27 new members of the Powering Past Coal Alliance, to accelerate the global transition from coal. This follows on from our role as a founding member of the Net Zero Banking Alliance and becoming part of the new coalition of the Glasgow Financial Alliance for Net Zero (GFANZ). Outside the bank, we launched our ‘CareerSense’ programme, providing more than 8,200 young people with free access to tools that will develop critical skills and support their employability prospects. We were also recognised by the ‘Good Business Pays’ campaign for our commitment to paying our suppliers the day after receiving an invoice, in line with the Supplier Charter which we introduced in 2020. In our top three layers globally, 38% of roles are currently filled by female colleagues, a 9% increase since we first introduced our target to have a full gender balance in these roles by 2030, but a 1% decrease from 31 December 2020. We know we have more to do and we continue to focus on the recruitment, retention and advancement of women to meet our 2030 target. In 2020, we launched the Racial Equality Taskforce to listen, learn and better understand the barriers faced by colleagues, customers and communities from Black, Asian and Minority Ethnic backgrounds. Of those who disclose their ethnicity, we have an aggregate of 11% Black, Asian and Minority Ethnic colleagues in our top four layers in the UK; a 3% increase since our 14% target was first introduced in 2018. Living up to our purpose Over the coming years, we will create a closer and deeper relationship with the people, families and businesses that we serve throughout the UK. From teenagers to retirees, from newlyweds to new homeowners and from start-ups to the largest multinationals, we will understand them better, provide more value to them and help them to thrive. By playing such a central role throughout the lives of our customers, by taking action on the issues they care about and by retaining their business as their needs and aspirations change, our bank will go from strength to strength. More than that, it will make a meaningful contribution to our society, helping to grow and transition our economy as we move towards net zero, sustainably growing our business by living up to our purpose. Alison Rose Group Chief Executive Officer 10 NatWest Group 2021 Annual Report and Accounts Read more about our Climate-related disclosures on pages 64 to 71. You mention the financial sector is a key enabler, how can banking make a difference? Banks have a vital role to play – by providing customers with access to the necessary finance, expertise and products, there is the chance to drive real, positive change. Importantly, I believe this is not only good for the planet, but good for business too. Our ‘Springboard to Sustainable Recovery’ report clearly highlights this. The report shows that small and medium- sized enterprises (SMEs) can deliver a significant amount of the UK’s abatement targets, if they get the right support. And this, we believe, is a huge opportunity for businesses. Demand for the financing to make this happen is already significant. In 2020, we set out to provide £20 billion of Climate and Sustainable Funding and Financing over two years. I am delighted that we met this initial target in under 18 months, so in October 2021 we committed to an ambitious new goal of providing an additional £100 billion of Climate and Sustainable Funding and Financing between 1 July 2021 and the end of 2025. Education and guidance are also key, which is why we worked with fintech company CoGo in 2021 to introduce a carbon-tracking feature in our mobile banking app helping retail customers reduce the climate impact of their spending. We are also working on similar pilot schemes for our business customers. What do you think will be the biggest legacies of COP26? I think history will judge COP26 as the point when serious, collective climate action began across all industries and all countries. In particular, it showed the private sector starting to act together and at scale: putting their own houses in order; taking action on deforestation and biodiversity loss; and focusing on the opportunities of the transition to net zero. Most of all though, as 100,000 activists walked the streets of Glasgow, it felt like a rallying call to embed climate in all our decisions. Time will tell, but I hope that COP26 will be remembered as the moment where climate change truly became a global priority. 11 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Our purpose framework A relationship bank for a digital world We champion potential, helping people, families and businesses to thrive Read more on page 13 We are guided by our purpose Read more on pages 14-17 and 54-63 Delivering long-term sustainable value and attractive returns, now and for the next generation Focused on growth, underpinned by our values and an intelligent approach to risk: We are informed by the needs of our stakeholders Customers Colleagues Regulators Read more on pages 18-19 We have four strategic priorities… Read more on pages 30-31 …creating a positive impact through our areas of focus Climate Enterprise Learning Supporting customers at every stage of their lives Communities Investors Suppliers Simple to deal with Sharpened capital allocation Powered by innovation and partnerships 12 NatWest Group 2021 Annual Report and Accounts Our purpose NatWest Group champions potential, helping people, families and businesses to thrive. Because when they thrive, so do we. Our purpose guides and underpins everything we do. It enables us to build long-term value, to invest for growth, to make a positive contribution to society and to drive sustainable returns for shareholders. Our stakeholders We aim to balance the different interests of our stakeholders – customers, investors, colleagues, communities, regulators and suppliers – in all our decision-making, especially when there are difficult choices to be made. We also recognise the need for transparency and openness, regularly engaging and seeking the views of our stakeholders. Our blueprint for better business Our strategy We are a relationship bank for a digital world. Our strategy for growth delivers on our purpose and drives sustainable returns to shareholders through four strategic priorities: we will support our customers at every stage of their lives; we will be powered by innovation and partnerships as we accelerate our digital transformation; we will be simple to deal with; and we will allocate our capital in a way that delivers for customers and shareholders. Our values Our values are at the heart of how we deliver our purpose-led strategy. In 2021, responding to feedback from stakeholders, we engaged with colleagues, customers and communities to re-envision a modernised set of values that fully align with our strategic priorities. These collaborative and evolved values will be launched in 2022 and will form an integral part of our cultural identity. Our positive impact We recognise the huge responsibilities that our role brings – from supporting the day-to-day financial needs of 19 million customers, to the positive impacts we can have on the environment and wider society. We have identified three focus areas where we can make a meaningful contribution and build long-term value in our business: Climate We have made addressing the climate challenge and supporting our customers in their transition to net zero a key strategic priority. Enterprise We are committed to removing barriers to enterprise and providing businesses in the UK the support they need to grow. Learning We are helping people to take control of their finances, to make the most of their money, safely and securely – now and in the future. Our robust balance sheet, strong capital position and capital generative businesses mean we are well placed to support our customers and invest for growth, as well as driving sustainable returns to shareholders and creating long-term value for all our stakeholders. Honest and fair with customers and suppliers A responsible and responsive employer A good citizen A guardian for future generations Our purpose: Deliver long-term sustainable performance by championing potential, helping people, families and businesses to thrive 13 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Our stakeholders Stakeholder engagement Our business is made up of a network of relationships. Listening, engaging and partnering with stakeholders helps us to address our business impacts and improve outcomes for customers, society and the environment. Below, we highlight who our key stakeholders are and some examples of how we collaborate with them to create value. How we engaged What we discussed Outcome of engagements Challenges we faced Customers – the people and businesses we serve () Within the scope of EY assurance. Refer to page 78 – Face to face with retail customers via branches, mobile branches and with our community bankers. Also, through our video banking, telephony and secure messaging services. – Customer surveys including Net Promoter Scores (NPS), syndicated surveys, focus groups and listening sessions. – Complaints. – With businesses, through Bankline for our business and commercial customers; our Accelerator, Business Builder and Digital Boost programmes; and our Banking on Business Surveys, polls and discussions. – We support customers with their financial wellbeing, goals and plans, our products and services, and with advice on how to avoid fraud and scams. – Customer experience and satisfaction, climate change (including COP26), problem debt and financial distress, our youth proposition, and building thriving local communities. – Examples included service quality, and processes such as fraud blocking and customer due diligence. – COVID-19, Brexit, support for small and medium-sized enterprises (SMEs), removing barriers to enterprise, UK Government’s Levelling Up agenda, transition to a net- zero economy. – In 2021 we delivered 6.1 million () financial capability interactions and helped 470,813 () additional customers start to save. We helped 111,895 people to identify scams and know where to go to get help in 2021. – In terms of customer advocacy in 2021, NPS for Retail Banking improved by six points for NatWest and seven points for Royal Bank of Scotland. In Commercial Banking, NatWest maintained a leading score in the market while Royal Bank of Scotland is one of the leading brands – refer to page 56 for full details. – Complaints provided us with the opportunity to improve our journeys for customers and enhance colleague capability. – Our Digital Boost collaboration has supported SME recovery and helped drive inclusive economic growth. We have committed to support Digital Boost to offer expertise to 500,000 women and 200,000 people from ethnically diverse backgrounds. Several customers reached out to us expressing their dissatisfaction at the closure of their local branch. The way people bank with us has changed dramatically in recent years, with an increased demand for mobile and online services as customers benefit from a faster and easier way to bank. However, we still have more than 800 branches open and 16,000 physical points of presence including our ATM network and our relationship with the Post Office. Closing a branch is a decision we take very seriously – we know it can affect people who are less confident with the alternatives we offer. We will strive to guide those customers through the changes and find the best way to serve them from now on. – Customer engagement programme for non-executive directors. – Customer feedback videos. – Customer experience and how our customers think about us. – Changing customer behaviours and product feedback. – Non-executive directors were able to observe customer-facing colleagues in action and to hear customer feedback as part of a focus group or customer listening surgery. – Feedback videos were shown to NatWest Group Board as part of the annual Board strategy session and provided useful insights to help inform Board discussions. Colleagues – the people who deliver our purpose – Our View opinion survey. – Wellbeing Champions, Inclusion Champions, Our Colleague Experience Squad and employee-led networks. – Team meetings, town halls and all-colleague webinars. – Junior Management Team (JMT). – Our View asks for colleague opinion on topics such as purpose, wellbeing, inclusion, leadership and reward. – Our colleague representative groups are passionate about advancing topics that influence our culture, such as wellbeing; new ways of working; diversity, equity and inclusion; colleague capability; and remuneration. – Several of the above topics, plus our sustainability aims. – The JMT mirrored the size and shape of the executive leadership team, and supported several strategic goals. – Our View September 2021 survey results showed that overall colleague sentiment remains strong, despite the impact of the pandemic. – Our c.1,300 Wellbeing Champions supported and amplified our wellbeing strategy, signposting colleagues to the right resources at the right time. We continued to support our c.24,000 participant employee-led networks, who empowered colleagues and helped to create an inclusive workplace. – In 2021, we transformed our approach to mandatory diversity, equity and inclusion learning. With help from some of our c.1,500 Inclusion Champions, we created an e-Learning module featuring videos focusing on lived experiences of colleagues. – The JMT created Mystery Meetups – an initiative that encourages connections across NatWest Group, promoting wellbeing and a one-bank mentality. Over 46,700 colleagues (81%) participated in our September 2021 Our View survey. Despite colleague sentiment on culture, purpose, inclusion and building capability remaining strong, scores in the reward category have declined since 2020, but remain aligned with the Global Financial Services Norm (GFSN) in all but one question. We will seek to address this, subject to performance, in 2022. Across all 15 measured categories, NatWest Group is an average of 11 percentage points above the GFSN and five percentage points above the Global High Performance Norm (GHPN). – Colleague Advisory Panel. – Board and Group Sustainable Banking Committee (SBC) talent sessions with potential Group Executive Committee (ExCo) successors. – Wellbeing, remuneration (including executives and the wider workforce), climate, retail banking strategy, sustainability and purpose. – Board: customer behaviour and purpose, sustainability and climate. – SBC: how we can continue to support, build relationships, and grow within the communities we serve. – The Colleague Advisory Panel continued to provide an important two-way communication channel between the Board and colleagues on key topics of interest. – Executive talent sessions helped our non-executive directors get to know potential future leaders, through focused debates on strategic topics. 14 NatWest Group 2021 Annual Report and Accounts How we engaged What we discussed Outcome of engagements Challenges we faced Customers – the people and businesses we serve () Within the scope of EY assurance. Refer to page 78 – Face to face with retail customers via branches, mobile branches and with our community bankers. Also, through our video banking, telephony and secure messaging services. – Customer surveys including Net Promoter Scores (NPS), syndicated surveys, focus groups and listening sessions. – Complaints. – With businesses, through Bankline for our business and commercial customers; our Accelerator, Business Builder and Digital Boost programmes; and our Banking on Business Surveys, polls and discussions. – We support customers with their financial wellbeing, goals and plans, our products and services, and with advice on how to avoid fraud and scams. – Customer experience and satisfaction, climate change (including COP26), problem debt and financial distress, our youth proposition, and building thriving local communities. – Examples included service quality, and processes such as fraud blocking and customer due diligence. – COVID-19, Brexit, support for small and medium-sized enterprises (SMEs), removing barriers to enterprise, UK Government’s Levelling Up agenda, transition to a net- zero economy. – In 2021 we delivered 6.1 million () financial capability interactions and helped 470,813 () additional customers start to save. We helped 111,895 people to identify scams and know where to go to get help in 2021. – In terms of customer advocacy in 2021, NPS for Retail Banking improved by six points for NatWest and seven points for Royal Bank of Scotland. In Commercial Banking, NatWest maintained a leading score in the market while Royal Bank of Scotland is one of the leading brands – refer to page 56 for full details. – Complaints provided us with the opportunity to improve our journeys for customers and enhance colleague capability. – Our Digital Boost collaboration has supported SME recovery and helped drive inclusive economic growth. We have committed to support Digital Boost to offer expertise to 500,000 women and 200,000 people from ethnically diverse backgrounds. Several customers reached out to us expressing their dissatisfaction at the closure of their local branch. The way people bank with us has changed dramatically in recent years, with an increased demand for mobile and online services as customers benefit from a faster and easier way to bank. However, we still have more than 800 branches open and 16,000 physical points of presence including our ATM network and our relationship with the Post Office. Closing a branch is a decision we take very seriously – we know it can affect people who are less confident with the alternatives we offer. We will strive to guide those customers through the changes and find the best way to serve them from now on. – Customer engagement programme for non-executive directors. – Customer feedback videos. – Customer experience and how our customers think about us. – Changing customer behaviours and product feedback. – Non-executive directors were able to observe customer-facing colleagues in action and to hear customer feedback as part of a focus group or customer listening surgery. – Feedback videos were shown to NatWest Group Board as part of the annual Board strategy session and provided useful insights to help inform Board discussions. Colleagues – the people who deliver our purpose – Our View opinion survey. – Wellbeing Champions, Inclusion Champions, Our Colleague Experience Squad and employee-led networks. – Team meetings, town halls and all-colleague webinars. – Junior Management Team (JMT). – Our View asks for colleague opinion on topics such as purpose, wellbeing, inclusion, leadership and reward. – Our colleague representative groups are passionate about advancing topics that influence our culture, such as wellbeing; new ways of working; diversity, equity and inclusion; colleague capability; and remuneration. – Several of the above topics, plus our sustainability aims. – The JMT mirrored the size and shape of the executive leadership team, and supported several strategic goals. – Our View September 2021 survey results showed that overall colleague sentiment remains strong, despite the impact of the pandemic. – Our c.1,300 Wellbeing Champions supported and amplified our wellbeing strategy, signposting colleagues to the right resources at the right time. We continued to support our c.24,000 participant employee-led networks, who empowered colleagues and helped to create an inclusive workplace. – In 2021, we transformed our approach to mandatory diversity, equity and inclusion learning. With help from some of our c.1,500 Inclusion Champions, we created an e-Learning module featuring videos focusing on lived experiences of colleagues. – The JMT created Mystery Meetups – an initiative that encourages connections across NatWest Group, promoting wellbeing and a one-bank mentality. Over 46,700 colleagues (81%) participated in our September 2021 Our View survey. Despite colleague sentiment on culture, purpose, inclusion and building capability remaining strong, scores in the reward category have declined since 2020, but remain aligned with the Global Financial Services Norm (GFSN) in all but one question. We will seek to address this, subject to performance, in 2022. Across all 15 measured categories, NatWest Group is an average of 11 percentage points above the GFSN and five percentage points above the Global High Performance Norm (GHPN). – Colleague Advisory Panel. – Board and Group Sustainable Banking Committee (SBC) talent sessions with potential Group Executive Committee (ExCo) successors. – Wellbeing, remuneration (including executives and the wider workforce), climate, retail banking strategy, sustainability and purpose. – Board: customer behaviour and purpose, sustainability and climate. – SBC: how we can continue to support, build relationships, and grow within the communities we serve. – The Colleague Advisory Panel continued to provide an important two-way communication channel between the Board and colleagues on key topics of interest. – Executive talent sessions helped our non-executive directors get to know potential future leaders, through focused debates on strategic topics. Key ESG topics for our stakeholders In 2021 we carried out an Environmental, Social and Governance (ESG) materiality assessment, involving a programme of stakeholder engagement to deepen our understanding of the ESG topics that matter most to them. The findings guide our reporting and decision-making, ensuring we remain focused on the right issues. While we have identified climate, enterprise and learning as the three focus areas of our purpose where we can make a meaningful contribution, our 2021 assessment confirmed that our stakeholders believe there are many other important ESG topics for NatWest Group to consider, particularly those related to our core business responsibilities. Read more about our ESG materiality assessment, including our methodology, in our 2021 Environmental, Social and Governance Supplement. How we engage across the company How we engage at Board level For further information on how stakeholder considerations influenced the Board’s discussions and decision-making, refer to our section 172(1) statement on pages 52 to 53, and our Corporate governance report on page 102. 15 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Our stakeholders continued How we engaged What we discussed Outcome of engagements Challenges we faced Communities – the places where we have an impact () Within the scope of EY assurance. Refer to page 78 – We continued to engage with our charity relationships, supporting them through Payroll Giving, colleague fundraising and volunteering, and disaster and emergency appeals. – We supported young people through the delivery of our MoneySense and CareerSense programmes. – NGOs, academia and think tanks. – We discussed raising awareness of charitable donations, and enabling employee volunteering and fundraising opportunities through our Do Good Feel Good campaign. – MoneySense gave financial advice to young people while our CareerSense programme provided critical employability skills – especially to those from underprivileged backgrounds. – We discussed several climate-related topics, such as our lending policies, Paris Alignment, biodiversity and COP26. – Our direct community investment in 2021 amounted to £7,266,818 () . Across all of our fundraising and volunteering programmes, our colleagues have given £3,543,533 and 43,003 worktime volunteering hours. – MoneySense has helped 10 million young people learn about money since it was launched in 1994, and is currently supported by over 6000 active volunteer colleagues. CareerSense has seen 8,200 pupil registrations since its launch in June 2021. – We sponsored COP26, published our first Nature and Biodiversity Statement, and signed up to the Net Zero Banking Alliance and other commitments. During 2021, the COVID-19 pandemic resulted in NatWest Group temporarily closing two popular volunteering programmes – MoneySense for Schools and The Conservation Volunteers (TCV). MoneySense for Schools remained closed throughout 2021, though online resources were still available. However, due to the TCV programme being delivered outdoors, in June we were once again able to offer colleagues the chance to do their bit to help nature and biodiversity to thrive. – The Chairman, Group CEO, Group CFO and selected non-executive directors attended the COP26 Climate Summit along with members of the executive team. – Progress against our climate ambitions, goals and targets. – Regulatory and investor expectations in relation to climate. – Non-executive directors and the executive team spent time talking with customers, colleagues and industry peers at a range of climate-focused events. Suppliers – where we source our goods and services – Regular review meetings with key suppliers. – Policy due diligence activity. – Audit reviews. – Environmental and ethical sustainability. – Prompt payment. – Risk management. – In collaboration with key stakeholders, we completed the first review of our Supplier Charter, which sets out our aims and expectations in several key areas. – We worked with EcoVadis – a leading organisation providing third-party evidence-based assessments of sustainability performance – to measure our own performance and that of our suppliers against the charter, enabling us to identify social, environmental and ethical improvements. Where suppliers that underwent the EcoVadis assessment performed below the global average, we know there is more we can do to engage and support them in improving their performance on key sustainability topics. To achieve this, we have put in place a strategy for 2022 that aims to enable our suppliers to improve and help us cultivate a more responsible value chain. – Business reviews (regular Board reports) – Regular updates on key supplier and partnership relationships and initiatives being undertaken with them. – Business review updates provided the Board with visibility on key supplier activity and how this supported our purpose, strategy, financial performance and climate ambitions. Investors – providers of the capital and funding that supports our business activities – Investor spotlight sessions, presentations at industry conferences and meetings with our senior management. – These presentations provided a deep dive into key areas of the business, progress to date and future priorities. – Institutional investors and research analysts gained a deeper understanding of our business and were able to ask questions of the wider management team. COVID-19 restrictions presented a challenge for the 2021 AGM. As a solution to investors being unable to attend the AGM, we held a virtual shareholder event one week prior to the AGM. Investors had the opportunity to hear from Board members and ask questions prior to voting on the AGM resolutions. Answers and a recording of the event were made available on our website. Holding the event demonstrated that engagement with investors is a priority for the Board. – The Chairman, Group CEO, and Group CFO took part in a programme of engagement through quarterly results presentations and 1-1 meetings with our largest investors. – The Chairman, Group CEO, and other non-executive directors represented the Board at three virtual shareholder events with private shareholders. – The Chairman and a number of non-executive directors hosted a corporate governance forum for investors. – Progress against strategic priorities, financial performance, capital return policy, environmental, social and governance topics, regulation and the macroeconomic environment. – As above, plus a discussion around dividends and share price performance, supporting enterprise and tackling climate change. – Board succession planning, diversity and inclusion, key areas of Board focus, ‘Say on Climate’ resolutions. – The Chairman, Group CEO and Group CFO have an open dialogue with institutional investors, updating investors on progress and keeping the Board informed about their views and priorities throughout the year. – Private shareholders also had the opportunity to raise any concerns directly with Board members at our virtual shareholder events. – Investors received an update on key corporate governance topics and the Board heard their views on evolving practice for Say on Climate resolutions. Regulators – who we seek to comply with – We engaged in several regulatory consultations. – Alternative risk-free reference rates (to replace LIBOR). – Credit risk. – Cybersecurity. – Historical conduct issues. – Access to cash. – COVID-19 support measures and recovery. – Environmental, Social and Governance issues. – We sent bilateral responses to material consultations or other requests for comment/input issued by various government, regulatory and standard setting bodies during 2021. – We engaged with regulators during the policy proposal phase on several occasions to help inform priorities – examples included the independent review of ring-fencing and proprietary trading and the FCA’s proposals for a new consumer duty. In December 2021, NatWest Bank Plc was fined £264.8 million by the FCA for three breaches of the Money Laundering Regulations 2007. We deeply regret that we failed to adequately monitor one of our customers between 2012 and 2016 for the purpose of preventing money laundering. We cooperated fully with the FCA’s investigation. As part of its ongoing programme of investment in its people, processes and technology, NatWest Group’s financial plans already include over £1 billion to further strengthen financial crime controls over the next five years. – Prudential Regulation Authority (PRA) attendance at July 2021 Board meeting. – Non-executive directors engaged with regulators through continuous assessment and proactive engagement meetings. – PRA periodic summary meeting (PSM) outputs. – Topics included strategy, financial performance, capital distributions, Board and Committee priorities, Board effectiveness, governance, risk and control environment, financial crime and ring-fenced bank independence. – The Board were able to hear directly from the PRA on the key messages in the PRA’s PSM letter, including regulator expectations for key areas of Board focus. – Engagement meetings allowed the directors to understand the regulators’ key areas of interest and provide them with direct feedback on those topics. 16 NatWest Group 2021 Annual Report and Accounts How we engaged What we discussed Outcome of engagements Challenges we faced Communities – the places where we have an impact () Within the scope of EY assurance. Refer to page 78 – We continued to engage with our charity relationships, supporting them through Payroll Giving, colleague fundraising and volunteering, and disaster and emergency appeals. – We supported young people through the delivery of our MoneySense and CareerSense programmes. – NGOs, academia and think tanks. – We discussed raising awareness of charitable donations, and enabling employee volunteering and fundraising opportunities through our Do Good Feel Good campaign. – MoneySense gave financial advice to young people while our CareerSense programme provided critical employability skills – especially to those from underprivileged backgrounds. – We discussed several climate-related topics, such as our lending policies, Paris Alignment, biodiversity and COP26. – Our direct community investment in 2021 amounted to £7,266,818 () . Across all of our fundraising and volunteering programmes, our colleagues have given £3,543,533 and 43,003 worktime volunteering hours. – MoneySense has helped 10 million young people learn about money since it was launched in 1994, and is currently supported by over 6000 active volunteer colleagues. CareerSense has seen 8,200 pupil registrations since its launch in June 2021. – We sponsored COP26, published our first Nature and Biodiversity Statement, and signed up to the Net Zero Banking Alliance and other commitments. During 2021, the COVID-19 pandemic resulted in NatWest Group temporarily closing two popular volunteering programmes – MoneySense for Schools and The Conservation Volunteers (TCV). MoneySense for Schools remained closed throughout 2021, though online resources were still available. However, due to the TCV programme being delivered outdoors, in June we were once again able to offer colleagues the chance to do their bit to help nature and biodiversity to thrive. – The Chairman, Group CEO, Group CFO and selected non-executive directors attended the COP26 Climate Summit along with members of the executive team. – Progress against our climate ambitions, goals and targets. – Regulatory and investor expectations in relation to climate. – Non-executive directors and the executive team spent time talking with customers, colleagues and industry peers at a range of climate-focused events. Suppliers – where we source our goods and services – Regular review meetings with key suppliers. – Policy due diligence activity. – Audit reviews. – Environmental and ethical sustainability. – Prompt payment. – Risk management. – In collaboration with key stakeholders, we completed the first review of our Supplier Charter, which sets out our aims and expectations in several key areas. – We worked with EcoVadis – a leading organisation providing third-party evidence-based assessments of sustainability performance – to measure our own performance and that of our suppliers against the charter, enabling us to identify social, environmental and ethical improvements. Where suppliers that underwent the EcoVadis assessment performed below the global average, we know there is more we can do to engage and support them in improving their performance on key sustainability topics. To achieve this, we have put in place a strategy for 2022 that aims to enable our suppliers to improve and help us cultivate a more responsible value chain. – Business reviews (regular Board reports) – Regular updates on key supplier and partnership relationships and initiatives being undertaken with them. – Business review updates provided the Board with visibility on key supplier activity and how this supported our purpose, strategy, financial performance and climate ambitions. Investors – providers of the capital and funding that supports our business activities – Investor spotlight sessions, presentations at industry conferences and meetings with our senior management. – These presentations provided a deep dive into key areas of the business, progress to date and future priorities. – Institutional investors and research analysts gained a deeper understanding of our business and were able to ask questions of the wider management team. COVID-19 restrictions presented a challenge for the 2021 AGM. As a solution to investors being unable to attend the AGM, we held a virtual shareholder event one week prior to the AGM. Investors had the opportunity to hear from Board members and ask questions prior to voting on the AGM resolutions. Answers and a recording of the event were made available on our website. Holding the event demonstrated that engagement with investors is a priority for the Board. – The Chairman, Group CEO, and Group CFO took part in a programme of engagement through quarterly results presentations and 1-1 meetings with our largest investors. – The Chairman, Group CEO, and other non-executive directors represented the Board at three virtual shareholder events with private shareholders. – The Chairman and a number of non-executive directors hosted a corporate governance forum for investors. – Progress against strategic priorities, financial performance, capital return policy, environmental, social and governance topics, regulation and the macroeconomic environment. – As above, plus a discussion around dividends and share price performance, supporting enterprise and tackling climate change. – Board succession planning, diversity and inclusion, key areas of Board focus, ‘Say on Climate’ resolutions. – The Chairman, Group CEO and Group CFO have an open dialogue with institutional investors, updating investors on progress and keeping the Board informed about their views and priorities throughout the year. – Private shareholders also had the opportunity to raise any concerns directly with Board members at our virtual shareholder events. – Investors received an update on key corporate governance topics and the Board heard their views on evolving practice for Say on Climate resolutions. Regulators – who we seek to comply with – We engaged in several regulatory consultations. – Alternative risk-free reference rates (to replace LIBOR). – Credit risk. – Cybersecurity. – Historical conduct issues. – Access to cash. – COVID-19 support measures and recovery. – Environmental, Social and Governance issues. – We sent bilateral responses to material consultations or other requests for comment/input issued by various government, regulatory and standard setting bodies during 2021. – We engaged with regulators during the policy proposal phase on several occasions to help inform priorities – examples included the independent review of ring-fencing and proprietary trading and the FCA’s proposals for a new consumer duty. In December 2021, NatWest Bank Plc was fined £264.8 million by the FCA for three breaches of the Money Laundering Regulations 2007. We deeply regret that we failed to adequately monitor one of our customers between 2012 and 2016 for the purpose of preventing money laundering. We cooperated fully with the FCA’s investigation. As part of its ongoing programme of investment in its people, processes and technology, NatWest Group’s financial plans already include over £1 billion to further strengthen financial crime controls over the next five years. – Prudential Regulation Authority (PRA) attendance at July 2021 Board meeting. – Non-executive directors engaged with regulators through continuous assessment and proactive engagement meetings. – PRA periodic summary meeting (PSM) outputs. – Topics included strategy, financial performance, capital distributions, Board and Committee priorities, Board effectiveness, governance, risk and control environment, financial crime and ring-fenced bank independence. – The Board were able to hear directly from the PRA on the key messages in the PRA’s PSM letter, including regulator expectations for key areas of Board focus. – Engagement meetings allowed the directors to understand the regulators’ key areas of interest and provide them with direct feedback on those topics. 17 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Our strategy A strategy to deliver our purpose, driving sustainable returns Supporting customers at every stage of their lives Powered by innovation and partnerships Simple to deal with Sharpened capital allocation – We acquired fintech company RoosterMoney, whose pocket money app aims to build money confidence and financial capability from an early age. – We delivered £2.2 billion of gross lending to small and medium-sized businesses in 2021 and processed 1 in 4 UK payments. – In Retail Banking, we have completed £728 million of Green Mortgages since their launch in Q4 2020, rewarding customers for choosing an energy efficient home. – We made it easier for our customers to understand their financial health, by providing c.1 million financial health checks during 2021. – Around £3 billion in investment continues to be made (over 2021–2023), of which c.80% relates to digital and technology programmes. – As the first major bank to join forces with a renewable energy supplier through our collaboration with Octopus Energy, we offer our retail, business and wealth customers a tailored package that improves the cost and efficiency of owning and running an electric vehicle. – Collaborating with the fintech firm CoGo, we were the first bank to introduce a carbon- tracking feature in our mobile banking app. – We established the Sustainable Homes and Buildings Coalition with British Gas, Worcester Bosch and Shelter to improve the energy efficiency of buildings in the UK. – 87% of our retail customer needs are now met digitally, with 60% of our customers banking exclusively digitally. (1) – There were 10,200 video banker conversations per week in 2021 across Retail Banking, compared with 3,300 per week in 2020. – In 2021, Cora, our AI virtual assistant, handled 10.7 million Retail Banking conversations, up 27% on the previous year. – Following our investments to improve customer journeys, 70% of digitalised new account openings in Retail Banking were completed without human intervention in 2021; this compares with 45% in 2020. – The NatWest Markets’ refocus has made substantial progress in 2021; risk-weighted assets reduced from £38 billion in 2019 to £24 billion in 2021. – We have made good progress on our phased withdrawal from the Republic of Ireland and expect the majority of the Allied Irish Banks p.l.c. (AIB) and Permanent TSB p.l.c. (PTSB) asset sales to be largely complete by the end of 2022 and deposits to reduce over a longer timescale. – £3.8 billion shareholder distributions were announced for the financial year 2021. – We completed £17.5 billion in Climate and Sustainable Funding and Financing in 2021, including £8.1 billion contribution towards our £100 billion target. (2) Outcomes We are more relevant to our customers by building deeper relationships and evolving our propositions to meet more of their needs throughout their lives. Through technology and digital expertise, we deliver an excellent customer experience by harnessing our internal knowledge and experience of partnering with leading external organisations around the world. By being simple to deal with we improve both customer experiences and colleague engagement. We focus on great customer service technology and improving customer journeys. Effective deployment of capital and efficient portfolio discipline helps manage risk and drives sustainable returns. Our execution is centred around our purpose, driving sustainable growth through our strategic priorities. We are a relationship bank for a digital world, building ever-deeper and closer connections with our customers throughout their financial lives, enabling people, families and businesses to thrive. 18 NatWest Group 2021 Annual Report and Accounts Supporting customers at every stage of their lives Powered by innovation and partnerships Simple to deal with Sharpened capital allocation – We acquired fintech company RoosterMoney, whose pocket money app aims to build money confidence and financial capability from an early age. – We delivered £2.2 billion of gross lending to small and medium-sized businesses in 2021 and processed 1 in 4 UK payments. – In Retail Banking, we have completed £728 million of Green Mortgages since their launch in Q4 2020, rewarding customers for choosing an energy efficient home. – We made it easier for our customers to understand their financial health, by providing c.1 million financial health checks during 2021. – Around £3 billion in investment continues to be made (over 2021–2023), of which c.80% relates to digital and technology programmes. – As the first major bank to join forces with a renewable energy supplier through our collaboration with Octopus Energy, we offer our retail, business and wealth customers a tailored package that improves the cost and efficiency of owning and running an electric vehicle. – Collaborating with the fintech firm CoGo, we were the first bank to introduce a carbon- tracking feature in our mobile banking app. – We established the Sustainable Homes and Buildings Coalition with British Gas, Worcester Bosch and Shelter to improve the energy efficiency of buildings in the UK. – 87% of our retail customer needs are now met digitally, with 60% of our customers banking exclusively digitally. (1) – There were 10,200 video banker conversations per week in 2021 across Retail Banking, compared with 3,300 per week in 2020. – In 2021, Cora, our AI virtual assistant, handled 10.7 million Retail Banking conversations, up 27% on the previous year. – Following our investments to improve customer journeys, 70% of digitalised new account openings in Retail Banking were completed without human intervention in 2021; this compares with 45% in 2020. – The NatWest Markets’ refocus has made substantial progress in 2021; risk-weighted assets reduced from £38 billion in 2019 to £24 billion in 2021. – We have made good progress on our phased withdrawal from the Republic of Ireland and expect the majority of the Allied Irish Banks p.l.c. (AIB) and Permanent TSB p.l.c. (PTSB) asset sales to be largely complete by the end of 2022 and deposits to reduce over a longer timescale. – £3.8 billion shareholder distributions were announced for the financial year 2021. – We completed £17.5 billion in Climate and Sustainable Funding and Financing in 2021, including £8.1 billion contribution towards our £100 billion target. (2) Outcomes We are more relevant to our customers by building deeper relationships and evolving our propositions to meet more of their needs throughout their lives. Through technology and digital expertise, we deliver an excellent customer experience by harnessing our internal knowledge and experience of partnering with leading external organisations around the world. By being simple to deal with we improve both customer experiences and colleague engagement. We focus on great customer service technology and improving customer journeys. Effective deployment of capital and efficient portfolio discipline helps manage risk and drives sustainable returns. (2) In October 2021, having surpassed our previous 2020-21 £20 billion target during H1 2021, NatWest Group announced an ambition to provide £100 billion climate and sustainable funding and financing between 1 July 2021 and the end of 2025. (1) Retail Banking current account customers only based as at 31 December 2021 – metric is 87% of our retail customer needs are now met digitally, with 60% of our customers banking entirely digitally. Only activity in the last quarter is considered. 19 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Our strategy in action We’re always here to help our customers when they need us. So, when Nathalie decided to pursue her goal of buying a car to give her more flexibility when travelling, we were ready to support. It was late afternoon on a Friday when Nathalie got in touch with us. She’d wanted a car for a long time and was unsure on how to go about it, but a prompt on her NatWest mobile app about a personal loan offer was the encouragement she needed to drive ahead with her plans. Nathalie booked a video call with us using her mobile app and was speaking to one of our team within 15 minutes. We made the process simple and easy for Nathalie, taking her through the loan application and also identifying that Nathalie would benefit from a savings account. By 6pm that evening, Nathalie had the loan money in her account, giving her the financial support she needed to buy a car. We’re passionate about getting to know our customers and supporting them with all their banking needs, whether we’re helping them in-person in a branch, or through one of our innovative digital channels like video banking. We think the help we gave to Nathalie is a great example of NatWest Group’s determination to build deeper relationships with our customers and support them to achieve their different goals in life. Supporting customers at every stage of their lives Watch the story online “We’re passionate about getting to know our customers and supporting them with all their banking needs” 20 NatWest Group 2021 Annual Report and Accounts 20 NatWest Group 2021 Annual Report and Accounts Paul French, Senior Personal Banker, NatWest Torquay Branch 21 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Our strategy in action Vernon is passionate about brewing, and sustainability. His company, Wye Valley Brewery in Herefordshire, has grown from humble beginnings to now distributing to over 1,200 pubs, as well as selling to all the major supermarkets. And as the business’s operations have expanded over the years, so have its sustainability ambitions. Reducing its carbon footprint has been a key priority. The company had already installed over 1,000 solar panels, producing around 280 kilowatts of electricity, but it also wanted to make the switch to all-electric vehicles. For Vernon, investing in sustainable and innovative technology is key to the long-term success of his business. And this is exactly where NatWest was able to help. When Vernon mentioned his plans to the NatWest relationship manager, we were able to tell him of our collaboration with Octopus Energy. Through our collaboration – the first time a major bank and a renewable energy supplier have joined forces – we offer our retail, business and wealth customers a tailored package that improves the cost and efficiency of owning and running an electric vehicle. The brewery now has eight charging points which the staff can use and are also open to the public. Vernon believes it has made a real difference in his company’s shift to electric vehicles. With our focus on partnerships and innovation, NatWest Group is making it easier and more affordable for our customers to make a positive difference to our environment. Powered by innovation and partnerships Watch the story online “With our focus on partnerships and innovation, NatWest is making it easier and more affordable for our customers to make a positive difference to our environment.” 22 NatWest Group 2021 Annual Report and Accounts Vernon Amor, Managing Director, Wye Valley Brewery 23 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Our strategy in action Mica Johnson, Owner, Floral Glory 24 NatWest Group 2021 Annual Report and Accounts Mica had always dreamed of running her own business. Indulging her passion for flowers, she launched Walsall-based florist Floral Glory. However, a month after she went self-employed, the pandemic struck. Being a start-up company can be hard enough at the best of times. But trying to connect with suppliers and customers during a national lockdown was a real challenge. Mica needed all the support she could get. As a long-standing personal banking customer, she knew NatWest was simple to deal with. So she reached out to our business banking team for help with setting up Floral Glory’s payments system. Running her business from home initially meant that transactions needed to work across virtual and physical platforms. Tyl by NatWest provided the solution. It allowed Mica to accept online payments securely through her website or by phone. The next-day business settlement also really helped in the early days when cash flow was so important. After the lockdown, when Mica moved into her premises, Tyl once again helped her keep things simple. The portable card machine was ideal for moving around the shop, while each payment integrated straight into her accounting software. Mica’s story shows how NatWest is here to help. By combining the right products and being simple to deal with, we make life easier for our customers. Simple to deal with Watch the story online “By combining the right products and being simple to deal with, we make life easier for our customers.” 25 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Our strategy in action Lightsource bp, solar array 26 NatWest Group 2021 Annual Report and Accounts The team at Lightsource bp believe there’s huge potential in the transition to a net-zero economy. They should know. As a global leader in the development and management of solar energy projects, they’ve seen the market for renewables grow sharply over the past decade. But accessing that opportunity has required hard work, innovation and, of course, the financing to make it happen. NatWest Group has supported Lightsource bp throughout its journey from a UK start-up 10 years ago, to its emergence as a major renewable energy firm. The company now employs 700 industry specialists working across 17 countries to help deliver affordable and sustainable solar power for businesses and communities around the world. For us, our work with Lightsource bp aligns perfectly with our purpose and climate ambitions. We know the financial sector is a key enabler in the drive towards net-zero emissions, but it’s more than that. As well as being good for the environment, it’s also good business. It’s a belief we have committed to with our announcement in 2021 to provide an additional £100 billion of Climate and Sustainable Funding and Financing by the end of 2025. And we’re continuing our journey with Lightsource bp too – agreeing in 2021 to be part of the funding package for the company’s ambitious new growth strategy. We believe focusing the allocation of capital in this way makes perfect sense. It’s good for our business, the companies we support, and our planet. Sharpened capital allocation Watch the story online “Focusing the allocation of capital in this way makes perfect sense. It’s good for our business, the companies we support, and our planet” 27 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements 2021 289.7 310.8 317.3 2020 2019 2021 310 277 256 2020 2019 2021 1 Jan 2022 16.2 18.5 18.2 15.9 2020 2019 2021 9.4 (2.4) 9.4 2020 2019 Financial Measuring our performance Key performance indicators £m % % Achieve net lending growth in our UK and RBSI retail and commercial businesses. Achieve a c.4% cost reduction in other expenses excluding OLD and Ulster Bank RoI direct costs in 2021. Achieve CET1 ratio target of 13-14% by 2023. Achieve return on tangible equity target of 9-10% by 2023. Net lending Cost reduction CET1 ratio Return on tangible equity Across the UK and RBSI retail and commercial businesses and excluding UK Government support schemes, net lending increased by £7.8 billion, or 2.6% largely driven by mortgages. Mortgage growth exceeded the market, however commercial lending was behind market as we have sought to reduce certain exposures, through targeted sector reductions and capital actions, whilst continuing to focus on supporting customers through sustainable lending. A cost reduction of £256 million, or 4.0%, in 2021, in line with our target for the year. This has been achieved by transformation across our customer journeys and in the NatWest Markets business. The CET1 ratio remains strong at 18.2%. The 30 basis points reduction in the year principally reflects capital distributions, partially offset by the reduction in RWAs and the attributable profit. RWAs of £157.0 billion reduced by £13.3 billion in 2021 mainly reflecting business movements in Commercial Banking, including targeted sector reductions, improvement in risk parameters and active capital management. Return on tangible equity which was 9.4% at year end, benefitted from significant impairment releases. Supporting customers at every stage of their lives. Simple to deal with. Powered by innovation and partnerships. Sharpened capital allocation. Sharpened capital allocation. Supporting customers at every stage of their lives. Simple to deal with. In 2022 we expect income excluding notable items to be above £11.0 billion in the Go-forward group. In both 2022 and 2023 reduce Go-forward operating expenses, excluding litigation and condu ct costs by around 3%. Aim to end 2022 with a CET1 ratio of around 14% and target a ratio of 13-14% by 2023. In 2023, we expect to achieve a return on tangible equity of comfortably above 10% for the Group. Link to remuneration Read more on how the KPIs are aligned to executive directors’ remuneration in our Annual remuneration report on pages 158 to 174. Why is it important? Delivering long-term sustainable performance. Run a safe and secure bank. Our performance Link to strategy and areas of focus How we measure our progress and our future priorities Future priorities Read more: Our investment case on page 8 and Outlook statement on page 51 £bn 28 NatWest Group 2021 Annual Report and Accounts 2021 13 7 4 -2 -2 -7 22 24 23 2020 2019 2021 12.0 9.4 8.1 2020 2021 c.60,700 2020 c.55,000 2021 79 80 80 2020 2019 £bn Increase the likelihood that customers will recommend our brands. Achieve NPS targets for our core customer-facing businesses. Net Promoter Score NatWest Retail main bank NPS exceeded its target by five points, up six points year on year. NatWest Business Banking missed its target by two points and continues to be ranked 3rd. NatWest Commercial Banking retained first position and its lead over next best competitor. Simple to deal with. NPS improvement of: one point for NatWest Retail Main Bank or be 5th or better; four points for NatWest Business Banking and be 3rd or better. Read more: Our customers on page 54 to 56. Why is it important? Link to strategy and areas of focus Future priorities How we measure our progress Our performance Honest and fair with customers and suppliers. Support removal of barriers to UK enterprise growth through the provision of learning, networking and funding interventions. Achieve the culture target, as measured through the NatWest Group ‘Our View’ colleague survey. Provide an additional £100 billion of Climate and Sustainable Funding and Financing from 1 July 2021 – end 2025. Non-financial Climate and Sustainable Funding and Financing Supporting enterprise Build up and strengthen a healthy culture We have supported c.55,000 (1) individuals or businesses through enterprise programmes with c.200,000 (1) customer interventions delivered. Of those supported, c.26% were from Black Asian and Minority Ethnic backgrounds c.60% identified as female. c.52% were purpose-led. c.75% were outside of London and the South East. In 2021 we exceeded our target on Culture by two points. Our target was to be seven points above the Financial Services Culture Board (FSCB) norm. For Culture measurement and assessment, our calculation methodology aligns with that used by the FSCB. In October 2021 having surpassed our 2020-2021 target of £20 billion in the first half of 2021 we announced an ambition to provide an additional £100 billion between 1 July 2021 and the end of 2025. In 2021 we provided £17.5 billion of Climate and Sustainable Funding and Financing () , including £8.1 billion () contribution to our £100 billion target. Support 35,000 businesses through enterprise programmes () with 200,000 customer interactions to start, run and grow a business. We independently survey thousands of customers each year, asking them how likely they would be to recommend the bank. Funding and financing provided to support climate and sustainable activities, in line with our Climate and Sustainable Finance Inclusion (CSFI) criteria. Read more: Our purpose-led areas of focus on pages 30 and 31 and in our ESG Supplement. Read more: Our colleagues section on pages 58 to 61 and in our ESG Supplement. Read more: Our climate-related disclosures on pages 64 to 71 and in our Climate-related Disclosures Report. A good citizen. Remove barriers to UK enterprise growth. A responsible and responsive employer. Build up and strengthen a healthy culture. A guardian for future generations. To be a leading bank in the UK helping to address the climate challenge. Climate Enterprise Learning () Within the scope of EY assurance. Refer to page 78. (1) Refer to page 31 for further details. 29 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Our purpose-led areas of focus building long-term value Our purpose-led focus areas Our ambition Our areas of focus contribute to UN Sustainable Development Goals (SDGs): We are committed to championing potential, helping people, families and businesses to thrive. Aligned to our purpose are three focus areas where we believe we can make a long-term, meaningful contribution to our customers, colleagues and communities. These are: climate, enterprise and learning. Climate A leading bank in the UK helping to address the climate challenge Our targets Net zero (1) by 2050 £100bn Climate and Sustainable Funding and Financing between 1 July 2021 and the end of 2025 -50% at least halve the climate impact of our financing activity by 2030 50% of our UK mortgage customers’ homes at, or above, EPC C rating by 2030 Full phase out of coal – by 1 January 2030 (2) -50% reduce our direct (3) own operations carbon footprint by 2025 As well as highlighting activity that relates to each of the SDGs above, case studies throughout this report will reference positive impacts mapped against other SDGs. More detail on our embedding of SDGs can be found in our ESG Supplement. As signatories of the UN Principles for Responsible Banking, we also remain committed to aligning our strategy with the 2015 Paris Agreement and the SDGs. (1) Please refer to section 1.2 in the NatWest Group plc Climate-related Disclosures Report for further detail on our net-zero ambitions. (2) Please refer to section 3.5.2 in the Natwest Group plc Climate-related Disclosures Report for further details on outcomes. (3) Against a 2019 baseline. Direct own operations is defined as Scope 1, Scope 2 and Scope 3 (paper, water, waste, business travel, commuting and work from home) emissions. It excludes upstream and downstream emissions from our value chain. (4) In October 2021, having surpassed our previous 2020-21 £20 billion target during H1 2021, NatWest Group announced an ambition to provide an additional £100 billion Climate and Sustainable Funding and Financing between 1 July 2021 and the end of 2025. Enterprise Removing the barriers to enterprise Our targets 35,000 individuals or businesses supported through enterprise programmes in 2021 (8) 200,000 interventions delivered to start, run or grow a business in 2021 (8) 60% of those supported will be female 75% of those supported will be based outside London and the South East 20% of those supported will be of a Black, Asian and/or Minority Ethnic background 10% of those supported will be social purpose-led Learning Building financial capability and resilience and enhancing the skills of our colleagues Our targets 15m financial capability interactions delivered by 2023 2m additional customers helped to start saving by 2023 100% front-line colleagues professionally accredited within the first 18 months in role UK Social Mobility Apprenticeship Programme extended across multiple UK locations 30 NatWest Group 2021 Annual Report and Accounts Our 2021 performance £17.5bn () Climate and Sustainable Funding and Financing completed, including £8.1bn contribution towards our £100bn target (4) 2020: £12 bn £728m () Retail Banking Green Mortgage completions (7) 38% () of Retail Banking mortgages are at, or above, EPC rating C (5) 2020: 36% 52% of gross lending and investment balances at 31 December 2019 estimated for financed emissions. A further eight high carbon emitting sectors estimated 2020: 45% (four sectors) -46% reduction in our direct (3) own operational carbon footprint (3) Credible transition plan assessments completed for oil and gas majors and in scope coal customers (2) Climate Read more on page 20 of NatWest Group plc 2021 Environmental, Social and Governance Supplement (5) Percentage of £110.3 billion UK Retail Banking mortgages where EPC data is available. 2020 comparative for England and Wales mortgages only. (6) Retail Banking RBS, NatWest and Ulster Bank Northern Ireland mobile apps. (7) Retail Banking Green Mortgage products relate only to mortgages for energy efficient homes (EPC A or B rated) and are aligned to the World Green Building Council definition of green mortgages. (8) Represents approximate number of interventions delivered by and individuals supported through enterprise programmes during 2021, which is based upon data provided by third parties delivering these interventions without further independent verification by NatWest Group. (9) Includes instances where customers had savings with other banks and transferred them to their NatWest Group account. () Within the scope of EY assurance. Refer to page 78. Read more on page 24 of NatWest Group plc 2021 Environmental, Social and Governance Supplement c.55,000 individuals and businesses supported through enterprise programmes in 2021 (8) c.75% of those supported were based outside of London and the South East c.200,000 interventions delivered to start, run or grow a business in 2021 (8) c.52% individuals or businesses supported were purpose-led businesses c.60% of those supported identified as female purpose-led businesses c.26% of those supported were of Black, Asian and Minority Ethnic background Enterprise Read more on page 29 of NatWest group plc 2021 Environmental, Social and Governance supplement 8.96m () financial capability interactions delivered by 31 December 2021 against the 2023 target 1.07m () additional customers helped to start saving by 31 December 2021 against the 2023 target (9) 99.6% front-line colleagues professionally accredited within the first 18 months in role Learning 31 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Customers Overview Customers’ needs and behaviours are changing as a result of new technologies. The impact of COVID-19 has accelerated digital trends as well as prompting different ways of working, shopping, socialising and communicating. Demographic shifts and changing labour patterns are also having a profound long-term effect on customer behaviours, as people work longer, retire later, rent for longer or buy property later in life. Our response Understanding these trends allows us to better support our customers’ needs, being there at every stage of their lives and tailoring banking services and products that meet their evolving expectations. By harnessing new technology and partnering with leading organisations, we have again enhanced and evolved our customer experiences in 2021. We have also continued our efforts to make banking more accessible for all of our customers through improving face-to- face, digital and remote interactions. And in 2021, we again devoted significant focus to supporting customers facing financial difficulty or in vulnerable situations, as well as helping more people to start saving. Technology Overview New business models and customer behaviours continue to rapidly evolve through advancing technology. COVID-19 has increased our customers’ reliance on technology with a further shift to digital, reinforcing the need for modern capabilities and resilient systems. Our active digital users across both personal and business customers continued to grow in 2021. Our response With a focus on innovation, and through collaborations with experienced companies, our technology solutions have driven significant benefits for our customers. This has been particularly evident again in 2021 with our approach to Open Banking. Leveraging the ability to combine transaction and bank issuance data has helped us generate invaluable insights for our commercial customers. In terms of our own digital estate in 2021, we have also delivered further technological innovation to help protect privacy and customer confidentiality. In addition to the strong focus on delivering innovative solutions for our customers, technology transformation continues to prioritise simplification, stability and resilience, as well as year-on-year run-cost reduction. The environment we operate in is constantly changing. Understanding the multiple influences on our business enables us to be prepared for change, to respond quickly, and to create value for the long term. NatWest Group continues to adapt to evolving market trends Economy Overview In 2021, the UK economy continued its recovery from the impact of COVID-19 and lockdown restrictions, with GDP approaching pre-pandemic levels towards the end of the year. The employment market continued to remain robust, with the furlough scheme proving an effective tool to lessen the impact of COVID-19 as well as helping the labour market emerge from COVID-19 in a position of strength. Towards the end of 2021, UK job vacancies remained elevated. Against this backdrop, inflationary pressure began to build with the Consumer Prices Index ending the year well ahead of the Bank of England’s 2% target. Countering inflation is therefore likely to remain high on the agenda for policy makers in the short to medium term. In the longer term, demographic change, climate change, high levels of debt and inequality could all have financial impacts for our customers. Our response Our business performance is correlated with economic factors. Put simply, when people, families and businesses thrive, so do we. We know the tough economic conditions many of our customers have faced throughout the year. As such, we have remained focused on removing barriers to doing business and providing more opportunities for companies to grow, helping the economy to build back better. Initiatives such as our ‘Accelerator’ programme, our ‘Springboard to Sustainable Recovery’ report, and an additional £1 billion in funding to help support female-led businesses in the UK recover from COVID-19 have been a key part of this. Market environment “COVID-19 has increased our customers’ reliance on technology with a further shift to digital, reinforcing the need for modern capabilities and resilient systems.” 32 NatWest Group 2021 Annual Report and Accounts Cyber threats Overview Cyberattacks pose a constant risk to our operations, both in relation to our own digital estate and indirectly with regards to our supply chain. Cybercrime continues to evolve rapidly. Attacks may be from individuals or highly organised criminal groups intent on stealing money or sensitive data, or potentially holding organisations to ransom. Our response We continue to invest significant resources in the development and evolution of cybersecurity controls, deploy rigorous due diligence with regards to third parties and work to protect and educate our colleagues and customers on fraud and scam activity. To provide continuity of service for customers with minimal disruption, we monitor and assess a diverse and evolving array of threats, both external and internal, as well as developing, strengthening or adapting existing control capability to be able to absorb and adapt to such disruptions. Climate change Overview Climate change represents an inherent risk to NatWest Group, not only from its impact on the global economy and our customers, but also through its potential effects on asset values, operational costs and business models as the essential transition to a net-zero economy accelerates. These risks are subject to increasing regulatory, political and societal change. Conversely, the requirement to reduce carbon emissions also means NatWest Group has a significant role to play in areas such as the provision of Climate and Sustainable Funding and Financing. Our response Climate risk was formally incorporated into the NatWest Group risk directory as a principal risk in February 2021 and in April 2021, NatWest Group Board Risk Committee approved a principles-based climate risk policy. Our Climate Opportunities Group (COG) was established to support our ambition to be a leading bank in helping to address climate change. The COG brings together colleagues from all business segments to conceptualise and develop opportunities that complement the NatWest Group climate ambition. Being a principal partner of COP26 gave us the opportunity to re-state our commitment to working with our partners to help reduce carbon emissions. At the conference in Glasgow, we focused on highlighting the practical support we are providing our customers to help them achieve their climate ambitions, as well as strengthening our existing partnerships and building new ones. Our commitment to tackling climate change means we have already reduced our direct own operations footprint by 46%, against a 2019 baseline and plan to achieve a 50% reduction by 2025. We have also set stretching targets for our wider operational value chain and have an ambition to halve the impact of our financing activity by 2030. Regulation Overview We operate in a highly regulated market which continues to evolve in scope. Areas of current regulatory focus include: delivering good customer outcomes, in particular the FCA’s current proposals for a Consumer Duty, which looks to expand its rules and principles to force firms to provide better consumer protection; operational resilience, in light of the UK authorities’ new policy requirements; climate change, and the development of the regulatory framework for sustainable finance; fraud and financial crime, with a focus on protecting customers from ever-more sophisticated scams; capital and liquidity management, including the UK’s approach to the implementation of Basel III; the UK’s future regulatory framework, following its exit from the European Union and the opportunities that this provides; digital currencies, with the development of both public (central bank digital currencies) and private (e.g. stablecoins) offerings which have the potential to materially change the digital payments landscape; improving diversity, equity and inclusion in financial services, through policy developments focused on improved data collection and reporting, and use of targets for representation. Our response We constantly monitor regulatory change and work with our regulators to help shape those developments that materially impact the bank, lobbying when necessary either bilaterally or in partnership with one of our affiliated industry bodies. We implement new regulatory requirements where applicable and use our frequent engagement meetings with regulators to discuss key regulatory priorities. (1) Since 1 July 2021, UK & Ireland £5.5 billion, Western Europe £1.9 billion and Other £0.6 billion. United Kingdom and Ireland W estern Europe Other T ot al: £17.5bn £7.8bn £8.5bn £ 1 .2bn Nat W est Group 2021 Climate and Sus tainable Funding and Financing – Geographic al split (1) 33 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Purpose-led and integrated value creation We aim to create value for our stakeholders, having a positive impact on our environment and wider society. Our work lends particular support to the below seven sustainable development goals. Find out more in the following sections: How we create value 1 Financial Human and relationships NatWest Group was a principal partner for COP26, widening the involvement of the business community, young people and civil society, enabling voices to be heard to help progress be made. Our business activities 2 Our resources 1 How we create value 3 Our resources Nature Infrastructure 34 NatWest Group 2021 Annual Report and Accounts 9.4% return on tangible equity, 18.2% CET1 ratio, £256 million cost reduction and £2,950 million profit attributable to ordinary shareholders. We support the financial lives of our customers and drive economic growth through our well-known brands. We make appropriate use of shareholder capital and other forms of financial capital, including £479.8 billion in customer deposits. We are committed to sustainability as a driver of value creation through our investment, products and service. Financial We rely on an engaged, healthy and inclusive workforce of 58,500 (1) to deliver our strategy to 19 million customers in the UK. Our relationships with all stakeholder groups help to shape and support our strategy and operations. This includes our shareholders and regulators, suppliers, consumer and campaign groups, local communities and more. Human and relationships Our resources Our business activities 2 (1) NatWest Group headcount for both continuing and discontinued operations at 31 December 2021, based on global data for active permanent colleagues (including FTC and excl. temps). We understand we are part of the natural world, benefiting from resources and ecosystem services to conduct our business activities. We are forming expert partnerships to restore degraded lands and forests, to support the needs of local communities and nature, as well as removing 120,000 tonnes of CO 2 e each year. Nature We depend on our property and technology infrastructure, and that of our supply chain, to run the bank’s systems and operations. We are also investing significantly in technology and human expertise to deliver a leading digital customer experience. Infrastructure Products and services We provide a comprehensive range of banking and financial services to personal, business and commercial customers via our businesses. Examples include current and savings accounts, credit cards, mortgages and investments for our personal customers; as well as banking, lending, project finance, risk management and trading solutions for our large commercial customers. Revenues and returns We earn income from interest charged on lending to our customers and fees from transactions and other services. We pay interest to customers who place deposits with us and to investors who buy our debt securities. We also make reward payments on products like our Reward bank accounts and credit cards. The attributable profit generated is either returned to shareholders or retained and reinvested into improving our business to benefit our stakeholders. Customer relationships We support our personal, business, commercial and institutional customers with financial services that meet their needs, which include keeping their funds safe and secure, improving financial capability and supporting enterprise. We believe in treating customers fairly, offering flexibility to our customers in how they choose to bank with us and providing extra help to customers in vulnerable situations or financial difficulty. Partners and networks Being powered by innovation and partnerships means we work with a diverse range of partners to help shape our business strategy and deliver positive outcomes for customers and society. This includes our supply chain, communities, academia, regulators, expert advisers, consumer groups and charities, as well as strategic partners. We are also members of, or signatories to, a large number of organisations, trade bodies and frameworks that help us create long-term value and balance the interests of stakeholders. 35 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements 3 How we create value for our customers and society Supporting enterprise Creating opportunities for businesses and enterprise £34.6 billion gross lending to SMEs and mid-corporates in Commercial Banking, supporting economic growth. £1 billion additional funding made available to support female-led businesses in the UK to recover from the disruption caused by COVID-19. Building financial capability Helping people make better financial decisions 470,813 () additional customers helped to start to save and 6.1 million () financial capability interactions delivered in 2021. 10 million MoneySense has helped 10 million young people learn about money since it was launched in 1994. Helping to address the climate challenge Taking action on the risks and opportunities of climate change £17.5 billion () Climate and Sustainable Funding and Financing completed, including £8.1 billion contribution towards our £100 billion target. (1) 38% () of Retail Banking mortgages are at or above EPC rating C. (2) Jobs and the economy Supporting employment across the UK Early career We hired over 1,000 interns, graduates and apprentices in 2021 including 205 colleagues who have been recruited through our social mobility apprentice programmes. £1.73 billion Payment of £1.73 billion in tax was made to the UK Government in 2021 which supported central government and local authority spending. (3) Protecting our customers Keeping money safe and accessible for our customers £193.3 million () We prevented 542,969 cases of attempted fraud against our customers, amounting to over £193.3 million in the UK. 159 hotline We are one of the original pilot organisations behind the new ‘159’ fraud reporting hotline, launched in 2021. Improving digital capability Offering customers more choice and ways to bank 9.7 million () active digital customers. 8.3 million actively use our mobile app and 4.2 million use our online banking platform. 60% () of our active current accounts are customers exclusively banking with us using digital channels through mobile or online. Community and charitable giving Making a difference in our local communities 32,235 trees planted by colleagues, in our new tree planting programme with The Conservation Volunteers. 43,003 hours were volunteered by our colleagues to local communities and good causes received o ver £3.5 million through their giving and fundraising. Helping our colleagues to thrive Building a great place to work that reflects the society we are proud to serve Our integrated wellbeing strategy allows us to support colleagues, customers and communities, and is a key part of NatWest Group being a purpose-led organisation. +14 points Colleague sentiment on inclusivity has continued to increase in 2021, now reaching a score of 93 percentage points. We are 14 percentage points above the Global Financial Services Norm and 10 percentage points above the Global High Performing Norm. Homes and housing Helping more people access efficient homes £728 million () Retail Banking Green Mortgage completions. (4) Over 48,000 We have supported more than 48,000 customers with first-time mortgages. () 262,000 customers were helped with mortgage payment holidays between 2020 and 2021 due to the challenges caused by COVID-19. Supporting customers at every stage of their lives Simple to deal with Sharpened capital allocation Powered by innovation and partnerships Purpose-led and integrated value creation continued 36 NatWest Group 2021 Annual Report and Accounts How we create value for our customers and society Supporting enterprise Creating opportunities for businesses and enterprise £34.6 billion gross lending to SMEs and mid-corporates in Commercial Banking, supporting economic growth. £1 billion additional funding made available to support female-led businesses in the UK to recover from the disruption caused by COVID-19. Building financial capability Helping people make better financial decisions 470,813 () additional customers helped to start to save and 6.1 million () financial capability interactions delivered in 2021. 10 million MoneySense has helped 10 million young people learn about money since it was launched in 1994. Helping to address the climate challenge Taking action on the risks and opportunities of climate change £17.5 billion () Climate and Sustainable Funding and Financing completed, including £8.1 billion contribution towards our £100 billion target. (1) 38% () of Retail Banking mortgages are at or above EPC rating C. (2) Jobs and the economy Supporting employment across the UK Early career We hired over 1,000 interns, graduates and apprentices in 2021 including 205 colleagues who have been recruited through our social mobility apprentice programmes. £1.73 billion Payment of £1.73 billion in tax was made to the UK Government in 2021 which supported central government and local authority spending. (3) Protecting our customers Keeping money safe and accessible for our customers £193.3 million () We prevented 542,969 cases of attempted fraud against our customers, amounting to over £193.3 million in the UK. 159 hotline We are one of the original pilot organisations behind the new ‘159’ fraud reporting hotline, launched in 2021. Improving digital capability Offering customers more choice and ways to bank 9.7 million () active digital customers. 8.3 million actively use our mobile app and 4.2 million use our online banking platform. 60% () of our active current accounts are customers exclusively banking with us using digital channels through mobile or online. Community and charitable giving Making a difference in our local communities 32,235 trees planted by colleagues, in our new tree planting programme with The Conservation Volunteers. 43,003 hours were volunteered by our colleagues to local communities and good causes received o ver £3.5 million through their giving and fundraising. Helping our colleagues to thrive Building a great place to work that reflects the society we are proud to serve Our integrated wellbeing strategy allows us to support colleagues, customers and communities, and is a key part of NatWest Group being a purpose-led organisation. +14 points Colleague sentiment on inclusivity has continued to increase in 2021, now reaching a score of 93 percentage points. We are 14 percentage points above the Global Financial Services Norm and 10 percentage points above the Global High Performing Norm. Homes and housing Helping more people access efficient homes £728 million () Retail Banking Green Mortgage completions. (4) Over 48,000 We have supported more than 48,000 customers with first-time mortgages. () 262,000 customers were helped with mortgage payment holidays between 2020 and 2021 due to the challenges caused by COVID-19. Examples of how we create value () Within the scope of EY assurance. Refer to page 78. (1) In October 2021, having surpassed our previous 2020-21 £20 billion target during H1 2021, NatWest Group announced an ambition to provide £100 billion climate and sustainable funding and financing between 1 July 2021 and the end of 2025. (2) Percentage of £110.3 billion UK Retail Banking mortgages where EPC data is available. 2020 comparative for England and Wales mortgages only. (3) Comprises £787 million corporate tax, £473 million irrecoverable VAT, £126 million bank levies, £257 million employer payroll taxes and £88 million other taxes. (4) Retail Banking Green Mortgage products relate only to mortgages for energy efficient homes (EPC A or B rated) and are aligned to the World Green Building Council definition of green mortgages, which has Pioneer status with the Green Home Finance Principles established by the Green Finance Institute. 37 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Building a purpose-led bank Our business performance Retail Banking Through the NatWest and Royal Bank of Scotland brands we provide a comprehensive range of banking products and related financial services including current accounts, mortgages, personal unsecured lending and personal deposits. We’re here for customers whenever and wherever they need us – from our mobile app and online banking, through to our contact centres and high street and mobile branches. Commercial Banking We offer comprehensive banking and financing solutions to start-up, SME, commercial, corporate and institutional customers in the UK. We’re there for our customers as they start, grow and manage their businesses. Our innovative products and services help customers achieve their growth, environmental and social targets. We deliver a high-quality sales and service experience through our expertise and deep engagement, locally, regionally and nationally through face-to- face, direct and digital channels. We continue to support our customers through the Brexit transition period and beyond. Ulster Bank RoI Since the end of July 2021 (apart from the UBIDAC asset finance business which remains fully open), commercial banking has been closed to new customers, remaining open for existing customers only. Since the end of October 2021, we have stopped accepting applications from new personal customers, but continue to consider applications on a reduced number of products from existing personal customers, mainly mortgages. We continue to support our existing customers pending further decisions on the phased withdrawal. RBS International As one of the largest full-service banks operating in the local and institutional banking sectors in the Channel Islands, Isle of Man and Gibraltar, we serve international customers with a UK connection through our International Banking proposition. We operate under six brands: RBS International; NatWest International; Isle of Man Bank; Coutts Crown Dependencies; NatWest Trustee and Depositary Services and RBS International Depositary Services. We have wholesale branches and fund depositary services businesses in the UK and Luxembourg to further serve our institutional clients and protect investors. Private Banking Private Banking is the Investment Centre of Expertise for NatWest Group, servicing all client segments across Retail, Premier & Private Banking. We provide private banking and wealth management services to UK-connected high-net-worth individuals and their business interests through the Coutts & Co brand. We continue to focus on delivering the best client experience through a proactive engagement model which supports clients across both sides of their balance sheet – improving returns by deepening client relationships and enhancing our digital banking capabilities to make it easier for clients to deal with us. NatWest Markets We help NatWest Group’s corporate and institutional customers manage their financial risks safely and achieve their short-term and long-term sustainable financial goals. We think and act as one bank for our customers, collaborating with teams across NatWest Group to be the partner of choice for our customers and their financial markets needs. By focusing on the things we do best and that matter most to our customers, we help champion their potential. 38 NatWest Group 2021 Annual Report and Accounts UN Principles for Responsible Banking We have now been signatories to the UN Principles for Responsible Banking for over two years. In 2021, we undertook a portfolio impact analysis using the United Nations Environment Programme Finance Initiative (UNEP FI) developed tool, responded to the collective progress survey, and were active in working groups on financial inclusion and health, biodiversity, and the collective commitment on climate action. We remain committed to aligning our strategy with the UN Sustainable Development Goals and the 2015 Paris Agreement and our progress against the six principles can be found in our second self-assessment report included in our 2021 ESG Supplement. Human Rights and Modern Slavery At NatWest Group, we understand that businesses have an important role to play in promoting respect for human rights. We seek to act in accordance with the Universal Declaration of Human Rights and our approach to respecting human rights is informed by other international standards and principles including the UN Guiding Principles on Business and Human Rights (UNGPs). We have established a human rights steering group, a management group that brings representatives from across NatWest Group together to coordinate our activities, and to make recommendations to NatWest Group Executive Committee and Board to develop and strengthen our approach. More information can be found at natwestgroup.com. Tackling modern slavery forms an integral part of our approach to human rights. We seek to tackle modern slavery and human trafficking through continued implementation of policies covering our customers, colleagues and suppliers and by monitoring our financing and supply chain for this activity. Our full approach is outlined in our annual Modern Slavery and Human Trafficking Statement which can be found at natwestgroup.com. In 2021, we continued to engage with a range of stakeholders in relation to human rights including charities, Non-Governmental Organisations (NGOs) and campaign groups to help grow our knowledge and understanding of these issues. We remained members of the Thun Group and the UN Global Compact’s UK Modern Slavery Working Group. We also continued to work with anti-slavery charity Unseen to support survivors and raise awareness of modern slavery with colleagues throughout NatWest Group. 1. Alignment 4. Stakeholders 2. Impact & Target Setting 3. Clients & Customers 6. Transparency & Accountability 5. Governance & Culture Ways of Working Re-imagining the workplace How do you manage a never-before moment in the world of work? That was the question we were suddenly posed with when COVID-19 hit. But as the pandemic played out, we quickly started to think beyond immediate operational requirements to what a new way of working could look like – considering the needs of over 58,000 colleagues across a number of jurisdictions. But we also knew we had a real opportunity to make the return to the work environment different from how it had always been: a more flexible design. Tailored to what mattered most to our colleagues. To get there, we adopted a robust, data and experience-led approach. Through extensive colleague interviews, executive engagement and external research we started to build a picture of the new way colleagues would like to work and interact. Our insights quickly guided us that one size wouldn’t fit all. And that a ‘Ways of Working’ framework designed around three models was a flexible and dynamic way to both deliver colleague choice and better meet customer needs. Colleague safety, and health and wellbeing were paramount during roll-out. To ensure this, we knew that having a range of measures in place – from a ‘Wellbeing Hub’ and ‘Best Practices Zones’, to working from home guides and mental health advice – was vital. We also realised that getting it right would take time. So we created a feedback loop, gathering colleague views and adapting our process. For example, following colleague suggestions we introduced reorientation events as well as onsite wellbeing support to help colleagues back into the office. We’re still on a journey, but it’s one we’re on together. “Our insights quickly guided us that one size wouldn’t fit all” 39 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Business performance Retail Banking In Retail Banking, we’re focused on creating lifelong relationships with our customers. Whether it’s providing early financial education, helping them onto the property ladder or building secure financial futures, we’re there at every stage of our customers’ lives. We are delivering on our strategy to support building a relationship bank for a digital world – combining the best people and the best technology. By investing in world-class digital experiences which meet the needs of our customers (from our digital banking app and AI virtual assistant Cora, to video calling with expert advisers), we make sure they have 24/7 access to the help and information they need. Our focused investment in driving deeper-value exchanges with customers while digitalising more customer journeys and simplifying our business has resulted in a further £52 million gross annualised cost reduction, as well as income growth from a number of products and journeys. We’re extremely proud of providing 30 years of free early financial education to children through our MoneySense programme. And we’re delighted to now evolve this further through the acquisition of RoosterMoney in October 2021 – a leading children’s banking app, which builds financial skills in a fun, accessible way. We are committed to helping more young customers with their financial capability and have seen a steady increase in the proportion of young people choosing to bank with us in 2021 versus pre-pandemic levels. We have also increased the number of customers who choose us as their main bank in 2021, reaching our highest-ever score for customer satisfaction. We are helping all our customers make the most of their money and achieve their goals, especially at a time when many are facing financial difficulties. We know that at every life stage, whether our customers have a short- or long-term goal, saving needs to be easy and rewarding. Our Digital Regular Saver account, alongside budgeting and goal tools, was designed specifically to help first-time savers build financial resilience. (1) We aim to address the savings gap by helping two million customers start saving by the end of 2023; since launch we have enabled over one million customers to start their savings journey, including almost 471,000 in 2021. We also conducted more than 661,000 financial health checks in 2021, of which over 350,000 were completed via video banking. We recognise that building secure financial futures begins early on in our customers’ lives and we are there to support them from the start. Our digital investing platform, NatWest Invest and Royal Bank Invest, helps our customers with their long- term financial plans. By offering digital access to five funds managed by Coutts, customers can plan for life’s big events or simply invest towards securing their financial future. Nearly 33,000 retail bank customers started investing through the platform in 2021. When our customers are ready to step onto the property ladder, they’re in safe hands, we have 11.5% flow share of UK mortgages, we helped more than 48,000 customers to buy their first home and over 40,000 customers to re-mortgage. Our continued digitalisation of the mortgage journey means that we can now offer customers browsing price-comparison websites a more seamless experience; gaining a decision in principle upfront without them having to leave the website. Through our Green Mortgage, which we provided to around 2,900 customers in 2021, we proactively supported customers to lower their carbon footprint by offering discounted mortgage rates for buying more energy efficient homes. We are also there to support our customers with their short- term borrowing needs and enable them to achieve their goals sooner. We have over 3.8 million users of our ‘Know My Credit Score’ tool, with just under 1.4 million signing up in 2021. This helps customers better understand their credit options – and how the decisions they make today, could affect their finances tomorrow. We launched a new Purchase and Balance Transfer credit card and grew credit card balances faster than the market in the second half of the year. Our credit card customers can also now manage large purchases more easily by setting up an instalment plan to spread payments between three and 24 months. We’re always striving to make banking simpler for our customers. We now have over eight million customers regularly using our mobile app, which uses biometric authentication to make the user experience secure and convenient and 60% of our customers now interact with us exclusively via digital channels. We’ve also launched ‘Banking My Way’ in the app, making it easier for customers to tell us how we can best support their needs relating to accessibility or personal circumstances. (1) Active customers aged 17+ who have saved more than £100 with us for the first time. Includes instances where customers had existing savings with other banks and transferred them to their NatWest Group account Total income (£m) 4,445 2020: 4,181 Operating expenses (£m) (2,513) 2020: (2,540) Operating profit (£m) 1,968 2020: 849 Return on equity (%) 26.1 2020: 10.2 Net loans to customers (£bn) 182.2 2020: 172.3 Video banking financial health checks 350k 2020: 173k Customers exclusively using digital channels (%) 60 2020: 58 Customers helped to buy their first home 48k 2020: 32k 40 NatWest Group 2021 Annual Report and Accounts Over the last few years, we have significantly improved Cora’s capability and intelligence. In 2021, Cora handled 10.7 million retail banking conversations, up 27% on the previous year. The AI virtual assistant also fully supported 47% of all customer queries without having to hand over to a human. Cora is now able to help customers by providing personalised responses to a range of different banking needs, from providing help on how to access the mobile app, to updating us when they move home. In 2021, for the first time, Cora began assisting customers over the phone, allowing the use of natural conversation to self-serve. Cora is now a key part of the bank’s digital and telephony offering, with a constantly evolving role in frontline customer support. As well as improving our service efficiency, it also enables our colleagues to focus on more complex customer enquiries. We will continue to invest in the use of innovative technologies to make it easier for our customers to get the support they require, when and where it is needed. For us, this is a vital component of being a relationship bank for a digital world. “The AI virtual assistant also fully supported 47% of all customer queries without having to hand over to a human.” Cora supporting our customers Using AI to provide that personal touch ‘Cora’ is NatWest Group’s customer-facing AI virtual assistant, helping to provide support for our customers using both our digital and telephony channels. 41 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Private Banking We partner with our clients and their families as their wealth needs evolve over their lifetime, ensuring that their wealth has its intended consequences. In 2021, we launched NatWest Group’s first digital Junior ISA, which so far has enabled over 4,000 clients to start saving for their children’s future more easily. We continue to develop our digital capabilities and have seen strong growth in digital sales with over 26% of net new money now being executed through digital channels. We also continue to meet the more complex lending and investment needs of Coutts clients through face-to-face specialist advisers and we welcomed a 29% increase in new Coutts clients in 2021 compared with 2020. As a result of our collaboration with global asset manager BlackRock, Coutts invests in a dedicated range of bespoke funds managed and administrated by BlackRock on their platform. Coutts set the investment strategy and ESG policy for the funds and this relationship provides efficiency benefits for our clients. We have also increased our ability to influence change at the companies held within these bespoke funds to drive better ESG outcomes, engaging with over five times more companies across the UK, Europe and North America and voting on 79% more company resolutions in 2021 compared with 2020. Our online investment product series, Personal Portfolio funds, available as NatWest Invest, Royal Bank Invest and Coutts Invest grew significantly and more than doubled from £0.9 billion in 2020 to £1.9 billion in 2021. Coutts collaborated with BGF Group (BGF) to launch the UK Enterprise Fund and provide additional growth funding and support to SMEs across the UK. The fund is co-investing equity growth capital alongside BGF, taking minority stakes in businesses looking to scale in the UK, with initiatives to support female entrepreneurship and promote the diversity of management teams. In 2021, over 100 clients invested a combined £42 million and Coutts and BGF intend to launch a further fund in 2022. In November, we launched our first full-scale brand and television campaign to increase awareness and consideration among a new type of client: younger (35-44), female and entrepreneurial. The campaign ‘real success takes true character’, focused on the duality of acting in the right way being the reason for achieving long-term success and played into the progress we have made to become a B Corporation and our responsible investing credentials. In June, we started to incentivise new and existing clients to improve the energy efficiency of their homes. We offer discounted mortgage fees on homes with an A or B EPC ratings and fee rebates to clients who improve their EPC rating above C within a year of taking out their mortgage. We continue to grow our nascent Green Mortgage book and have further plans to help our clients understand the carbon intensity of their homes. Coutts has been recognised by the Green Finance Institute as a Pioneer of the UK Green Home Finance Principles. We introduced our new Coutts mobile app to a pilot population with a full roll out planned for 2022. We have introduced integrated biometrics for enhanced security and easy-to-use digital features such as first time beneficiary payment authorisation. In app domestic payments can be completed in one of the most efficient journeys in the UK market amongst other notable features. The latest digital tools have enabled clients to self-serve all disclosures during the onboarding process, including electronic e-signatures, and enabled us to send automated fraud alerts via SMS. (1) Private Banking manages assets under management portfolios on behalf of Retail Banking and RBSI and receives a management fee in respect of providing this service. Business performance continued Private Banking is the Centre of Expertise for asset management across NatWest Group, and in 2021 we continued to see growth in customers investing with us across our brands and through various mediums, such as digital or face-to-face. Coutts provides our high-net-worth and ultra-high-net- worth clients with day-to-day banking, flexible lending and responsible investments, underpinned by first-class client service. In July 2021, Coutts became a Certified B Corporation, evidencing our commitment to balance people, profit and the planet. Total income (£m) 816 2020: 763 Operating expenses (£m) (520) 2020: (455) Operating profit (£m) 350 2020: 208 Return on equity (%) 17.0 2020: 10.3 Net loans to customers (£bn) 18.4 2020: 17.0 AUMA ( 1) (£bn) 35.6 2020: 32.1 Customer deposits (£bn) 39.3 2020: 32.4 NatWest Invest/Royal Bank Invest/Coutts Invest users 78,890 2020: 44,410 42 NatWest Group 2021 Annual Report and Accounts It’s a conviction woven deeply in our history, most notably in the philanthropic legacy of Angela Burdett- Coutts, whose family forged the bank. And now more than ever, we know we have a responsibility to make a positive difference to the world we live in. It’s why – over two years ago – we made the decision to aim to be part of the ever-growing community of Certified B Corporations. B Corps are a new kind of business. Ones that balance purpose and profit – being required to consider the impact of their decisions on their workers, customers, suppliers, community and the environment. However, the journey to B Corp certification is understandably long and rigorous. The external accreditation took over 18 months and involved answering around 300 questions on everything from company governance and how we care for our colleagues, to our environmental impact and what we contribute to the community. Most meaningfully perhaps, we also changed our Articles of Association, enshrining the importance of considering all stakeholders in our decision-making. In July 2021, as a result of these efforts, Coutts gained the proud distinction of being a Certified B Corp. Since then, we have been busy. Coutts was a founding member of the ‘B Finance UK Coalition’ which was launched at COP26, and also supported B Lab UK’s Boardroom 2030 initiative. But for us, this is very much just the beginning. “For us, this is very much just the beginning” Doing well by doing good Coutts becomes a Certified B Corp As a business, we believe we can be a force for good. “More than ever, we know we have a responsibility to make a positive difference to the world we live in.” 43 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Commercial Banking In 2021, we opened over 78,000 accounts for new businesses, supported c.55,000 individuals and businesses through c.200,000 interventions; of those supported c.52% were purpose-led businesses, c.60% identified as female and c.26% were from Minority Ethnic backgrounds. Further to publishing our ‘Springboard to Sustainable Recovery’ reports in March and October, we implemented our SME Task Force across all our regions to focus on five areas identified with the potential to create opportunity for SMEs tackling climate change. We continued our support for customers through Brexit, facilitating UK imports and exports by onboarding 27 more non-UK suppliers to Supply Chain Finance programmes and increasing the proportion of our lending to non-UK suppliers by 50%. As transaction volumes recovered in the second half of 2021, our investments in Payit and Tyl led to continued growth in their respective customer bases. Payit became one of the largest Open Banking-enabled ‘Payment Initiation Service’ platforms in the UK by volume and Tyl, our point-of-sale solution for small businesses, processed its 50 millionth transaction during 2021. Our Confirmation of Payee API also won the first public tender with HMRC. We collaborated with NatWest Markets to underwrite 56 new transactions, £6 billion commitments, and improve onboarding processes enabling customers to take advantage of our award-winning corporate FX services. Our strategy of collaborating with industry leaders to deliver better customer experiences evolved at pace in 2021 with a joint offering of charging infrastructure with Octopus, allowing customers to understand the carbon emissions of their supply chains and working on The Global Farm Metric with the Sustainable Food Trust. We gave 16,000 additional SME customers access to a relationship manager through the launch of our new direct relationship manager proposition. We enhanced 32 digital sales and servicing journeys, enabling our customers to start and complete more journeys digitally. In 2021, over 60% of customers’ service requests were initiated digitally and over two thirds of those were processed with no human intervention. Our AI virtual assistant, Cora handled over 1.2 million chats, of which more than half required no human intervention. We continue to be disciplined in our capital allocation, allowing us to best support the economy in line with our strategy while maintaining a resilient balance sheet. In 2021, we embedded our climate commitments in our capital allocation and pricing- decision frameworks. Our new sector strategy reflects a continued rebalancing of our balance sheet towards sectors aligned to an economic recovery and building a fair transition to a green economy across the regions. In 2021, we delivered a £1.5 billion risk-weighted assets (RWA) saving from targeted sector reductions, significant risk transfers and other active capital management actions; improving RWA efficiency by around 1%. Business performance continued We pivoted from our leading role supporting customers with £14.4 billion of approved government scheme lending through the COVID-19 crisis to support UK businesses to grow with £4 billion of SME-scale funding. We grew lending in areas where we have competitive advantage, such as climate and sustainable funding and financing where we delivered £5.2 billion of lending. As a relationship bank for a digital world, our innovations allow us to better support our customers across a growing number of digital channels while simplifying and automating our own processes. Total income (£m) 3,875 2020: 3,958 Operating expenses (£m) (2,354) 2020: (2,430) Operating profit/(loss) (£m) 2,594 2020: (399) Net loans to customers (£bn) 101.2 2020: 108.2 Return on equity (%) 22.0 2020: (4.5) Tyl payments processed (m) 39.3 2020: 13.6 44 NatWest Group 2021 Annual Report and Accounts “Speed of arrangement was crucial. Working to short timescales we were able to deliver the contract for the required facility quickly.” It’s why we place so much importance on championing potential in those early years. When a business has a clear commercial opportunity, we want to help them deliver on their ambitions. PensionBee is a great example. A direct-to-consumer financial technology company and a leading online pension provider in the UK, it enables customers to interact with their retirement savings through its unique combination of smart technology and dedicated customer service. We assisted PensionBee in March 2021, in the run up to its planned IPO, with a £10 million revolving credit facility through our innovative Growth Capital team. Our support gave the company that vital element of flexibility around optimising its capital structure to protect its cash runway. Speed of arrangement was crucial. Working to short timescales we were able to deliver the contract for the required facility quickly, providing PensionBee with fast assurance that liquidity would be available if needed. The company is continuing to move from strength to strength. Having more than doubled its assets under administration to £2.25 billion in the year between September 2020 and 2021, it is now listed on the High Growth Segment of the main market of the London Stock Exchange and has announced its intention to transition to the Premium Segment in the first half of 2022. For us, seeing PensionBee’s success is massively rewarding. It shows that our support made a difference – at a time when it was needed most. “We want to help them deliver on their ambitions” There when it counts Championing business potential We know it’s essential for growing businesses to get the right kind of support at the right time. 45 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements RBS International We have continued to support our customers through life’s changing circumstances. We helped our customers grow their deposits, with over 500 customers (who had either never saved with us or had previously saved less than £100 with us) now saving at least £100. We provided 8,729 financial health checks, of which over 21% were virtual and we removed six different mortgage fees and launched our mortgage broker portal to simplify our offering and support customers. We also launched our Green Mortgage to NatWest International customers in the UK as we support the wider climate ambitions of NatWest Group. Following the successful launch of Cora, our AI virtual assistant, 63% of interactions have been completed without the need for human intervention. RBSI’s Social Enterprise Mentoring Scheme is also now well established and involves partnering with a social enterprise in each retail banking jurisdiction to share our knowledge and expertise. We have also shared our wellbeing material, which received the ‘Wellbeing in the Workplace Star Award’ for our work with Gibraltar Samaritans. Partnering with four banks, RBSI will contribute £90,000 over three years to help secure the future of Jersey’s Community Savings Limited – a registered charity working to promote financial inclusion. Operating profit of £358 million was £259 million higher than 2020, primarily reflecting a £52 million impairment release combined with income growth and cost reduction. Net loans to customers increased by £2.2 billion, or 16.5%, and customer deposits by £6.2 billion, or 19.8% compared with Q3 2021. During the year, Moody’s upgraded our long-term credit rating to A3, bringing us more in line with our peers, setting our rating outlook to stable and affirming the short-term credit rating at P-2; this reflects the resilience of the business throughout the pandemic, our continued profitability and strong balance sheet position. In responding to changing customer demands, we introduced cheque deposits in our mobile app among other new features across our personal digital channels, contributing to a 23% increase in users. Overall, 82% of local banking customers are now registered with digital banking which is a 14% increase compared with 2020. Our Institutional Banking and Depositary Services business has received significant investment as it progresses on its digitisation journey. Customers have felt the benefits of this and the business continues to be a driver of growth with Climate and Sustainable Funding and Financing solutions increasingly popular. We have worked closely with NatWest Markets to strengthen our combined position as a trusted partner for these clients by supporting them with a holistic offering across products and geographies. Business performance continued Our strategy of digital transformation across the communities we operate in remained unchanged despite the COVID-19 pandemic. Parts of the transformation programme were also accelerated in recognition of rapidly changing customer behaviours and needs. We believe this focus on becoming a bank that is easy to deal with helps fulfil our purpose of championing potential, helping people, families and businesses to thrive. Total income (£m) 548 2020: 497 Operating expenses (£m) (242) 2020: (291) Operating profit (£m) 358 2020: 99 Return on equity (%) 22.5 2020: 6.1% Net loans to customers (£bn) 15.5 2020: 13.3 Retail customers registered with digital banking (%) 82 2020: 68 Net Promoter Score 36 2020: 30 Financial health checks 8,729 2020: 9,872 46 NatWest Group 2021 Annual Report and Accounts “For us, this is about fulfilling our purpose, being part of the community we live and work in” Helping financial inclusion RBSI in the community Think about what it means to be outside the financial system. To not have a bank account. To not be able to pay bills, obtain credit or save for the future. The effects can be devastating, trapping people in a vicious cycle of poverty and financial exclusion, unable to participate fully in society. It’s a problem that we felt we could (and, should) help with. So, we decided to do something about it. We got together with four other local banks in Jersey to support Community Savings Ltd – a registered charity which works to promote financial inclusion in Jersey by providing services, guidance and practical assistance to those most in need. We know Community Savings well. We’ve been banking the charity since 2018 and recognise the outstanding work it does in Jersey supporting the financial inclusion of the islanders. Community Savings relies on grants, donations and bequests to ensure the continued running of its long-standing initiative. Its customers’ money is not used to fund its operations and it strives to provide its services free of charge. Over the next three years, we are contributing £90,000 to ensure that the charity is able to help provide access to mainstream banking services. For us, this is about fulfilling our purpose, being part of the community we live and work in. But it’s also more than that. We look after each other here on the island, and helping people with financial inclusion is a big part of that.” Lynn Cleary Chief Financial Officer, RBS International 47 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Business performance continued NatWest Markets We have made progress during 2021 to better support NatWest Group’s corporate and institutional customers through refining our global footprint and product range. We have also simplified our operating model and leveraged expertise across the bank to improve core processes to support cost reduction. Our Foreign Exchange (FX) teams have worked with NatWest Group’s Commercial, Retail and Private Banking segments on technology and customer sales initiatives to ensure that customers across NatWest Group benefit from our market- leading expertise. We collaborated across RBSI, NatWest Markets and Commercial Banking to establish a team to grow our offering to the investment management sector and provide a more integrated experience for our Funds and Sponsors customers. We continued to support our customers with their ESG and climate-related finance needs, with product innovation across bonds, FX, interest rate derivatives and private finance. In 2021, we completed £9.7 billion of Climate and Sustainable Funding and Financing, including £3.3 billion which will contribute towards the new NatWest Group target of £100 billion between 1 July 2021 and the end of 2025. Our support for customers has been recognised by a number of awards: – ‘Lead manager of the year, sustainability bonds – local authority/municipality’, and ‘Lead manager of the year, green bonds – supranational, sub-sovereign and agency (SSAs)’, from the Environmental Finance Bond Awards 2021. – ‘Sterling Bond House of the Year’ from the IFR Awards 2020 (awarded February 2021). – ‘Best Agent of International US Private Placements’ from the GlobalCapital Private Debt Awards 2020 (awarded February 2021). – ‘Best Bank for ALM and Libor Transition Management’ from the GlobalCapital Covered Bond Awards 2021. – ‘#1 bank for Overall FX Service Quality to the UK corporate sector’ from Coalition Greenwich 2021. We have advanced product innovation in the voluntary carbon market by supporting NatWest Group’s collaboration with other international banks to develop a transparent global marketplace for carbon offsets with clear and consistent pricing and standards known as Carbonplace. We also progressed the development of our digital bond capability, completing a successful pilot trade of a blockchain bond in the secondary market. We made significant progress on the implementation of our agreement with BNP Paribas for the provision of house futures and associated back-office services, and in January 2022 we successfully went live with the outsourcing of back office services for our US-based Listed Derivatives business. NatWest Markets incurred an operating loss of £711 million in 2021. A reduction in income was driven by a weak performance in Fixed Income, reflecting subdued levels of customer activity and the continued reshaping of the business. This also contrasted with the exceptional levels of market activity seen in 2020. We continued to reduce costs in line with the strategic announcement in February 2020, with other expenses decreasing by 12.6%. RWAs were £2.7 billion lower than 2020 reflecting lower levels of market risk and counter- party credit risk, including the impact of capital optimisation actions taken throughout the year. Note: The NatWest Markets operating segment is not the same as the NatWest Markets Plc legal entity (NWM Plc) or group (NWM or NWM Group). The NatWest Markets segment excludes the Central items & other segment. We have supported our customers’ evolving needs with innovative solutions and continued to deliver a more integrated customer proposition across NatWest Group. We have made good progress on building a refocused, sustainable business from which we can grow. We incurred an operating loss in 2021, but have continued to reduce our risk-weighted assets (RWAs) and operating expenses. Total income (£m) 415 2020: 1,123 Operating expenses (£m) (1,161) 2020: (1,310) Operating loss (£m) (711) 2020: (227) Risk-weighted assets (£bn) 24.2 2020: 26.9 Climate and Sustainable Funding and Financing (£bn) 9.7 2020: 7.2 GBP-denominated DCM volume by bookrunner – FY 2021 Dealogic #1 2020: #1 48 NatWest Group 2021 Annual Report and Accounts One of the most important ways we can do this is by helping tackle climate change. To build out the green infrastructure needed to reach net-zero targets first requires the funding and the market mechanisms to deliver it. This is where NatWest Markets has a vital role to play. Following the UK Government’s announcement of its first-ever sovereign green bond, we supported the second issuance of green gilts in October 2021 as joint bookrunner. The bond, which matures in July 2053, is the longest-dated sovereign green bond currently outstanding in the market. Crucially, it will help finance a whole range of climate projects such as offshore windfarms, zero-emission transport and schemes to decarbonise homes and buildings. With these two green issuances, the UK’s Debt Management Office has become one of the top three largest sovereign issuers of green bonds in the world. NatWest Markets is proud to be part of this process, and to have helped deliver on the government’s commitment to issue a minimum of £15 billion of green gilts in 2021–22. Supporting the UK Government to tackle climate change NatWest Markets and green finance Being purpose-led is about knowing and fulfilling our responsibilities. It means delivering on our commitments to our stakeholders, society and the environment. “NatWest Markets is proud to have helped deliver on the government’s commitment to issue a minimum of £15 billion of green gilts in 2021–22” 49 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Ulster Bank Rol During 2021, we entered into binding agreements for the sale of material parts of our commercial and personal banking businesses with Allied Irish Banks p.l.c. (AIB) and Permanent TSB p.l.c. (PTSB), which subject to regulatory and other approvals and other conditions being satisfied, are expected to be completed during 2022 and 2023. Since the end of July 2021, (apart from the UBIDAC asset finance business), commercial banking has been closed to new customers, remaining open for existing customers only. Since the end of October 2021, we have stopped accepting applications from new personal customers, but continue to consider applications on a reduced number of products from existing personal customers, mainly mortgages. We have focused on effective and timely communications, engaging with all customers impacted by the loan sales and launched the ‘Choose, Move & Close’ readiness campaign designed to give personal customers, especially those in vulnerable situations, as much notice as possible of the steps they will be required to take to move the products they hold with us that are not already covered by the sale agreements. This readiness campaign is an important step in our closure, not just for customers but for the industry too, as we work together to ensure the safe transition of customers to their new providers. With this in mind, we are engaging with the rest of the industry within the bounds of competition law, to allow them time to prepare for the volume of customers who will need to move or switch accounts. We are also engaging with the main direct debit originators and large employers to provide advance notice of the changes to allow them time to prepare to help their own customers and employees who will be switching accounts. In July 2021, we launched our Customer Charter, a set of principles developed from our colleagues’ ideas and suggestions for how we best serve customers and the communities in which we operate throughout the withdrawal process. This includes helping customers in vulnerable situations to close or move their accounts, continuing to provide financial education to customers and donating surplus office furniture to local communities and charities. Following the announcement of the phased withdrawal, our focus on colleague wellbeing has been a key priority. Listening sessions were held to answer questions and keep our colleagues informed. We also invested significantly in learning and development to support colleagues, which has included one-to-one career coaching sessions and career development focus workshops. Following the announcement to begin a phased withdrawal from the Republic of Ireland, we have made progress to develop and implement a plan which acts in the best interests of customers, colleagues and stakeholders. Our focus is to support customers and colleagues now and help them to prepare for the future. Continuing operations Total income (€m) 265 2020: 250 Operating expenses (€m) (557) 2020: (498) Total income (€m) 578 2020: 574 Operating expenses (€m) (609) 2020: (548) Net loans to customers (€bn) 7.9 2020: 20.0 Operating loss (€m) (259) 2020: (405) Net loans to customers (€bn) 18.6 2020: 20.0 Operating profit/(loss) (€m) 68 2020: (255) Business performance continued The results above are presented for continuing operations. For further details on the treatment of discontinued operations refer to Note 8 to the consolidated financial statements. Total including discontinued operations 50 NatWest Group 2021 Annual Report and Accounts Outlook Outlook. The economic outlook remains uncertain. We will monitor and react to market conditions and refine our internal forecasts as the economic position evolves. The following statements are based on current market interest rate and economic expectations. – In 2023, we expect to achieve a return on tangible equity of comfortably above 10% for the Group. – In 2022, we expect income excluding notable items to be above £11.0bn in the Go-forward group. – We plan to invest around £3 billion over 2021 to 2023 but, with continuing simplification, we plan to reduce Go-forward group operating expenses, excluding litigation and conduct costs, by around 3% in both 2022 and 2023. – As a result of positive actions to change the shape of our book in recent years, we expect our through-the-cycle impairment loss rate to be around 20 – 30 basis points. We expect our 2022 and 2023 impairment charge to be lower than our through the cycle loss rate. – Across 2022 and 2023, we expect movements in RWAs to largely reflect lending growth and our phased withdrawal from the Republic of Ireland. Capital and funding – We aim to end 2022 with a CET1 ratio of around 14% and target a ratio of 13-14% by 2023. – We intend to maintain ordinary dividends of around 40% of attributable profit and to distribute a minimum of £1 billion in each of 2022 and 2023 via a combination of ordinary and special dividends. – We intend to maintain capacity to participate in directed buybacks of the UK Government stake, recognising that any exercise of this authority would be dependent upon HMT’s intentions and is limited to 4.99% of issued share capital in any 12-month period. – We will consider further on-market buybacks, in addition to the £750 million announced today, as part of our overall capital distribution approach as well as inorganic opportunities provided they are consistent with our strategy and have a strong shareholder value case. – As part of the NatWest Group capital and funding plans we intend to issue between £3 billion to £5 billion of MREL-compliant instruments in 2022, with a continued focus on issuance under our Green, Social and Sustainability Bond Framework. NatWest Markets plc’s funding plan targets £4 billion to £5 billion of public benchmark issuance. Ulster Bank RoI – We have made good progress on our phased withdrawal from the Republic of Ireland and expect the majority of the Allied Irish Banks and Permanent TSB asset sales to be largely complete by the end of 2022 and deposits to reduce over a longer timescale. – We would expect income and RWAs to follow the balance sheet trajectory. We expect the cost base to reduce over time and anticipate other operating expenses, excluding withdrawal related costs, in 2023 will be around €200 million lower than 2021. – We expect to incur disposal losses through income of around €300 million in 2022 and withdrawal related costs of around €600 million across 2022-24, with around €500 million incurred by the end of 2023. – We expect the phased withdrawal to be capital accretive. (1) The guidance, targets, expectations and trends discussed in this section represent NatWest Group plc management’s current expectations and are subject to change, including as a result of the factors described in the Risk Factors section on pages 406 to 426 of the 2021 NatWest Group plc Annual Report and Accounts and on pages 179 to 201 of the NatWest Markets Plc 2021 Annual Report and Accounts These statements constitute forward-looking statements. Refer to Forward-looking statements in this document. 51 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Section 172(1) statement In this statement we describe how our directors have had regard to the matters set out in section 172(1) (a) to (f) of the Companies Act 2006 (section 172) when performing their duty to promote the success of the company. Board engagement with stakeholders The Board reviews and confirms its key stakeholder groups for the purposes of section 172 annually. For 2021, they remained customers, colleagues, communities, investors, regulators and suppliers. Examples of how the Board has engaged with key stakeholders, including the impact on principal decisions, can be found in this statement and on pages 14 to 17 (stakeholder engagement) and pages 102 to 113 (Corporate governance report). Supporting effective Board discussions and decision-making Our purpose continues to influence Board discussions and decision-making. Our Board and Committee terms of reference reinforce the importance of considering both our purpose and the matters set out in section 172. Our Board and Committee paper template includes a section for authors to explain how the proposal or update aligns with our purpose and a separate section for them to include an assessment of the relevant stakeholder impacts for the directors to consider. Our directors are mindful that it is not always possible to achieve an outcome which meets the requirements, needs and/or expectations of all stakeholders who are, or may be, impacted. For decisions which are particularly challenging or complex, we introduced an additional page to our paper template in 2021 which provides directors with further information to support purposeful decision-making. This additional page uses the Blueprint for Better Business as a base and is aligned to our broader purpose framework. Principal decisions Principal decisions are those decisions taken by the Board that are material, or of strategic importance, to the company, or are significant to NatWest Group’s key stakeholders. This statement describes three examples of principal decisions taken by the Board during 2021. Likely long-term consequences. Employee interests. Relationships with customers, suppliers and others. The impact on community and environment. Maintaining a reputation for high standards of business conduct. Acting fairly between members of the company. Section 172(1) statement Withdrawing from the Republic of Ireland What was the decision-making process? In February 2021, the Board took the decision to commence a phased withdrawal from the Republic of Ireland. This was a very carefully considered decision by the Board that followed a strategic review of the Ulster Bank business in the Republic of Ireland, which concluded that Ulster Bank Ireland Designated Activity Company (UBIDAC) would not be able to generate sustainable long-term returns for NatWest Group plc’s shareholders. Alongside the decision to withdraw, it was announced that a non-binding Memorandum of Understanding with Allied Irish Banks, p.l.c had been entered into in connection with the sale of a portion of UBIDAC’s performing commercial loan book. To support the Board in its decision-making, it received comprehensive papers prepared by management which updated the Board on the progress of each stage of the strategic review and sought the Board’s support to proceed to the next stage. These papers included detailed analysis of the potential options available to execute the withdrawal (including potential counterparties and transactions), valuations, financial impacts, key risks, and stakeholder impacts and engagement plans. During its discussions, the Board acknowledged the complexity and challenges of a withdrawal and the various options were explored through the lenses of time, value, execution risk and stakeholder impacts. How did the directors fulfil their duties under section 172? How were stakeholder interests considered? At each stage of the strategic review the directors were mindful of their duties under section 172 including the likely long-term consequences of the decision. Each update the Board received provided an overview of relevant stakeholder considerations. The Board discussed in detail the various stakeholders that would be impacted (including shareholders, employees, customers, suppliers, regulators and communities), what their concerns were likely to be and the key messages that would support engagement. The Chairman and Group CEO undertook engagement directly with key stakeholders and reported back to the Board on their discussions. The UBIDAC CEO also attended each meeting at which the strategic review was discussed to provide direct feedback to the Board on stakeholder concerns and considerations. How was our purpose considered as part of the decision? Considering relevant stakeholder interests is key to purposeful decision-making. Our new purposeful decision-making page was used to provide the Board with a detailed analysis of stakeholder considerations and impacts, using the Blueprint for Better Business framework. Having taken the decision to withdraw, the Board agreed this should be done in an orderly manner that was considerate to customers, colleagues, suppliers and other stakeholders. Actions and outcomes The Board continues to receive updates on the execution of the withdrawal. A binding agreement was subsequently reached with Allied Irish Banks p.l.c. on the sale of the majority of UBIDAC’s performing commercial lending portfolio. Factors considered: 52 NatWest Group 2021 Annual Report and Accounts Approving capital distributions Approving our refreshed values What was the decision-making process? During 2021, the Board recommended a final dividend, agreed to participate in a directed buyback of ordinary shares from Her Majesty’s Treasury, approved an interim dividend and agreed to commence an on-market buyback of ordinary shares, as well as providing outlook guidance to investors on capital distributions. The Board’s decisions were informed by the 2021 capital distribution plans as well as regular updates on NatWest Group plc’s financial and capital positions. A key focus of Board-level discussions was how surplus capital was being managed. The Group Board Risk Committee also reviewed all capital distributions proposals in advance of Board consideration, and recommended them to the Board for approval. How did the directors fulfil their duties under section 172? How were stakeholder interests considered? Again, in taking decisions, the directors were mindful of their duties under section 172. For the dividend decisions the directors were particularly focused on whether the declaration of a dividend would support the long-term sustainable success of the company. The Board also sought advice from NatWest Group plc’s corporate brokers on investor expectations in respect of the outlook guidance. How was our purpose considered as part of the decision? The Board is aware that in taking decisions on capital distributions, it also needs to consider the financial implications of those decisions in terms of continuing to support customers and maintaining financial stability. Actions and outcomes The final dividend of 3 pence per ordinary share was approved by shareholders at the Annual General Meeting in April 2021 and an interim dividend of 3 pence per ordinary share was approved by the Board in July 2021. The outlook guidance on capital distributions was announced as part of the 2020 annual results in February 2021. It stated that, subject to market conditions, the company intended to maintain ordinary dividends of around 40% of attributable profit and aimed to distribute a minimum of £800 million per annum from 2021 to 2023 via a combination of ordinary and special dividends. This was updated by the Board in July 2021 which increased the outlook guidance for capital distributions from £800 million to £1 billion for 2021 and future periods (again subject to market conditions). In March 2021, the company participated in a directed buyback of ordinary shares from Her Majesty’s Treasury and in July 2021 the Board agreed to commence an on-market buyback of ordinary shares, further reducing the UK Government’s shareholding in NatWest Group plc. What was the decision-making process? In July 2021, the Board received an update on the work being undertaken to refresh our values and the related behavioural framework to provide greater alignment to our purpose and strategy. At that time, the Board confirmed its support for the refresh and noted that the final proposal would be brought back to the Board for approval. In December 2021, the Board was presented with detailed proposals from management seeking approval for the recommended refreshed values and behaviours. The paper explained the behavioural science and data-led approach that had been adopted and the range of stakeholders that had been engaged. The paper also set out the first draft of the people proposition that would be aligned to the refreshed values. The Board discussed the proposals and provided positive feedback on both the approach taken and the refreshed values. How did the directors fulfil their duties under section 172? How were stakeholder interests considered? The paper explained very clearly the stakeholder engagement that had been undertaken in developing the refreshed values and the draft people proposition, both in terms of the stakeholder groups consulted (which included colleagues, customers and communities) and the methods of engagement used (such as interviews with senior executives, workshops, focus groups, digital surveys, external partner review by Blueprint for Better Business and virtual engagement). A stakeholder overview also set out stakeholder impacts and a number of Board members provided direct input and feedback as part of the stakeholder engagement process. Colleagues were, understandably, the key focus of the Board’s discussions. How was our purpose considered as part of the decision? The refresh of our values was undertaken to provide greater alignment with our purpose and strategy and the Board acknowledged this as part of its discussions. Actions and outcomes The Board approved the refreshed values in December 2021 and noted the intention to launch them to colleagues, customers and communities in 2022. Factors considered: Factors considered: “The Board knows how important it is to engage with our stakeholders, to listen to them and to consider their interests during Board discussions and decision-making. Understanding the needs of our stakeholders is at the core of our purpose framework.” Howard Davies, Chairman 53 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Listening and responding to our customers We want to know what our customers think about us. It helps us better understand their needs and improve the products and services we offer. To achieve this, we have in place a framework of independent customer feedback surveys that measure satisfaction across our business segments. In terms of customer advocacy in 2021, Net Promoter Scores (NPS) for Retail Banking improved by six points for NatWest and seven points for Royal Bank of Scotland. Business Banking NPS remained flat. In Commercial Banking NPS declined by two points for NatWest and six points for Royal Bank of Scotland. Refer to page 56 for the full breakdown of scores. The insight from these surveys is reported at the most senior levels of the bank and plays a crucial role in how we address the evolving requirements of our customers. In 2021, we responded to customer feedback with a range of innovative solutions. Stakeholder focus areas Customers Customer trust NatWest 74% Q4 2021 76% Q4 2020 Royal Bank of Scotland 68% Q4 2021 61% Q4 2020 Source: Yonder reputation tracker, GB, trust amongst Retail Banking customers Listening, engaging and partnering with our stakeholders is vital for the success of our business. It helps us to address our operational impacts and improve outcomes for customers, society and the environment. In the following sections we detail some of the notable steps we have taken to respond to our stakeholders’ changing requirements during 2021. So that customers can settle payments easily between family and friends (without the need to share account details or hold cash), we launched ‘PayMe’. This service uses Payit, our Open Banking Payments solution, to request a payment from anyone who uses online or mobile banking and has a participating UK Bank account. Payment can be made via a link or QR code, which can be scanned by any device with a camera. Our approach to Open Banking and the innovative use of data has also created opportunities for reusing services and capabilities across NatWest Group products, making it simpler and quicker to develop and deploy them to our customers. For example, through Tyl, Payit and Mettle we will be able to offer a seamless, one-bank payments proposition, delivering personalised, smart insights for businesses so they can track sales, target customers and grow loyalty. Elsewhere, a new feature launched in 2021 in the mobile banking app to enable our retail and commercial customers to deposit cheques has swiftly become one of the app’s most used features – testament to both the demand for, and usability of the function. For our Commercial Banking customers, we also enhanced our digital platform offering ‘Bankline’, with new and improved functionality within the service. Making banking more accessible We recognise that our customers’ individual needs are all different. As such, we aim to make banking as accessible as possible for everyone, offering our customers the ability to choose from a variety of face-to-face, digital and remote options. We have more than 800 branches and 16,000 physical points of presence, including our ATM network and our relationship with the Post Office, which remain an important part of how we deliver services to our customers and communities. 54 NatWest Group 2021 Annual Report and Accounts Customers can now also take greater digital control of their finances through our mobile app, including the ability to open an account, check their credit score and apply for a mortgage. Our app is compatible with both Apple and Android accessibility features such as inverting colours and magnifiers, as well as biometric log-ins. We have also introduced a dark/ light mode for customers with visual impairments or dyslexia. Our AI virtual assistant, Cora supports customers via the ‘message us’ feature in the app, and our contact centre colleagues are just a click away with the ‘tap to call’ function. When our customers want the reassurance of a face-to-face conversation remotely, our video banking service is available. We offer customers who require additional support a range of accessibility services, such as accessible statements in braille, large print and audio CD. BT’s Relay UK service also supports customers with hearing impairments through a type-to-talk service, while accessible card readers, rubber signature stamps, braille card wallets and our talking ATM service are other key accessibility features. Combating financial crime Detecting and preventing financial crime to protect people, families and businesses is a key priority for NatWest Group. Along with other major banks and telecoms companies, we participated in a pilot scheme to introduce a hotline to help fight fraud across the industry and protect our customers from fraud and scams. Spearheaded by Stop Scams UK (SSUK), the phone number ‘159’ is designed to disrupt scams in which victims have been contacted or engaged by a scammer via phishing or impersonation. The number works by encouraging customers experiencing suspected fraud to stop, hang up and call 159, at which point they are directed to their bank. Supporting customers in vulnerable situations At any time, a customer may find themselves either in a vulnerable situation or caring for a loved one experiencing a vulnerability. The continuing impact of COVID-19 has meant that for many of our customers this was a reality in 2021. Our dedicated customer care line, which was set up in response to the pandemic, has continued to support a significant number of our customers in 2021. Our support service ‘Banking My Way’ continues to develop, with customers now able to tell us about the support they need by updating their details in the new mobile app function. In 2021, we continued to work with organisations such as ‘GamCare’ and the ‘Money Advice Trust’ to improve the support available to customers in vulnerable situations, connecting them to expert advice where appropriate. We also significantly expanded our referral programme with Citizens Advice, connecting customers to their advisers where we identify additional advice or vulnerability needs. In February 2021, with the domestic abuse charity SafeLives, we launched The Circle Fund. The Circle Fund, available for three years, supports SafeLives to provide small grants to help economic abuse victims and survivors to regain financial confidence and control. This follows from our announcement to donate £1 million for the fund in 2020. We know how important our branches are to our customers. But we also know that the ways in which our customers live, work and bank have altered dramatically in the past two years. To meet these changing needs and to help people, families and businesses to rebuild and thrive, we plan to turn our branches into sustainable local banking hubs. We want to provide our customers a space in the heart of our high streets with a range of specialist services, venturing beyond traditional banking to help break down barriers to enterprise and increase financial capability. Our Broadmead Bristol hub, which opened earlier in 2021, is the first example of this. Within the hubs, retail customers are able to connect face-to-face and learn more about financial education and how to best manage their money, and businesses can access expert advice and collaboration spaces. The hubs will also include enterprise zones, where potential and current customers can liaise with local enterprise managers and other specialists with access to initiatives such as ‘Women in Business’ or our ‘Accelerator’ programme. Among the other features are: dedicated events and learning spaces, which can also be used by local charities or community groups; customer hot desks offering free Wi-Fi; private consultation rooms, where we can provide confidential assistance to customers both face to face and digitally; and self-service areas with colleague assistance to support people with simple banking transactions quickly and conveniently. And from listening to our customers, we understand that managing the environmental impact of the space is vital. To help reduce waste and promote sustainability, we’ve incorporated recycled furniture, included water bottle refill stations for customers and removed paper marketing materials. We’ll also measure the climate impact of our new local banking hubs through the SKA and Energy Performance Certificate (EPC) assessments. 55 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Account opening Q4 2021 28 Q4 2021 14 Q4 2021 45 Q4 2021 25 Q4 2021 78 Dec 2021 74% Q4 2021 37 Dec 2021 68% Q4 2020 16 Q4 2020 16 Q4 2020 44 Q4 2020 22 Q4 2020 76 Dec 2020 76% Q4 2020 32 Dec 2020 61% Source: Strategic NPS benchmarking study run through InMoment Source: Strategic NPS benchmarking study run through InMoment Source: Strategic NPS benchmarking study run through InMoment Source: Strategic NPS benchmarking study run through InMoment Source: Operational NPS study run through InMoment Source: Yonder reputation tracker, GB, Trust among Retail Banking customers Source: Operational NPS study run through InMoment Source: Yonder reputation tracker, GB, Trust among Retail Banking customers Lending NatWest Mortgage Day-to-day servicing Royal Bank of Scotland Mobile Banking Online Banking Retail Banking Business and Commercial Banking Customer Trust Stakeholder focus areas continued Overall NPS NatWest Royal Bank of Scotland Business Q4 2021 -2 Q4 2021 -12 Q4 2020 -2 Source: MarketVue Business Banking from Savanta, England & Wales, businesses with a turnover up to £2m Q4 2020 -13 Source: MarketVue Business Banking from Savanta, Scotland, businesses with a turnover up to £2m Q4 2021 22 Q4 2021 21 Q4 2020 24 Source: MarketVue Business Banking from Savanta, England & Wales, businesses with a turnover up to £2m Q4 2020 27 Source: MarketVue Business Banking from Savanta, Scotland, businesses with a turnover over £2m Commercial Banking: Retail Q4 2021 13 Q4 2020 7 Source: Strategic NPS benchmarking study run through InMoment, England & Wales Q4 2021 -2 Q4 2020 -9 Source: Strategic NPS benchmarking study run through InMoment, Scotland Customers continued Our brands are our main connection with customers. We track customer advocacy for our key brands and services using the Net Promoter Score (NPS), a commonly used metric in banking and other industries across the world. 56 NatWest Group 2021 Annual Report and Accounts Investors Transparency and engagement Private investors We engaged with our private investors through our Annual General Meeting (AGM), virtual shareholder events, and our annual and strategic report communications. In light of ongoing restrictions related to the COVID-19 pandemic, investors were not be able to attend the 2021 AGM in person. However, we held a live virtual shareholder event a week prior to the AGM. Investors were invited to submit questions either in advance of, or during, the virtual event and the answers to questions on key themes were displayed on our website. In addition, we held two further virtual events in July and November 2021. At these events, we spoke about the work NatWest Group is doing to support and stimulate enterprise, why it was so important for us to sponsor COP26 and how tackling climate change is at the core of our purpose. These virtual shareholder events remain a key component of our stakeholder engagement programme and provide an opportunity for private investors to hear from, and ask questions of, Board members and senior management on topics such as innovation, enterprise, sustainability and our financial performance. It is our intention to deliver further virtual events in 2022. In addition, we published investor updates on the topics of ‘Championing Enterprise’ and ‘Our Purpose: Beyond COP26’. These updates provided information on initiatives such as the relaunch of our enterprise programme, the additional £1 billion in funding to help support female-led businesses in the UK recover from the pandemic, the introduction of our carbon footprint tracker for our mobile app and our launch of the UK’s first carbon-neutral podcast. Our investor updates and recordings of our virtual events can be found on our website. Institutional investors We have a well-established programme of engagement with our institutional investors. The financial year begins with a presentation on our annual results in February, hosted by our Chairman, CEO and CFO. This live event includes an interactive Q&A session to give research analysts and investors an opportunity to ask questions and engage with our management team. We then follow up quarterly with presentations to the market when we announce each set of financial results in April, July and October. While these events could not be held face to face in 2021, we were able to host a live presentation and Q&A session via Zoom, enabling the same level of interaction in a virtual forum. In addition to the quarterly results presentations, we hosted a programme of virtual one-to-one and group meetings with institutional investors from around the world. Across our management team, we hosted over 250 meetings with investors covering key topics such as progress against our financial targets, strategic priorities, innovation, ESG and industry challenges. While the total number of one-to-one meetings was lower than the prior year when we saw an unusually heightened demand for time with management due to the pandemic, our CEO and CFO engaged regularly with UK Government Investments and our largest active institutional investors throughout the year. To enhance our investor relations programme during a challenging time when we were unable to meet face to face, we hosted a series of ‘Meet the Exco’ and business spotlight presentations via Zoom. These events gave analysts and investors the opportunity to hear from key members of our executive team as they discussed their priorities for the year ahead and to ask questions live over Zoom. Environmental, Social and Governance (ESG) issues were regularly discussed at our one-to-one meetings and we also engaged with specialist socially responsible investors through a programme of meetings with ESG analysts from institutional investors, presentations at ESG-focused conferences and increased interactions with sustainability rating agencies. Alongside the virtual shareholder events mentioned above, members of our Board hosted a live virtual corporate governance forum. This gave investors the opportunity to hear an update on Board priorities in 2021 and the opportunity for a discussion on corporate governance topics directly with our non-executive directors. A key development in terms of the transparency of our business during 2021 was the enhancement of two key areas of our non-financial reporting. In recognition that climate change is a critical global issue which has significant implications for our investors (as well as our customers, employees, suppliers and partners), we produced our first standalone Climate-related Disclosures Report in February 2021. This comprehensive document was a material step towards alignment with the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) recommendations and recommended disclosures. The report covered our climate strategy and associated ambitions, governance, scenario analysis, risk management and climate-related metrics. We also produced our first Environmental, Social and Governance Supplement – providing investors and other stakeholders with a deeper understanding of the work that we are doing to understand and manage issues facing our business, customers, communities and society as a whole. 57 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Colleagues Helping our colleagues to thrive We want NatWest Group to be a great place to work. By offering a fulfilling job, a healthy workplace, fair rewards, excellent development and great leadership, we believe together our colleagues can thrive and unlock the full potential of NatWest Group. Our People Pledge sets out commitments and initiatives in direct response to what colleagues tell us is important to help them in their jobs. Throughout 2021, we have worked with colleagues to champion their potential across all five parts of the pledge: ‘Help you develop your skills’; ‘Support your wellbeing’; ‘Help customers thrive’; ‘Create inclusive and connected teams’; and ‘Help you make a difference’. The pandemic has drastically altered how we work and has changed (perhaps forever) the relationship between employers and employees. We listen to our colleagues and use this insight to attract, engage and retain the best talent for the future. Our colleague listening strategy – which includes: our colleague opinion surveys; a Colleague Advisory Panel (CAP) that connects colleagues directly with our Board; the ‘Colleague Experience Squad’, a group of colleagues who volunteer to provide feedback on colleague products and services; and Workplace, our social media platform – contributes to our deeper understanding of colleague sentiment. We also track metrics and key performance indicators which we can benchmark with sector and high-performing comparisons. Over 46,700 colleagues (81%) participated in our September 2021 Our View survey. The results showed that colleague sentiment remains strong, despite the pandemic. Lead measures in culture, purpose, inclusion and building capability showed a continued and sustained year-on-year improvement (+1 percentage point each). Across all 15 measured categories, NatWest Group sits an average of 11 percentage points above the Global Financial Services Norm (GFSN) and five percentage points above the Global High Performance Norm (GHPN). (1) Regular interactions with our employee representatives such as trade unions, elected employee bodies and works councils are a vital means of transparency and engagement for us. We frequently use these sessions to discuss developments and updates on the progress of our strategic priorities. In 2021, topics included ‘ways of working’ and ‘health and safety in the context of the pandemic’. We are also committed to respecting our employees’ rights of freedom of association across all our business. In addition, our CAP was set up in 2018 to help promote colleague voices in the boardroom. For full details, refer to the Corporate governance report and ESG Supplement. Performance and reward Our approach to performance management provides clarity for our colleagues on how their contribution links to our purpose, with all colleagues set performance goals across a balanced scorecard of measures. We continue to ensure employees are paid fairly for the work they do and are supported by simple and transparent pay structures in line with industry best practices. We keep our policies and processes under review to ensure we do so. In general, the scores from the reward category in Our View declined since 2020, although in all but one category they remain above the GFSN. We will be looking to address this, subject to performance, in 2022. In the UK, our rates of pay continue to exceed the Living Wage Foundation benchmarks and we ensure employees performing the same roles are paid fairly. We ensure colleagues have an awareness of financial and economic factors affecting our performance through quarterly ‘Results Explained’ communications and ‘Workplace Live’ events with our Group Chief Executive Officer and Group Chief Financial Officer. Refer to our Directors’ remuneration report for full details on our remuneration policies and employee share plans. Helping colleagues realise their potential At NatWest Group, we exist to champion potential and help people, families, and businesses to thrive – helping them at every stage of their lives. We’ll achieve our ambition to be a relationship bank for a digital world by working together as one team, across NatWest Group. Investing in our workforce in a variety of ways helps us achieve that. To support this, we’re building a learning organisation that tests ideas and learns every day – helping colleagues develop the capabilities to stay relevant and employable for the future. The COVID-19 pandemic has accelerated the pace of change, and it is likely that predictions made for 5-10 years’ time – working seamlessly alongside robotics, smarter uses of AI and collaboration across organisations and boundaries – will become the norm more quickly. This will have a significant impact on how people work and the capabilities they will need to thrive in this new world. At NatWest Group, we believe that we have an obligation to help build skills across our industry. Working with the Financial Services Skills Commission, we led the build of an industry- wide skills framework that is available via an online tool to all financial services organisations in the UK. Its purpose is to create a consistent language around skills across the industry – which in turn will support mobility and is in line with our commitment to support wider communities. In 2021, we provided all colleagues with access to build future skills through the NatWest Group Learning Academy, bringing together learning opportunities and curated content into a single place. This supports our commitment for all colleagues to be upskilled in future-focused skills by 2025. Around 80% of colleagues have used it since it launched in 2020 and, in 2021, we’ve offered new topics including cybersecurity and innovation. It has helped us to increase colleague learning completions by 10%, with our target (aligned to the UN Sustainable Development Goals) to increase them by 50% at the end of 2023. As well as increasing our colleagues’ learning and development, we’re also focused on ensuring that it’s the right kind. We have made a commitment that half of all learning at NatWest Group is focused on building critical skills for the future. We have prioritised data and digital capability and have given our colleagues access to a range of opportunities to build these skills through the NatWest Group Academy. Early Stakeholder focus areas continued (1) NatWest Group Our View results exclude Ulster Bank RoI. 58 NatWest Group 2021 Annual Report and Accounts Supporting our colleagues’ wellbeing To be part of NatWest Group means being part of something bigger than ourselves, where the strength of our culture underpins everything we do; an organisation where we all learn, grow, thrive and support each other. A vital part of this is having a fully embedded wellbeing strategy; refer to our ESG Supplement for full details. progress is positive with data learning up 134% and digital learning up 31%. We also continue to invest in our people to do their job, with 99.6% of our front-line colleagues professionally accredited within their first 18 months in role. We are committed to reskilling colleagues whenever possible. The Mobility Hub supports with redeploying colleagues and reskilling them for future work. In 2021, we commenced our first formal reskill programme, with 20 colleagues who were at risk of redundancy taking the opportunity to reskill as software engineers. Of these, 17 accepted permanent positions. In 2021, we launched our global Talent Academy to help identify and develop colleagues with high potential through a programme of challenging and purposeful development opportunities. For the first time, colleagues were encouraged to self-nominate regardless of role, level, working pattern and location. Following a robust assessment process, 3,911 colleagues were accepted on to the programme. The cohort is 53% male and 47% female, and 23% of the successful applicants come from a Black, Asian and Minority Ethnic background, thus providing NatWest Group with a diverse talent pipeline for the future. As we committed to, we hired over 1,000 interns, graduates and apprentices in 2021; including 205 colleagues who were recruited through our social mobility apprentice programmes and we aim to hire a further 1,100 interns, graduates and apprentices in 2022. We are also focusing on building our leaders’ capabilities, which is critical to delivering our purpose-led strategy. Our ‘Determined to Lead’ programme has helped focus and energise our people leaders, cultivating a framework for common leadership behaviours and practices. In addition, our leadership, talent and career support activity is enabled by our new Leadership and Coaching Faculty. This resource gives our leaders access to clear thinking, relevant frameworks and problem-solving approaches at the point of need. Supporting this, our succession planning processes enhance our framework to spot, develop and mobilise a diverse pool of our most promising talent. Successors are assessed and developed against a purpose-led profile that defines the behaviours, traits and drivers associated with success in a purpose-led role and organisation. Our Succession Council gives bank ExCo successors the opportunity to engage directly with the CEO and other ExCo members to ensure they have the potential and aspiration to reach ExCo level. Our most talented senior leaders are given exposure through Board & Talent sessions with interactive sessions discussing topics that are shaping the direction of NatWest Group. Following the success of our first NatWest Junior Management Team (JMT), a second cohort was selected in September 2021. The JMT mirrors the NatWest Group Executive Committee and brings a fresh perspective and voice to that team. They also deliver key strategic projects to broaden their experience, exposure and connections across NatWest Group. Refer to our ESG Supplement for full details on how we support colleagues to realise their potential. Diversity, equity and inclusion Creating a diverse, equitable and inclusive workplace is integral to fulfilling our purpose. It enables us to truly connect with, and serve, our diverse customers and communities with the products and services they need. We remain committed to progressing our diversity, equity and inclusion strategy, focusing on becoming gender balanced, ethnically diverse, disability smart, LGBT+ innovative and an inclusive workplace. Inclusive workplace Colleague sentiment on inclusivity continued to increase in 2021, reaching a score of 93 percentage points. We are 14 percentage points above the GFSN and 10 percentage points above the GHPN. Although sentiment has increased in all colleague groups, our focus is now on where scores may vary for our minority colleague groups. Our 2021 Inclusion Week showcased diversity, equity and inclusion across our business. This offered time to reflect on why we need a diverse and inclusive workplace, to celebrate the progress we are making, and challenge ourselves to do more. We also continued to focus on behavioural change through new and enhanced learning modules. These include our mandatory learning and additional optional learning (such as ‘Choose to Challenge’, which educates colleagues on the importance of challenging behaviours that are not inclusive). For more details refer to our ESG Supplement. We continued to support our employee-led networks, which have around 24,000 members globally. These include: Gender, Multicultural, Disability, Rainbow (LGBT+), Armed Forces, Families & Carers, Sustainable Futures, and Aspire. In 2021, NatWest Markets Americas’ Energized Employees Network (and sub-networks) focused on uniting and empowering colleagues by running several events and initiatives, including ‘One Small Step: The George Floyd Verdict’ hosted by the Black Professional Network and ‘New Ways of Working and the Impact on Women’ hosted by the Gender Network. We have been listed in the ‘Working Families Benchmark Top 10 Employers’, showing that we are among those leading the way in building a flexible, family-friendly workplace. We have also been accredited as a ‘Good Work Standard’ employer at Excellence (highest) level by the Mayor of London’s office. We marked ‘South Asian Heritage Month’ with cultural celebrations and awareness campaigns that define the diverse cultural tapestry of our South Asian colleagues. We ran events (such as wedding traditions across different faiths) and created a memory wall for colleagues to share personal histories. For the third consecutive year, NatWest Poland received the highest score in ‘Diversity IN CHECK’ – a certification granted to employers well advanced in managing diversity and inclusion considerations. References to ‘colleagues’ in this Strategic report mean all members of our workforce (for example, contractors, agency workers). 59 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Gender balanced Our Board composition exceeds the FTSE Women Leaders target with a figure of 36% female representation. We have female representation of 29% on our executive management team, with a female Chief Executive Officer, Chief Financial Officer, Chief Marketing Officer, Chief People & Transformation Officer and Chief Governance Officer & Company Secretary. We have a target to have full gender balance in our CEO-3 and above global roles by 2030. At 31 December 2021, we had, on aggregate, 38% women in our top three layers, a decline of 1% since 31 December 2020. While representing an increase of 9% since targets were introduced in 2015, we know we have more to do and we continue to focus on the recruitment, retention and advancement of women to meet our 2030 target. The mean gender pay gap for NatWest Bank is 30.1% (median: 34.2%) and the mean gender bonus gap is 26.0% (median: 12.5%). The statutory bonus gap calculated in line with regulation is the number including recognition vouchers (mean 50.5%; median 92.9%). This means that even colleagues who received a small recognition voucher – for example a £10 voucher – are included in the calculations. Most colleagues in our more junior jobs only receive fixed pay – a change made to provide more certainty over earnings; and this means that many colleagues included in the statutory bonus gap calculations only received a recognition voucher. We currently have a higher proportion of women in these roles. We therefore believe the figures excluding recognition vouchers, 26.0% (median: 12.5%), are the most accurate reflection of our gender bonus gap today. In line with being a signatory to HM Treasury’s ‘Women in Finance Charter’, we are committed to implementing its four key industry actions for gender balance across financial services. Executive Sponsor for Gender, David Lindberg (CEO, Retail Banking), is also part of the external Accountable Executive Taskforce for the Charter. In 2021, we were listed as a ‘Times Top 50 Employer for Women’ for the 11th consecutive year. For the fifth year, we’ve retained our place in Bloomberg’s ‘Global Gender Equality Index’. NatWest Group India was recognised as the ‘Winner of Gender Inclusive Workplace’ by ‘UN Women Asia Pacific Awards 2021’ for the region and as a ‘Top 10 Best Workplaces for Women 2021’, awarded by the Great Place to Work (GPTW) Institute, India. Elsewhere, NatWest Poland won the ‘Fair to Women’ award, in recognition of their initiatives and, more specifically, for supporting women in technology. We continued our long-standing collaboration with Women in Banking and Finance (WiBF), a volunteer-led organisation which aims to connect members to thought leaders, business leaders and women at all stages of their careers. Alison Rose was presented with WiBF’s first President’s Award, recognising her contribution to financial services over many years. Ethnically diverse Introduced in 2018, our ethnicity target is to have 14% Black, Asian and Minority Ethnic colleagues in our top four layers (CEO-4 and above) in the UK by 2025. At 31 December 2021, Stakeholder focus areas continued of 86% of colleagues who disclosed their ethnicity in the top four layers in the UK, we have on aggregate 11% Black, Asian and Minority Ethnic colleagues. This represents a 3% increase since targets were introduced. Overall, of those who disclose their ethnicity, 17% of colleagues in the UK identify as Black, Asian and Minority Ethnic. In line with our commitment to transparency under the UK Government’s Race at Work Charter and in anticipation of a requirement to disclose our ethnicity pay gap, we have voluntarily disclosed our ethnicity pay gap for NatWest Group combined UK & Ireland. The mean ethnicity pay gap for NatWest Group is 9.3% (median: 13.0%). The mean ethnicity bonus gap for NatWest Group is 24.2% (median: 17.9%). These bonus gap numbers are excluding recognition vouchers, the numbers including recognition vouchers are 32.8% (median 46.3%). We are proud to be placed in the ‘Top 10 Outstanding Employers’ as part of ‘Investing in Ethnicity Employer’s Maturity Matrix’, a position we have held since its inception in 2018. The Matrix creates a framework and provides a benchmark to assist employers on their ethnicity journey. In 2020, we launched the Racial Equality Taskforce to listen, learn and better understand the barriers faced by colleagues, customers and communities from Black, Asian and Minority Ethnic backgrounds. The Taskforce set out ten commitments in the Banking on Racial Equality report, including a new UK target to have Black colleagues occupying 3% of UK roles (CEO-5 and above) by 2025. At 31 December 2021, we have 1.5% of colleagues who identify as Black in the top five layers in the UK. Overall, of those who disclose their ethnicity, 2% of our colleagues in the UK identify as Black. In 2021, we published a first anniversary update on the report, for full details refer to natwestgroup.com. In October, we celebrated Black History Month 2021 with a theme of Black Excellence. This provided opportunities to celebrate Black people striving to be the best version of themselves, and spotlight Black role models excelling in their chosen fields. We ran events throughout the month, with a keynote lecture from Lord Simon Woolley, supported by our Executive Sponsors for Ethnicity Simon McNamara (Chief Administration Officer) and Nigel Prideaux (Chief Communications Officer). In 2021, we relaunched our Ethnicity Advisory Council to support our ethnicity and inclusion strategy. Chaired by Simon McNamara, nominated diversity and inclusion specialists from different industries will provide critical challenge, guidance, and direction on our strategy. Disability smart In 2021, we re-launched a career development programme on a virtual platform for colleagues with a disability to explore common barriers which impede progress and provide access to tools and techniques to help overcome them. We undertook a discovery session with Lexxic (specialist psychology consultants) to help us create an environment where neurodiversity can flourish. This helped inform us of areas for improvement, with the aim of exploring how to 60 NatWest Group 2021 Annual Report and Accounts become an even more neuroinclusive employer. We have a roadmap in place, with five key areas: governance and strategy; awareness and education; positive management culture; attracting and retaining neurodiverse talent; and future ways of working. Since 2019 we have sponsored the Business Disability Forum’s (BDF) Scottish Disability Conference, bringing together organisations to support each other in becoming disability smart. In 2021, the conference ran virtually and consisted of workshops which facilitated group discussions on topics including disability and diversity in the wake of COVID-19, how to have conversations about disability at work, and supporting neurodiverse colleagues in the workplace. The workshops had more than 330 attendees. In 2021, we refreshed our disability smart e-learning module to help colleagues understand how we can be more inclusive and accessible for all colleagues and customers. The module included an overview of why accessibility is important from our Executive Sponsor for Disability, Oliver Holbourn (Director of Strategy & Ventures) and featured colleagues sharing experiences. Our efforts to be disability smart are recognised through a gold rating in the BDF benchmark and Leader (the highest level) status in the UK Government’s Disability Confident Scheme. In India, we launched an On-Demand Sign Language programme to facilitate access to sign language interpreters for colleagues with hearing impairments for one-on-one discussion and team meetings. NatWest Group India received special recognition for disability smart work practices at the GPTW Diversity & Inclusion Award Summit 2021. In Poland, we ran a ‘Becoming Disability Smart’ project to increase support for colleagues with disabilities. A new assistive technology and workplace adjustment process was introduced, as well as updated safety arrangements for disabled colleagues. LGBT+ innovative In 2021, we celebrated Pride by running a host of different events that celebrated some of the successes we’ve had with progressing our work. We also participated in the UK Stonewall Workplace Equality Index to understand what more we can do to support our LGBT+ colleagues and customers. This will provide us with a definitive benchmark and allow us to assess our achievements and progress on LGBT+ equality going forward. Our Executive Sponsor for LGBT+, Jen Tippin (Chief People & Transformation Officer), is guiding and shaping our roadmap for the future. During 2021, we created a new LGBT+ e-learning module to be launched in 2022. The module focuses on establishing colleagues’ understanding of various subjects across the gender identity and sexual orientation spectrum. Our global learning uses colleagues’ perspectives and insights from external partners to enhance understanding. We also reviewed and updated our international travel safety guidance for LGBT+ colleagues and our family friendly policies to ensure language and scenarios are LGBT+ inclusive. As a founding partner of the British LGBT Awards in 2015, we continued our support in 2021 as a sponsor. The awards 2021 UK ethnicity profile by level #Black, Asian and Minority Ethnic #White %Black, Asian and Minority Ethnic CEO-3 and above combined 52 566 8 CEO-4 262 2,018 11 CEO-5 886 5,171 15 Target population (CEO-4 and above combined) 314 2,584 11 () 2021 Global gender profile by level #Women #Men %Women CEO 1 – 100 CEO-1 3 12 20 CEO-2 48 80 38 CEO-3 270 429 39 CEO-4 1,298 1,863 41 Target population (CEO-3 and above combined) 322 521 38 () Note: Our reporting reflects our organisational (CEO) levels. This is more reflective of our organisational structure and enables comparison to be made externally. To maintain integrity, we remove colleagues from our reporting that sit in CEO-3 and above that do not hold leadership or influential roles. For ethnicity: Our reporting only includes colleagues who have disclosed their ethnicity. We report CEO to CEO-3 as a total to comply with GDPR restrictions. For gender: There are differences between CEO and CEO-1 reporting versus reporting on the gender balance of our Executive Management Team. Female representation on our Executive Management Team is 29% Male Female Directors of the company 7 4 Executive employees 72 24 Director of subsidiaries 189 68 Permanent colleagues (active and inactive) 30,000 29,500 There were 353 senior managers (in accordance with the definition contained within the relevant Companies Act legislation), which comprises our executive population and individuals who are directors of our subsidiaries. () Within the scope of EY assurance. Refer to page 78. spotlight organisations working to better meet the needs of LGBT+ people. In 2021, Jen Tippin delivered a keynote speech at the awards and presented the lifetime achievement award. NatWest Group India received special recognition for LGBT+ workplace practices at the GPTW 2021 Diversity & Inclusion Award Summit. In Poland, we once again hosted and organised the NatWest LGBT+ Business Awards in recognition of organisations and influencers making a real difference to the lives of LGBT+ people in a very challenging climate. 61 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Stakeholder focus areas continued Young people have been hit hard by the pandemic. From disrupted study time to reduced job prospects, the current generation of pupils and school leavers will be feeling the shockwaves of COVID-19 for a long time to come. – Bless Chiwanda Stronger together Making a positive contribution to the communities in which we live and work is integral to delivering on our purpose. The last two years have been incredibly tough for many of our customers, but we have also seen the remarkable collective support that happens when people come together. We firmly believe NatWest Group has a role to play in this process, positively impacting communities at both a local and national level. Focused on our communities During the year we worked with the Centre for Social Justice (CSJ) to carry out dedicated research into community strength: ‘Pillars of the Community’ explored what government, business and the third sector can do to strengthen local communities as the UK recovers from the pandemic. The research identified the barriers that prevent local communities from thriving and set out a range of policy initiatives that could help to overcome these barriers. We were also once again in regular contact with our communities, including through our regional boards, leveraging existing relationships and forming new ones. Our seven regional boards are key to delivering the bank’s strategy at a local level and championing potential across the UK. With membership drawn from across the bank, the local insight and strong teamwork of the boards is vital in demonstrating our purpose to the communities we are part of. The boards have been particularly important during the pandemic, bringing people together to help serve our customers and support our colleagues. In 2021, the regional boards continued to focus on engaging with colleagues, customers and communities across the nations and regions of the UK, particularly in the areas of climate, learning and enterprise. Real-life support We believe in supporting our customers with practical measures that can help them in their day-to-day lives. In doing so, we can provide part of the vital infrastructure that communities need to live and thrive, such as our mobile banking fleet, which visited nearly 600 communities every week in 2021. In response to the pandemic we have changed the way we interact with our customers and communities, launching video banking so our customers can meet with us from the comfort of any location they choose. Elsewhere, NatWest Group’s collaborations with Business in The Community (BITC), Hatch and Digital Boost are another vital link with our business communities, providing access to networks, sponsorship and mentorship opportunities. Helping young people into work In 2021, we launched our ‘CareerSense’ programme – which provides free-to-access tools to develop critical skills and support youth employability prospects for 13 to 24-year-olds – especially for those from low-income families and Black, Asian and Minority Ethnic backgrounds. In November 2021, we also Communities Our CareerSense programme Supporting young people into workplaces Bless Chiwanda Journey Developer welcomed our first cohort to the CareerSense ‘Find Your Path’, an initiative for young people not in employment, education or training, which has been created and delivered in partnership with regional youth delivery partners. The scheme helps young people to benefit from a range of skills-development sessions, mentoring and paid work experience. To support the CareerSense programme we have developed the mycareersense.com website, which offers access to a range of free tools and resources, as well as the learning content accessed through our NatWest Learning Academy. In addition, we launched an external learning academy ‘Learning with NatWest’ in November 2021 which supports communities, families and businesses (both customers and non-customers), focusing on five key capabilities: climate; employability; entrepreneurship and enterprise; future skills; and financial capability. For more information, please refer to our NatWest Group ESG Supplement. So, when NatWest Group launched the CareerSense programme in 2021, I saw it as great way of offering some practical help, and welcomed the opportunity to get involved. Along with almost 600 of my colleagues, who have also volunteered, I became a CareerSense Ambassador: a role that has involved me supporting a local high school in Edinburgh, running sessions for S4 pupils. The experience has been great. Not just because of the positive feedback from the school, but because I’ve been able to see so many of the young people get engaged about their next steps. It’s also given me the opportunity to reflect on my own personal development. To think about the skills and behaviours I use daily to deliver my work, while also making a positive change to my local community. Since its launch in June 2021, over 8,200 pupils have registered to attend a skills exploration workshop. That’s a lot of young people getting the career support they need. 62 NatWest Group 2021 Annual Report and Accounts Our Supplier Charter As a purpose-led business, we foster strong relationships with all our key stakeholders, including our supply chains. In 2022, our ambition is to quantify the impact of all supplier activities through a supplier engagement framework. A key milestone towards this ambition was the launch of the NatWest Group ‘Supplier Charter’ in September 2020. The charter sets out our aims and expectations in the areas of ethical business conduct, human rights, environmental sustainability, diversity and inclusion, the Living Wage and prompt payment. It details what we expect from our suppliers, but also outlines our own commitments in these key areas and the outcomes we aim to achieve by working together. In 2021, led by NatWest Group’s Chief Administrative Officer and with collaboration from subject matter experts and policy owners, we completed our first annual review of the charter. Central to the aims of charter, we worked with EcoVadis – a leading organisation providing third-party, evidence-based assessments of sustainability performance. EcoVadis is helping us to understand and measure our own performance and that of our suppliers against the charter, enabling us to identify social, environmental and ethical improvements. NatWest Group has made significant progress in the first year of working with EcoVadis, with 834 suppliers invited to take part in the assessment, representing over 85% of our in-scope supplier spend. During 2021, NatWest Group Supply Chain Services has delivered the biggest and fastest deployment of EcoVadis supplier sustainability assessments in the UK. Continuing to support our suppliers We are determined to pay our suppliers promptly for the services that they provide to us. Our standard payment terms are normally 30 days. However, from earlier on in the COVID-19 pandemic and since, we have maintained immediate payment on receipt of goods and services whenever possible. This supports our suppliers during this difficult financial period and goes beyond our commitment undertaken as a signatory to the UK Government’s ‘Prompt Payment Code’, which requires payment to be made in 60 days. Ongoing dialogue We operate in a highly regulated market which continues to evolve in scope. As such, we understand the need to have an ongoing, constructive and open dialogue with all relevant regulatory bodies. During 2021, this included bilateral responses to material consultations or other requests for comment/input issued by various government, regulatory and standard-setting bodies. Key consultations that NatWest Group has responded to bilaterally include the FCA’s Consumer Duty proposals; its work on diversity and inclusion; the UK Government’s plans for audit and corporate governance reform; the independent review of Ring-fencing and Proprietary Trading; and the Payment Systems Regulator’s proposals on Authorised Push Payment (APP) scams. We formally engage with our regulators, at both senior executive and Board level, as well as via individual non- executive directors, through continuous assessment and proactive engagement meetings. Most notably, during 2021, we kept our regulators fully informed of any contingencies and impacts on our operations as a result of COVID-19. This has been particularly relevant for monitoring compliance with the Financial Conduct Authority’s Senior Managers and Certification Regime to ensure that all governance arrangements across NatWest Group have been kept under review in the context of the pandemic. We have also engaged with regulators during policy proposal phases on a number of occasions to help inform priorities. Suppliers Regulators 63 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Climate-related disclosures overview Climate-related disclosures We recognise that climate change is a global issue which has significant implications for our customers, employees, suppliers, partners, investors and therefore NatWest Group itself. Our ambition is to be a leading bank in the UK helping to address the climate challenge. We have set ourselves the challenge to halve the climate impact of our financing activity by 2030 and to become net zero (1) by 2050. NatWest Group confirms that it has: – made climate related financial disclosures for the year ended December 31, 2021 that it believes are consistent with the Task Force on Climate-related Financial Disclosures (“TCFD”) Recommendations and Recommended Disclosures (as defined in Appendix 1 of the Financial Conduct Authority Listing Rules) and summarised in the tables on pages 66-69; – set out these disclosures in its “2021 NatWest Group Climate-related Disclosures Report” (the “Climate Report”), published today (and available on natwestgroup.com); and – adopted this approach given the detailed and technical content of the climate-related financial disclosures as it believes these presentations best present its climate related financial disclosures in a decision-useful manner to the users of those reports. (1) Science Based Targets initiative (SBTi) defines net zero as reducing Scope 1, 2 and 3 emissions to zero or to a residual level that is consistent with reaching net-zero emissions at a global or sector level in eligible 1.5 degree-aligned pathways. (2) Upstream operational value chain emissions are all the indirect Scope 3 emissions required for our operations to occur, including emissions from our suppliers, energy creation and transport to our facilities, and our mail. Downstream operational value chain emissions are all of the indirect Scope 3 emissions associated with our operations during and after serving our customers, including customer transport to and from our facilities, how our products are used and how they are disposed of. Accelerating the speed of transition to a net-zero economy Helping to end the most harmful activity Championing climate solutions Net-zero emissions for our operational value chain (2) Embedding climate into our culture and decision-making Net zero by 2050 64 NatWest Group 2021 Annual Report and Accounts Climate ambition statements A leading bank in the UK helping to address the climate challenge We have an ambition to achieve net zero by 2050, this includes: – Financed emissions : Greenhouse gas emissions from loans and investments activity, attributable to NatWest Group. – Assets under management: Greenhouse gas emissions associated with our discretionarily managed assets. – Our operational value chain: Greenhouse gas emissions related to the upstream and downstream activities associated with our operations. Helping to end the most harmful activity – We plan to phase out of 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. Embedding climate into our culture and decision-making – Each year, we plan to include targets for executive remuneration that reflect our latest climate ambitions. – We have an ambition to at least halve the climate impact of our financing activity by 2030 and align with the 2015 Paris Agreement. To do this, we plan to quantify our climate impact and set sector-specific targets by the end of 2022. – We plan to continue the integration of the financial and non-financial risks arising from climate change into our enterprise wide risk management framework (EWRMF). Net-zero emissions for our operational value chain – We have a target to reduce our direct (3) own operations carbon footprint by 50% by 2025, against a 2019 baseline. – We plan to reduce the carbon footprint for our wider operational value chain by 50%, against a 2019 baseline, by 2030 and achieve net zero by 2050. – We plan to use only renewable electricity in our direct own global operations by 2025 (RE100) and improve our energy productivity 40% by 2025 against a 2015 baseline (EP100). – We plan to install electric vehicle charging infrastructure in 15% of spaces across our UK portfolio by 2030 and upgrade our fleet of 300 vehicles to electric by 2025 (EV100). Accelerating the speed of transition to a net-zero economy Championing climate solutions – We have a target to provide £100 billion Climate and Sustainable Funding and Financing between 1 July 2021 and the end of 2025. – We have an ambition to support our UK mortgage customers to increase their residential energy efficiency and incentivise purchasing of the most energy efficient homes, with an ambition that 50% of our mortgage portfolio has an EPC rating of C or above by 2030. – We plan to collaborate cross industry and create products and services to enable customers to track their carbon impact. – We plan to reduce the carbon intensity of our funds and discretionary portfolios by 50% by 2030 and to achieve net zero on discretionarily managed assets by 2050. For our full report, refer to the 2021 Climate-related Disclosures Report (3) Our Scope 1, Scope 2 and Scope 3 (paper, water, waste, business, travel commuting, work from home). Excludes upstream and downstream emissions from our wider operational value chain as well as financed emissions. Net zero by 2050 65 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Governance NatWest Group’s governance around climate-related risks and opportunities The Board’s oversight of climate-related risks and opportunities Summary – Board monitoring and oversight of climate-related risks and opportunities is supported by clear roles and responsibilities for the Board and Board Committees, as well as regular management reporting on climate strategy, ambition, and risk management activities. – Key Board level decisions and areas of discussion and/or challenge related to climate strategy, climate scenario analysis, risk appetite, reporting controls and embedding climate measures within remuneration and performance structures. – The Boards of NatWest Group’s principal subsidiaries exercised oversight of key climate-related risks and opportunities through regular risk reporting and management updates. Future priorities – Continue to oversee progress against NatWest Group’s climate ambitions and targets, particularly long term reduction in financed emissions and development of transition plans to support this. – Continue to build knowledge at Board level and to support the directors in addressing and overseeing climate-related risks within NatWest Group’s overall business strategy and risk appetite. References NatWest Group plc 2021 Climate-related Disclosures Report – sections 2.1, 2.2. Management’s role in assessing and managing climate-related risks and opportunities Summary – NatWest Group CEO and Chief Risk Officer jointly share accountability under the Senior Managers and Certification Regime for identifying and managing the financial risk of climate change. – This responsibility is delegated amongst the Executive and senior leadership teams. Cross-bank climate-related groups, advisory teams and committee structures support with collaboration, escalation, and additional controls. – The Climate Change Executive Steering Group acts as the primary management forum responsible for overseeing direction and progress on NatWest Group’s climate-related commitments. Future priorities – Further embed operating models and business processes to support the management of climate-related risks and opportunities, including coordination of actions to support further development and execution of climate transition plans. – Continue to maintain a One Bank approach to climate strategy development and transition plans, including at subsidiary levels. References NatWest Group plc 2021 Climate-related Disclosures Report – sections 2.1, 2.3. Climate-related disclosures overview NatWest Group publicly committed to support the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) recommendations in 2017. Our first stand-alone 2020 Climate-related Disclosures Report provided updates on climate as a key focus area for NatWest Group. During 2021, we have continued to progress our work and the tables on the following pages summarise the content of the 2021 Climate-related Disclosures Report. Please refer to the NatWest Group plc 2021 Climate-related Disclosures Report for further detail. Disclosures summary 66 NatWest Group 2021 Annual Report and Accounts Strategy The actual and potential impacts of climate-related risks and opportunities on NatWest Group’s businesses, strategy and financial planning Climate-related risks and opportunities identified over the short, medium and long term Summary – NatWest Group’s climate ambition, announced in February 2020, recognises various short, medium and long-term climate-related risks and opportunities to embed climate in our business and culture, as well as support our customers in their transition to net zero. Future priorities – Further enhance capabilities associated with climate-related risks and opportunities measurement. References NatWest Group plc 2021 Climate-related Disclosures Report – sections 1.1, 1.2, 1.3, 1.4, 3.1, 3.2, 3.3, 3.4, 3.5, 4.3, 5.1. The impact of climate-related risks and opportunities on our businesses, strategy and financial planning Summary – NatWest Group made a number of environmental, social and ethical (ESE) policy updates during 2021 to help end the most harmful activity and concluded a credible transition plan (CTP) assessments for oil and gas majors and in scope coal customers. This supported our stated ambition to stop lending and underwriting to companies with more than 15% of activities related to thermal and lignite coal, unless they had a CTP in line with the 2015 Paris Agreement in place by the end of 2021. – We continued to harness climate-related opportunities. We exceeded our 2020-2021 Climate and Sustainable Funding and Financing target in under 18 months and supported our retail customers with a range of Green Mortgage products. – Our work on climate scenario analysis has supported our assessment of climate related risks and opportunities and helped re-affirm our climate ambition. We continued to build powerful partnerships, acting as principal partner at COP26, and becoming a founding member of the Net Zero Banking Alliance and Glasgow Financial Alliance for Net Zero (GFANZ). – We worked to incorporate climate in the financial planning process by developing our first carbon plan. This included an assessment of carbon impacts of current and planned climate-related opportunities as well as climate-related risks, particularly those related to dependencies on future policy and technology development. Future priorities – Continue to integrate climate in business activities. – Further enhance carbon planning capability to support the development of transition plans to measure and track our progress towards our ambition to halve the climate impact of our financing activity by 2030. References NatWest Group plc 2021 Climate-related Disclosures Report – sections 1.1, 1.2, 1.3, 1.4, 3.1, 3.2, 3.3, 3.4, 3.5. 3.6, 3.7, 3.8. The resilience of our strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario Summary – During 2021, NatWest Group has developed its scenario analysis capabilities and deepened its understanding of climate-related risks and opportunities through its participation in the Bank of England’s Climate Biennial Exploratory Scenario (CBES) exercise. NatWest Group has also taken further steps to translate these insights into tangible action that will enable us and our customers to mitigate climate-related risks and take advantage of the opportunities that the transition to net zero will create. – NatWest Group has used three scenarios published by the Bank of England for its CBES exercise as the foundation for its scenario analysis, including an early action scenario which assumes the increase in global temperature is limited to under 2.0°C. Also, scenarios have been used to estimate financed emissions reductions required by 2030 to support our net zero by 2050 ambition. Future priorities – Continue to enhance scenario modelling and analytic capabilities. – Continue to address significant challenges related to the availability of granular customer data. – Respond to developing regulatory requirements on the approach to climate-related risk within the regulatory capital regime. References NatWest Group plc 2021 Climate-related Disclosures Report – sections 3.4, 3.7, 3.8, 5.7. G o v e r n a n c e S t r a t e g y R i s k M a n a g e m e n t M e t r i c s a n d T a r g e t s 67 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Risk Management How NatWest Group identifies, assesses, and manages climate-related risks Our processes for identifying and assessing climate-related risks Summary – Climate risk was incorporated into the NatWest Group risk directory as a principal risk in February 2021 and in April, Board Risk Committee approved a principles-based climate risk policy that defined the key requirements for the identification, assessment, and management of climate risk, through the incorporation of climate considerations in key risk management processes. – We completed a qualitative assessment of the current and potential impact of physical and transition climate risk as a causal factor to other risks. This assessment of relative significance identified the following principal risks as being most exposed to climate-related impacts: credit risk; operational risk; reputational risk; conduct risk and regulatory compliance risk. – NatWest Group regularly considers existing and emerging regulatory requirements related to climate change through external horizon scanning and monitoring of emerging regulatory requirements which is completed by our Legal, Governance and Regulatory Affairs team. Future priorities Continue enhancements to our enterprise wide risk toolkit to support identification and assessment of risk impact on other principal risks. References NatWest Group plc 2021 Climate-related Disclosures Report – section 3.1, 3.2, 4.1. Our processes for managing climate-related risks Summary – The management of climate risk is largely delivered through three mechanisms: scenario analysis, long-term balance sheet transformation and enhanced climate risk data capabilities. – NatWest Group has established a climate risk appetite statement, determining the level of risk which the climate risk policy seeks to operate within. – A climate maturity rating was developed, which supports ongoing assessment of climate risk management throughout the organisation. This approach translated NatWest Group’s climate risk policy into thematic management outcomes. – As at 31 December 2021, NatWest Group has achieved first generation implementation of climate risk management, with a predominantly qualitative approach to internal risk policy outcomes, covering priority sectors or customers. Where quantitative approaches are applied, they are predominantly conducted on an ad hoc basis. Future priorities – Work will continue to further integrate climate-related risk across business processes to achieve full integration within risk management and decision-making. – Future target state includes, but is not limited to, climate risk being systematically captured as a quantified risk factor within lending and risk decision-making, informing limits and pricing. References NatWest Group plc 2021 Climate-related Disclosures Report – sections 3.1, 3.2, 4.2. How our processes for identifying, assessing, and managing climate-related risks are integrated into overall risk management Summary – Retail credit risk: A review of EPC and flood impact was finalised for the Retail Banking residential mortgage portfolio; Credit oversight tracking of EPC and flood risk concentrations have been developed. In addition, preliminary climate operational measures were developed. – Wholesale credit risk: Continued evolution of our credit risk frameworks to incorporate climate risk, for example its inclusion in Transaction Acceptance Standards (TAS) and in climate commentary within credit applications for the majority of the wholesale portfolio. – Operational risk: NatWest Group-wide operational risk climate scenarios were completed in 2021. Two distinct extreme heat scenarios were considered. – Reputational risk: Review of risk acceptance criteria (RAC) suite to validate the sectors which present high environmental, social and ethical (ESE) risk. – Conduct risk and regulatory compliance risk: Supported the development and embedding of climate focused questions which have been embedded into the existing governance processes. Future priorities – Continue to assess impact of climate-related risks on NatWest Group’s financial and non-financial risk profile as part of risk and control assessment of relevant processes. – Further embedding of climate considerations in product design and lending decisions through the use of climate risk data (EPC and flood analysis, CBES findings). References NatWest Group plc 2021 Climate-related Disclosures Report – sections 3.1, 3.2, 4.3. Disclosures summary continued 68 NatWest Group 2021 Annual Report and Accounts G o v e r n a n c e S t r a t e g y R i s k M a n a g e m e n t M e t r i c s a n d T a r g e t s Metric and Targets The metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material The metrics used to assess climate-related risks and opportunities in line with our strategy and risk management process Summary Metrics used to assess climate-related risks: – Exposures to heightened climate-related risk sectors. – Energy efficiency and flood risk assessment for Retail Banking residential mortgage portfolio. – Capital markets transactions. – NatWest Group own operational footprint. – Estimates of financed emissions and emission intensities. Metrics used to assess climate-related opportunities: – Climate and Sustainable Funding and Financing. – NatWest Group Own Green Bond issuance. We added performance against climate targets as part of the bonus pool assessment for our wider workforce. Refer to the Directors’ Remuneration Report in the NatWest Group plc 2021 Annual Report and Accounts for further details. Future priorities We will continue to develop metrics and measurement capabilities to monitor and manage climate-related risks and opportunities during 2022. References NatWest Group plc 2021 Climate-related Disclosures Report – sections 3.4, 4.2, 4.3, 5.1, 5.2, 5.3, 5.4, 5.5, 5.6., 5.7. Scope 1, Scope 2 and, if appropriate, Scope 3 greenhouse gas (GHG) emissions, and the related risks. Summary We continued to develop and enhance capabilities to measure our carbon footprint in relation to our own operational footprint as well as financed emissions: – We reduced our direct own operations carbon footprint by 46% against a 2019 baseline, and increased our renewable electricity consumption to 97%. – We worked on enhancing our capabilities across an additional eight emissions intensive wholesale sectors. We also extended the scope of emissions calculations for the oil and gas sector beyond extraction activities covered in 2020. We have now analysed 52% of our loans and investment portfolio based on 2019 gross on-balance sheet loans and investments. Future priorities – To support our commitments to the Net Zero Banking Alliance, we will align to the Science Based Targets initiative’s (SBTi) definition and account for the wider value chain, including suppliers, for our own operational footprint. – We have submitted our 2030 sector emissions reduction estimates to SBTi for validation and will continue our work to enhance availability of data to support future calculations of financed emissions and emissions intensities. References NatWest Group plc 2021 Climate-related Disclosures Report – sections 5.6, 5.7, 5.8. The targets used by the organisation to manage climate-related risks and opportunities and performance against targets Summary Our stated climate ambition is to be a leading bank in the UK helping to address the climate challenge. We have committed to achieve net zero by 2050 across our financed emissions, assets under management and our operational value chain. Progress is monitored via climate-related targets and ambitions across the following thematic opportunities: – Accelerating the speed of transition. – Helping to end the most harmful activity. – Championing climate solutions. – Embedding climate into our culture and decision-making. – Net zero for our operational value chain. Future priorities We will continue to monitor our performance against our climate-related targets and ambitions and revise, as appropriate. References NatWest Group plc 2021 Climate-related Disclosures Report – sections 1.1, 3.5, 5. 69 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Own operational footprint Own operational footprint During 2021 (1) , we reduced our direct own operations (2) carbon footprint (3) 46% against 2019 baseline, and increased our renewable electricity consumption to 97%. Net-zero carbon (3) We plan to reduce the carbon footprint for our wider operational value chain by 50% (against a 2019 baseline) by 2030 and achieve net zero by 2050. While there was previously no standard definition of net zero, as part of COP26, in October 2021 the SBTi released the ‘SBTi Corporate Net Zero Standard’, the world’s first net zero framework which encapsulates the full value chain of Scope 3 and deep decarbonisation targets. To support NatWest Group’s public commitments to the Net Zero Banking Alliance, we plan to align to the SBTi’s definition for own operations and also account for the wider value (4) chain, including suppliers. We have a target to reduce our direct own operations carbon footprint by 50% by 2025 (2019 baseline) and plan to halve the carbon footprint of our wider operational value chain by 2030, with minimum 90% decarbonisation by 2050 for all emissions (refer section 5.7 of the NatWest Group plc 2021 Climate- related Disclosures Report for approach to financed emissions). We intend to neutralise the remaining 10% of emissions with high quality internationally recognised carbon credits (5) to achieve net zero. We plan to continue making significant emission reductions within our own operations, alongside investments to mitigate GHG emissions through carbon removal projects, programmes and solutions that provide benefits to climate, especially those that generate additional co-benefits for people and nature, in line with SBTi guidance. As the first part of our journey, we are disclosing an initial view of our upstream emissions for our 2021 footprint, with a plan to refine this view and disclose our downstream emissions for 2022. Further, from 2022, NatWest Group will be using the outputs from our 2021 energy audits to run a programme to improve our building EPC ratings, reducing our climate impact. Our 2021 total market-based operational footprint 66,149 tCO 2 e covers Scopes 1, 2 and our direct own operation upstream Scope 3. This includes emission reductions from the use of green electricity covering 97% of our consumption through green tariffs and renewable electricity certificates, but in accordance with the Greenhouse Gas Protocol, it does not include emissions reduction from the use of carbon credits. Further detail on our decarbonisation plans can be found on page 71 of the NatWest Group plc 2021 Climate-related Disclosures Report. When announcing our Climate Positive (6) ambition in February 2020, the wide-ranging impacts from COVID-19 could not have (1) Our own operational footprint reporting year runs from October 2020 to September 2021. (2) NatWest Group defines direct own operations as our Scope 1, Scope 2 and Scope 3 (paper, water, waste, business travel, commuting and work from home) emissions. It therefore excludes upstream and downstream emissions from our value chain. (3) Carbon/carbon footprint in this section refers to GHG emissions reported as carbon dioxide equivalent. (4) Upstream operational value chain emissions are all the indirect Scope 3 emissions required for our operations to occur, including emissions from our suppliers, energy creation and transport to our facilities, and our mail. Downstream operational value chain emissions are all of the indirect Scope 3 emissions associated with our operations during and after serving our customers, including customer transport to and from our facilities, how our products are used and how they are disposed of. (5) NatWest Group used carbon credits for our 2021 achievement. These projects remove carbon from the atmosphere through tree planting and are dual-validated and verified under the Verified Carbon Standard (VCS) and Climate, Community and Biodiversity Standards (CCB). (6) NatWest Group defines Climate Positive as reducing location-based emissions from our direct own operations 25% from our 2019 baseline and using carbon credits to neutralise our baseline market-based emissions of 120,000 tCO 2 e. been anticipated. By procuring a minimum 120,000 tCO 2 e in carbon credits, in line with our market-based 2019 baseline, while simultaneously reducing emissions from our own operations, we have already achieved our ambition to be Climate Positive in 2021 for our direct own operations. We used 120,000 tCO 2 e of internationally recognised carbon credits which add environmental, social and community benefits compared to the 2021 residual market-based 66,149 tCO 2 e Scope 1, 2 and 3 emissions. We had previously targeted a 25% reduction in emissions from our direct own operations by 2025 (2019 baseline) but are now increasing this to 50% as we seek to build on the emissions reductions that have already occurred. Energy and carbon In 2021, we reduced our direct operational Scope 1, 2 and 3 (business travel, paper, waste, water, commuting and work from home) emissions by 46% against a 2019 baseline. This has been through a number of emission reduction activities as well as impacts from COVID-19. Despite COVID-19, a number of key projects were still completed in 2021. Notable highlights include: – Renewable power : NatWest Group has partnered to develop a solar generation facility in the UK under a corporate power purchase agreement. The facility is due to start generating low-carbon electricity for the bank from 2024 and will bring additional renewable generation capacity online to facilitate the decarbonisation of the UK power grid. Once constructed, the facility is expected to generate 40% of NatWest’s electricity demand in the UK. – Branch investments : The high-performance specification implemented for a branch fit-out in Bristol meant that we achieved an energy performance rating of ‘B’ and achieved Royal Institute of Chartered Surveyors (RICS) SKA Silver rating in terms of the design’s broader sustainable design. – Lifts : The first phase of a replacement passenger lift system at our offices at 250 Bishopsgate, London, leading to a 30% reduction in the energy use of the lifts; making the lifts ‘A’ rated in terms of energy. – Building Management System investment : In our Coutts head office we have invested in ‘out BMS controllers’ which have provided a better environment for our colleagues and enable more efficient energy management from the facilities management team. We have also installed dashboard screens in the customer and colleague areas in both the Coutts head office and 250 Bishopsgate to educate on the energy usage of the buildings. 70 NatWest Group 2021 Annual Report and Accounts Streamlined energy and carbon reporting 2021 2020 Greenhouse gas (GHG) emissions UK and offshore (1) area Global total (excluding UK and offshore)’ UK and offshore (1) area Global total (excluding UK and offshore) Emissions from the combustion of fuel and operation of any facility (Scope 1 (2) Direct) CO 2 e (tonnes) () 17,464 1,663 18,443 1,921 Emissions from the purchase of electricity, heat, steam or cooling by the company for its own use (Scope 2 (3) Indirect) Location-based CO 2 e emissions (tonnes) () 52,735 16,305 63,841 23,057 Total gross Scope 1 & Scope 2 (location-based) emissions CO 2 e (tonnes) () 70,199 17,968 82,284 24,977 Energy consumption used to calculate above emissions (kWh) 329,396,747 40,652,346 347,909,621 49,510,271 Intensity ratio: Location-based CO 2 e emissions per FTE (Scope 1 & 2) (tonnes/FTE) 1.71 1.03 1.83 1.37 Scope 3 (4) CO 2 e emissions from direct operations, paper, water, waste, business travel, commuting and working from home (tonnes) () 36,016 8,855 38,502 14,967 Total gross CO 2 e emissions for direct operations (Scope 1, location-based Scope 2, Scope 3) (tonnes) () 106,215 26,823 120,787 39,944 Intensity ratio: Location-based CO 2 e emissions per FTE (Scope 1, 2 & direct operations Scope 3) (tonnes/FTE) 2.59 1.54 2.69 2.19 Scope 2 (5) (Indirect) Market-based CO 2 e emissions (tonnes) () 12 2,139 8,860 2,346 Emissions methodology and basis of preparation Boundary: We have reported on all emission sources required under the Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018. Our reporting year runs from October 2020 to September 2021. The emissions reporting boundary is defined as all entities and facilities either owned or under our operational control. Calculation : Emissions have been calculated using the Greenhouse Gas Protocol Corporate Standard and associated guidance and include all greenhouse gases, reported in tonnes of carbon dioxide equivalent (CO 2 e) and global warming potential values. When converting data to carbon emissions, we use Emission Factors from UK Government Emissions Conversion Factors for Company Reporting (Department for Business, Energy & Industrial Strategy, 2021), CO 2 emissions from fuel combustion (International Energy Agency, 2021) or relevant local authorities as required. NatWest Group utilises a third-party software system, Envizi, to capture and record our environmental impact and ensure audit requirements are met. All data is aggregated at a regional level to reflect the total regional consumption. The regional consumption results are then collated to reflect the total NatWest Group footprint. CO 2 e values are attributed to these sources via an automatic conversion module in the Envizi system. For more information, please see the own operational footprint page on natwestgroup.com. (1) Offshore area as defined in The Companies (Directors Report) and Limited Liability Partnerships (Energy and Carbon) Regulations 2018. This includes Jersey and Guernsey but not our overseas sites in America, EMEA and Asia-Pacific. These are included in the global total (excluding UK and offshore). (2) Scope 1 emissions from natural gas, liquid fossil fuels, fluorinated gas losses and owned/leased vehicles. (3) Scope 2 emissions from electricity, district heating and cooling used in NatWest Group premises. (4) Scope 3 emissions from paper and water, category 5: waste (UK and RoI only), category 6: business travel including air, rail, hired vehicles and our grey fleet, category 7: employee commuting and working from home. (5) Market-based Scope 2 emissions. UK market-based emissions have dropped 99% (to 12 tCO 2 e) as we have procured 100% of the electricity we have consumed from renewable sources using green tariffs and renewable electricity certificates, whereas in 2020, we sourced 90% of our UK electricity from renewable sources, with the remaining 10% accounting for 8,848 tCO 2 e. The 12 tCO 2 e arises from district cooling and district heating, which is used at only a few sites. () Within the scope of EY assurance (2021 only). 71 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Risk overview Risk management Risk is an inherent part of doing business. Some types of risk – such as credit risk or market risk for example – are an integral part of NatWest Group’s day-to-day activities and a vital part of revenue generation. Other risks, such as those arising from changes in the economy or the competitive landscape, are an inescapable part of the environment in which NatWest Group operates and must also be managed and mitigated. Effective risk management is a vital element of ensuring NatWest Group is able to achieve its long-term strategy and fulfil its purpose. NatWest Group operates an enterprise-wide risk management framework. The framework – which is supported by policies, standards and operational procedures – sets out a consistent approach to managing risk across the organisation. It is aligned to NatWest Group’s purpose and is designed to support intelligent risk-taking. While the Board reviews and approves the framework, all colleagues share ownership of risk management. The industry- standard three lines of defence approach is used to define responsibilities. This aims to ensure that risks are properly identified and assessed, managed and mitigated, monitored and reported. NatWest Group’s independent Risk function designs and maintains the framework. The Risk function – which is led by the Chief Risk Officer – also provides oversight and monitoring of all risk management activities. The Chief Risk Officer plays an integral role in providing the Board with advice on NatWest Group’s risk profile, the performance of its controls and in providing challenge where a proposed business strategy may exceed risk tolerance. NatWest Group has identified a number of principal risks. These are risks that are an inherent part of banking activity and have the potential to significantly affect NatWest Group’s performance or prospects. They are categorised as financial and non-financial principal risks. In addition, a regular process identifies top and emerging risks. These are specific scenarios of concern that may combine elements of several principal risks – or create new types of threat altogether – and which, without appropriate management and mitigation, could have a significant negative impact on NatWest Group’s ability to meet its strategic objectives. These are detailed on page 75. Risk appetite is a key component of the framework. It defines the level and types of risk NatWest Group is willing to take as part of its business activities. Risk appetite is set in line with overall strategy and approved by the Board. It supports the strategic aim of building a sustainable business by providing colleagues with a structured approach to risk-taking within agreed boundaries. Information on the risk profile relative to risk appetite, as well as details of new and emerging risks, is reported regularly to the Board and to NatWest Group’s senior risk committees. Principal financial risks Principal non-financial risks Credit risk Conduct risk Traded market risk Financial crime risk Non-traded market risk Operational risk Capital adequacy Regulatory compliance risk Liquidity and funding Model risk Earnings stability Climate risk Pension risk Reputational risk Areas of focus in 2021 The global economy continued to grow, though more slowly than expected. The aftershocks of the pandemic also intensified uncertainty around both the pace of recovery and the longer-term future. Accordingly, risk management played a critical role throughout the year, focusing both on striking the correct balance between risk and opportunity, and also on ensuring that supporting processes, policies and controls were properly optimised to deal with the heightened risk environment. Providing a clear risk perimeter allowed NatWest Group’s customer-facing franchises to operate safely as they set out to achieve NatWest Group’s purpose of helping people, families and businesses to thrive. As a result, NatWest Group’s credit risk profile remained in line with expectations, though given the heightened uncertainty, this remained an area of significant risk management focus. Impairment releases were significant. IFRS 9 forward-looking expected credit losses for performing assets in Stage 1 and Stage 2 reduced and actual Stage 3 default charges were relatively modest. However, NatWest Group anticipates increased default levels in 2022 as the longer-term impacts of pandemic-related disruption emerge. Other headwinds, such as ongoing supply chain challenges and inflation, have the potential to heighten the credit risk profile. NatWest Group’s traded and non-traded market risk profiles were also broadly stable, though the potential second-order effects of the pandemic on both remain a key risk management consideration. Compliance and conduct Further progress was made on the compliance agenda during 2021. This included the introduction of a digital rules-mapping platform intended to enhance NatWest Group’s assessment and implementation of regulatory obligations. In addition, a new ring-fencing hub was established to provide an aggregated view of ring-fencing compliance and risk management. The conduct risk profile also remained a key focus. In December 2021, the NatWest Markets subsidiary pleaded guilty to one count of wire fraud and one count of securities fraud related to historical spoofing conduct by former employees in US Treasuries markets between 2008 and 2014. As part of the plea agreement, NatWest Markets will pay Impactful and effective risk management supports NatWest Group in delivering its strategy and purpose. 72 NatWest Group 2021 Annual Report and Accounts a criminal fine and a criminal forfeiture as well as restitution. The plea agreement also imposes an independent corporate monitor. NatWest Markets has also committed to compliance programme reviews and improvements. Throughout the year, with many colleagues working from home, additional controls around the supervision of certain roles remained in place to ensure secure and compliant operations. Controls established to mitigate risks relating to the recording of regulated communications, the flow of inside information and management of conflicts of interest also remained a focus. Financial crime While work continues to enhance the control environment relating to financial crime risk, operational weaknesses between 2012 and 2016 resulted in the inadequate monitoring of a UK-incorporated NatWest Bank Plc customer. Regulations require risk-sensitive ongoing monitoring of customers for the purposes of preventing money laundering. NatWest Bank Plc co-operated fully with the regulator’s investigation into this case and, in October 2021, pleaded guilty to three breaches of the Money Laundering Regulations 2007. NatWest Group takes its responsibility to prevent and detect financial crime extremely seriously and continues to make significant multi-year investments to strengthen and improve its overall financial crime framework with prevention systems and capabilities. This investment continued during 2021 and there was significant risk management focus on the systems and processes relating to customer due diligence, transaction monitoring and automated customer screening. NatWest Group continues to work with law enforcement agencies, industry bodies and regulators to develop intelligence and collaborative solutions to prevent financial crime. Anti-bribery and corruption (ABC) NatWest Group is committed to ensuring it acts responsibly and ethically, both when pursuing its own business opportunities and when awarding business. Consequently, it has embedded appropriate policies, mandatory procedures and controls to ensure its employees, and any other parties it does business with, understand these obligations and abide by them whenever they act for NatWest Group. ABC training is mandatory for all staff on an annual basis, with targeted training appropriate for certain roles. NatWest Group considers Risk management process This diagram summarises the main risk management processes and responsibilities within NatWest Group. Risk activities Responsibilities Governance Identify and Assess Report Monitor Manage/ Mitigate Board Responsible for reviewing the effectiveness of the risk management and internal control systems of NatWest Group, including the nature and extent of the risks it may take in pursuit of its strategic objectives. Strategic consideration of principal risks – together with top and emerging risks – against NatWest Group’s business plan. Leads the development of, and assesses/ monitors, risk culture. NatWest Group Risk Function Design and implementation of the enterprise- wide risk management framework and policies. Oversight of franchise and entity risk management activities. Aggregated reporting of franchise/ entity-level management of principal risks – together with top and emerging risks – against the agreed risk appetite set by the Board, including assessment of the way correlation and concentration levels may change in aggregate. Franchises and Entities Take risks within the risk appetite set by the Board in pursuit of business objectives. Day-to-day risk management including, identification and assessment, mitigation and monitoring. Reporting on franchise/entity-level management of principal/top and emerging risks within appetite. Horizon-scanning to identify and assess likely changes in risk environment/landscape. Board Sets risk appetite, reviews and approves the enterprise-wide risk management framework. Board Risk Committee Provides oversight and advice to the Board on current and future risk profile. Reviews the effectiveness of internal controls to manage risk. Group Audit Committee Reviews the effectiveness of NatWest Group’s system of internal control relating to financial management. Executive Risk Committee Reviews, challenges and debates all material risk and control matters across NatWest Group. Franchise Risk Committees Detailed oversight of risk profile relative to risk appetite for specific franchises/entities. Top down Bottom up 73 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Risk management continued ABC risk in its business processes including, but not limited to, corporate donations, charitable sponsorships, political activities and commercial sponsorships. Where appropriate, ABC contract clauses are required in written agreements. Climate risk The impact of climate change on NatWest Group and its customers continued to be a central risk management focus during the year. A new Climate Centre of Excellence was established to provide specialist expertise across NatWest Group, including horizon scanning to identify strategic opportunities and risks. In addition, the qualitative consideration of climate-related risk was made mandatory for most of the wholesale portfolio within credit assessments, and enhancements were made to NatWest Group’s environmental, social and ethical framework to address reputational risks arising from carbon-intensive sectors. NatWest Group also participated in the Bank of England’s Climate Biennial Exploratory Scenario stress test exercise. This exercise was designed to support improved understanding of the financial system’s exposure to climate-related risks and the likely challenges to business models emerging from climate change. While participation was mandatory, the exercise also helped NatWest Group in understanding and preparing to manage risks that could arise, both in terms of the transition to net zero and the physical risks from climate change. LIBOR Risks relating to the reform of interest-rate benchmarks were a consistent focus during the year. With the exception of certain tenors, publication of the London Inter-Bank Offered Rate (LIBOR), a key benchmark in the global financial markets for many years, ceased on 31 December 2021. In preparation for the move to alternative risk-free rates – including the Sterling Overnight Index Average (SONIA) – NatWest Group stopped offering Sterling LIBOR for new transactions on 31 March 2021. A Group-wide transition programme coordinated work to help customers smoothly transition from a range of LIBOR- based products, such as mortgages, investment-backed lending and derivatives, to those using alternative benchmarks. Significant attention was paid to the potential conduct risks arising from transition activity, as well as related operational risks, in order to ensure appropriate customer outcomes. In addition, there was a strong focus on carefully managing the associated compliance risk, market risk and counterparty credit risk. The complexity of the transition, especially in relation to so-called ‘tough legacy’ contracts that cannot be transitioned to alternative reference rates, also heightened execution risk. The FCA has proposed that use of synthetic sterling LIBOR may be permitted for a number of legacy contracts. It’s expected that management of related risks will remain a focus into 2022 as NatWest Group continues to support its customers through the transition. Information and cyber-security Cyber crime is an ever-present threat across the digital landscape and continues to evolve rapidly. Attacks may be from individuals or highly-organised criminal groups intent on stealing money or sensitive data, or potentially holding organisations to ransom. NatWest Group takes this threat seriously and continues to work with industry bodies, peers and the National Cyber Security Centre to gather and share intelligence. During 2021, there was continued risk management focus on ensuring defences remain optimised for the evolving threat. Risk culture NatWest Group’s multi-year programme to enhance risk management capability at every level of the organisation continued with an ongoing emphasis on risk culture. This work aims to embed a generative risk culture across all three lines of defence – where risk management is an integral part of the way colleagues work and think. The approach supports intelligent risk-taking, better customer outcomes, stronger and more sustainable business as well as an improved cost base. During 2021, there was a focus on a number of risk culture initiatives, including improvements in risk data and systems alignment as well as enhancements to risk identification processes and risk culture management information. Model risk An effective understanding of likely future outcomes and the scale of likely hazards is an essential part of forward-looking risk management. NatWest Group is heavily reliant on modelling across all aspects of its business. Ensuring its models are designed effectively – and that associated assumptions, data inputs and techniques are appropriate – remained a key risk management focus in 2021. This included a programme of ongoing work to upgrade a number of models to improve predictability and compliance with new regulatory requirements. Risk-weighted assets (RWAs) RWAs were down £13.3 billion at 31 December 2021, ending the year at £157 billion (from £170.3 billion in 2020). This was mainly driven by a £9.8 billion reduction in credit risk RWAs as well as reductions in market risk RWAs (£1.4 billion), counterparty credit risk RWAs (£1.2 billion) and operational risk RWAs (£0.9 billion). Common Equity Tier 1 ratio NatWest Group maintained a strong CET1 ratio of 18.2% (2020 – 18.5%), reflecting both the £13.3 billion reduction in RWAs and a £2.9 billion decrease in CET 1. This decrease was mainly driven by the directed buy-back and associated pension contribution of £1.2 billion and on-market share buy-backs totalling £1.5 billion, as well as foreseeable dividends and associated pension contributions of £1.2 billion and a £1.1 billion decrease in the IFRS 9 transitional adjustment and other reserve reductions, offset by the £3 billion attributable profit in the period. The CET1 ratio reduced to 15.9% on 1 January 2022 as a result of regulatory RWA and capital changes. Leverage ratios The CRR leverage ratio decreased to 4.4% (2020 – 5.2%) due to a £40 billion increase in leverage exposure and a £4 billion decrease in Tier 1 capital. The UK leverage ratio decreased to 5.8% (2020 – 6.4%) due to the decrease in Tier 1 capital. Stress testing Under the 2021 Bank of England solvency stress test, on an IFRS 9 transitional basis NatWest Group’s low point CET1 ratio was 10.4%. This was above the reference rate of 7%. The transitional Tier 1 leverage ratio low point was projected to be 4.4% under stress. NatWest Group also took part in the Bank of England’s Climate Biennial Exploratory Scenario. Liquidity and funding The liquidity portfolio increased by £24.1 billion to £286.4 billion. Primary liquidity increased by £38.2 billion to £208.6 billion. The increase in primary liquidity resulted mainly from customer deposits, TFSME funding, new issuances and a methodology change to include UBIDAC cash at central banks. 74 NatWest Group 2021 Annual Report and Accounts Top and emerging risks A continuous process is used to identify and manage the Group’s top and emerging risks. These are risks that could have a significant negative impact on the ability to operate or meet strategic objectives. External Climate-related risks NatWest Group and its customers may face significant climate-related risks, including those arising from the transition to a net-zero economy. These risks are receiving increasing regulatory, political and societal scrutiny, both in the UK and internationally. There are significant uncertainties as to the extent and timing of the manifestation of the physical risks of climate change, such as more extreme and frequent weather events and reductions in biodiversity. Embedding climate risk into the Group’s risk framework and adapting NatWest Group’s operations and business strategy to address the risks is in line with the purpose-led strategy. Competitive environment NatWest Group operates in markets that are highly competitive, raising the threat of a loss of market share, reduced revenue and lower profitability. The risks mainly relate to changes in regulation, developments in financial technology (including digital currency), new entrants to the market and changes in customer behaviour. The Group closely monitors the competitive environment and adapts strategy as appropriate to deliver innovative and compelling propositions for customers. COVID-19 The COVID-19 crisis could impede the Group’s ability to meet its targets and deliver its purpose-led strategy. Despite delivery of a mass vaccination programme in the UK, uncertainty remains around the future evolution of the virus and the ultimate impact of the pandemic on NatWest Group and its customers. Key mitigation measures to manage the uncertainty include scenario analysis, stress testing and active portfolio management including the adjustment of risk appetite. Cyber threats The threat from cyber attacks is constant both directly to businesses such as NatWest Group and to others in the supply chain. As cyber attacks evolve and become more sophisticated, NatWest Group continues to invest in additional capability and controls designed to defend against the evolving threats. There is a sustained focus on managing the impact of the attacks and maintaining the availability of services for NatWest Group’s customers. Economic and political risks NatWest Group is exposed to economic and political risks in the markets in which it operates. Economic uncertainty remains high due to a combination of inflationary pressures including supply chain frictions and disruption due to new COVID-19 variants. A range of complementary approaches is used to mitigate these risks including scenario analysis and stress testing. The Group continues to monitor geopolitical risks alongside domestic political risk including those in relation to the UK’s withdrawal from the European Union and a Scottish independence referendum. In the longer term, demographic change, high levels of debt and inequality could all have financial impacts. As a result, these risks are closely monitored and strategic plans are adapted as appropriate. Regulatory, legal and conduct risks NatWest Group is subject to extensive laws and regulations and expects government and regulatory intervention in the financial services industry to remain high for the foreseeable future. The Group implements new regulatory requirements, where applicable, and incorporates the implications of related changes in its strategic and financial plans. However, changes in laws or regulations, or failure by NatWest Group to comply with these, may adversely affect NatWest Group’s business, results of operations and outlook. Internal Change risk The implementation of NatWest Group’s purpose-led strategy and the refocusing of NatWest Markets carry significant execution, operational and people risks. NatWest Group continues to manage and implement change in line with its strategic plans while assessing execution risks and taking appropriate mitigating action. In addition, the Group continues to monitor and strengthen its control environment including in relation to financial crime, through robust governance and controls frameworks. Data management NatWest Group operations and strategy are highly dependent on the accuracy and effective use of data. Failure to have current, high-quality data and/or the ineffective use of such data could result in a failure to deliver NatWest Group’s strategy including reducing costs and meeting customer expectations. The Group is focused on delivering a long-term data strategy alongside control and policy framework enhancements governing data usage. People risk NatWest Group’s success depends on its ability to attract, retain and develop highly skilled and qualified personnel, including senior management, directors and key employees in a highly competitive market and under internal cost reduction pressures. A combination of strategic workforce planning, including in relation to critical role resource and retention of specific skills, and close monitoring of staff turnover levels and colleague wellbeing are key mitigants. Third-party suppliers Operational risks arise from NatWest Group’s reliance on third-party suppliers to provide a range of services, including information technology. While the ineffective management of these risks could adversely affect NatWest Group, significant resources and planning have been devoted to mitigate the risks including the implementation of robust risk controls. 75 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements In assessing NatWest Group’s future prospects, the Board considers a period of three years to be appropriate. Although strategic and business planning – as well as internal stress tests – are based on a five-year timespan, levels of uncertainty increase as the time horizon extends and therefore the shorter period is considered more suitable for this assessment. The Board will continue to monitor and consider the appropriateness of this period. In assessing NatWest Group’s viability over that three-year time frame, the Board has considered a wide range of information, including: Strategic – NatWest Group’s long-term business and strategic plans; – Its liquidity and funding profile, including projections over the relevant period; – Its current capital position and projections over the relevant period. Risk – NatWest Group’s risk profile and risk management practices, including the processes by which risks are identified and mitigated; – Its principal risks as well as the top and emerging risks that could have a significant negative impact on NatWest Group’s licence to operate or meet its strategic objectives over the medium term; – Internal stress tests, which include consideration of NatWest Group’s principal and emerging risks within the scenario design. Regulatory – The results of the Bank of England 2021 solvency stress test; – The Group’s results in the Bank of England’s Climate Biennial Exploratory Scenario (CBES); – The output of the Group’s 2021 Internal Capital Adequacy Assessment Process (ICAAP) and Internal Liquidity Adequacy Assessment Process (ILAAP). Operating environment – The wider political and economic environment within which NatWest Group operates, including uncertainties relating to the geopolitical outlook and the global pandemic. The Group’s business and strategic plans, which are reviewed and evaluated on an annual basis at minimum, provide long-term direction. This includes multi-year forecasts assessing NatWest Group’s expected financial position throughout the planning period. Threats to the achievement of those plans – including financial, operational, conduct and financial crime risks – are identified and assessed through NatWest Group’s enterprise-wide risk management framework. As part of this, Board-approved risk appetite is a key consideration. Performance against risk appetite for each of the principal risks is reported to the Board on a regular basis together with assessments of emerging risks that could have an impact within the planning horizon. NatWest Group’s principal risks and uncertainties are set out on pages 72 to 75. Further detail can be found in the Risk and capital management section of the Annual Report and Accounts (pages 187-285). The effects of COVID-19 and associated government responses remained an important consideration particularly in relation to the impacts on customers – including the end of government support schemes and the likely trajectory of the overall recovery. The impact of the pandemic and potential aftershocks are subject to continuous monitoring with additional focus in NatWest Group’s senior risk committees and at Board level. In addition, other impacts, such as the effect of sustained supply chain disruption for business and corporate clients, were also a focus. A series of internally-developed stress scenarios supports NatWest Group’s planning processes. During 2021, a range of future economic conditions of increasing severity was defined in order to support internal modelling and assess NatWest Group’s potential performance over the planning horizon. These included a base case – or central – scenario using a set of assumptions such as expected GDP growth of 1.7% over the scenario period, an average Bank of England base rate of 0.8% and a total change in the UK house price index of 12.1%. This scenario also assumed a resilient labour market following the end of the government furlough scheme and inflation peaking in early 2022, followed by a gradual easing of pressures in the medium term. While potential performance was also assessed against a more positive, or upside scenario, NatWest Group’s likely response to more adverse and challenging conditions was assessed using a suite of downside scenarios ranging from moderate to extreme. The assumptions used in these scenarios included GDP contraction of -1.8% and -7.9%, base rate of 1.5% or -0.5%, and house price index falls of -3% and -26%. Additional scenarios, assuming much more severe conditions – ranging from a sharp economic downturn in the UK to persistent COVID-19 impacts and a global recession – were also used for internal modelling and planning purposes. These included a range of challenges relating to NatWest Group’s principal risks. Internal scenarios used for the ICAAP are designed to be extreme but plausible and take account of potential risk management actions and mitigation supported by the enterprise-wide risk management framework. For example, a range of financial crime scenarios was assessed using both one-in-25-years and one-in-100-years stresses to analyse the likely impacts of extreme events on the Group’s licence to operate. These assessed the potential impacts of external fraud, sanctions, money laundering, tax evasion or bribery Viability statement Viability statement In accordance with Provision 31 of the UK Corporate Governance Code, the Board is required to make a statement in the Annual Report and Accounts regarding NatWest Group’s viability over a specified time horizon. 76 NatWest Group 2021 Annual Report and Accounts and corruption events on the Group. Similarly, such exercises were carried out across credit risk, market risk, pension risk, capital adequacy, liquidity and funding, operational risk and conduct risk – in order to ensure NatWest Group remains appropriately resilient even in extreme circumstances. In addition, NatWest Group’s top and emerging risks are a significant consideration in internal planning as well as in assessing future capital and liquidity resilience under adverse scenarios through the ICAAP and ILAAP. Reverse stress testing is also used to assess scenarios and circumstances that could make NatWest Group’s business model unviable. These exercises begin with a definition of business model failure – including capital adequacy thresholds – and then analyse the events that could cause that failure. NatWest Group uses a range of stress scenarios that include systemic events, that may affect the entire financial system, idiosyncratic events that would create adverse consequences for only NatWest Group and a combination of these. During 2021, reverse stress testing considered the impact of sustained income challenges and increased impairments in a recession. Significant drops in UK GDP (-9%, -12, -15%) were factored in together with high unemployment (16–17%), a collapse in asset prices (commercial real estate values falling, for example, by up to 50%) and a dramatic reduction in house prices (-34%, -47% and -50%). In each of the extreme scenarios, NatWest Group remained above the defined thresholds. The results of the 2021 Bank of England solvency stress test were also considered as part of the assessment. The assumptions involved in this stress scenario included a significant drop in UK GDP (37% of 2019 UK GDP) between 2020 and 2022, an unemployment spike just under 12% and a 33% fall in residential and commercial property prices. The scenario also included a 31% cumulative fall in world GDP. NatWest Group remained considerably above the hurdle rate before and after strategic management actions. In considering NatWest Group’s prospects over the period of the viability assessment, the Board’s assessment in this regard is that NatWest Group is appropriately resilient and able to withstand a combination of severe economic shocks without breaching regulatory thresholds. The assessment also considered the effects of an intensifying competitive environment particularly in the context of the disruption to underlying economic cycles due to COVID-19. Throughout the year, consideration was given to the likelihood of a catastrophic cyberattack within the time frame of the assessment. While NatWest Group operates a multi-layered system of defences, there is a possibility that a successful cyberattack could have a severe effect on operations. However, the evolving threat is continually monitored. NatWest Group remains prepared and continues to invest in this area to ensure that it remains robustly protected. Planning also takes into account a range of correlated risks in order to ensure that NatWest Group’s strategy and forecasts remain appropriate for the evolving environment. During 2021, there was further management focus on the potential crystallisation of a severe but plausible combination of both principal risks and top and emerging risks. Such combinations could amplify existing risks and adversely affect NatWest Group’s profitability. The results of these exercises were considered by the Executive Risk Committee and form part of NatWest Group’s forward-looking risk management activity. While considering both near-term and medium-term risks in its assessment – and given the increased uncertainty over longer-term predictions – the Board noted analysis performed as part of NatWest Group’s participation in the Bank of England’s CBES test. While this is a mandatory stress test, the activity supports NatWest Group in understanding and preparing to manage risks that could arise, both in terms of the transition to net zero and the physical risks from climate change. This included a Group-wide operational risk scenario, assuming significant business disruption due to an intense heatwave. Aspects of the CBES scenarios were also used in the Group’s ICAAP process and in internal stress tests, particularly in relation to credit risk. In drawing its conclusions, the Board also considered the following: – The Group’s strong capital position (CET1 ratio of 18.2%–17.8% excluding IFRS 9 transitional relief). The current capital position provides significant headroom above both NatWest Group’s minimum requirements and its MDA threshold requirements; – Its ability to generate capital in recent years; – Its proposed distribution strategy to shareholders; and – Its strong liquidity position (LCR of 172% at 31 December 2021 and liquidity headroom of £89.9 billion). Based on the factors above, the current financial forecasts, the management of NatWest Group’s principal risks, including mitigating actions, and the strength of its capital and liquidity positions, NatWest Group’s Board has a reasonable expectation that NatWest Group will be able to continue in operation and meet its liabilities over the three-year period of the assessment. 77 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Non-financial information statement Non-financial information statement This non-financial information statement provides an overview of topics and related reporting references in our external reporting as required by sections 414CA and 414CB of the Companies Act 2006. We integrate non-financial and Environmental, Social and Governance (ESG) information across the Strategic report and wider reporting suite, thereby promoting cohesive reporting of non-financial and ESG matters. ESG reporting frameworks and guidance We are actively monitoring developments including in relation to metrics. In 2021, our focus included the Sustainability Accounting Standards Board (SASB) standards, the Global Reporting Initiative (GRI) standards, the Task Force on Climate-related Financial Disclosures (TCFD) and the World Economic Forum (WEF) International Business Council (IBC) metrics. As signatories of the UN Principles for Responsible Banking, we are committed to an ongoing process to align our strategy with the 2015 Paris Agreement and the UN Sustainable Development Goals (SDGs). Our climate ambition strives to make a positive contribution. Further information on non-financial and ESG matters can be found within our reporting suite – Climate-related Disclosures Report – ESG Supplement – natwestgroup.com Assurance Approach NatWest Group plc appointed Ernst & Young LLP (EY) to provide independent assurance over certain sustainability metrics, indicated with () in the NatWest Group’s 2021 Strategic Report, the 2021 Environmental, Social and Governance (ESG) Supplement, and the 2021 Climate-related Disclosures Report. The assurance engagement was planned and performed in accordance with the International Standard on Assurance Engagements (UK) 3000 (July 2020) Assurance Engagements Other than Audits or Reviews of Historical Financial Information (“ISAE (UK) 3000 (July 2020)”). An assurance report was issued and is available at natwestgroup. com. This report includes further details on the scope, respective responsibilities, work performed, limitations and conclusion. 78 NatWest Group 2021 Annual Report and Accounts Reporting requirement Page references in this document Relevant policy available at natwestgroup.com Business model – Our purpose framework – Our strategy – Our strategy in action – Our purpose-led areas of focus – How we create value – Our business performance – 12 to 13 – 18 to 19 – 20 to 27 – 30 to 31 – 34 to 37 – 38 to 50 Our stakeholders – Our stakeholders – Section 172(1) statement – Stakeholder focus areas – 14 to 17 – 52 to 53 – 54 to 63 Environment – Market environment – Climate-related disclosures – Top and emerging risks – Risk overview – Risk factors – 32 to 33 – 64 to 71 – 75 – 72 to 75 – 406 to 426 Environmental, social and ethical policies Our colleagues – Colleagues – Approving refreshed values – Diversity and Inclusion – 58 to 61 – 53 – 59 to 61 Our code of conduct Governance – Governance at a glance – Section 172(1) statement – Boardroom Inclusion Policy – Corporate governance – Directors’ remuneration report – Report of the directors – 80 to 81 – 52 to 53 – 114 to 115 – 102 to 113 – 136 to 142 – 184 to 186 Boardroom Inclusion Policy Social matters – Market environment – Our strategy in action – Stakeholder focus areas – How we create value – 32 to 33 – 20 to 27 – 54 to 63 – 34 to 37 Supplier Charter Respect for human rights – Human rights and Modern Slavery – 39 Statement on Human Rights Anti-bribery and corruption (ABC) – Risk overview – Risk and capital management – Mandatory learning for all colleagues – 72 to 75 – 188 to 285 – 73 to 74 Statement on Anti- Bribery and Corruption Risk management – Risk overview – Top and emerging risks – Risk and capital management – Risk factors – 73 to 74 – 75 – 188 to 285 – 406 to 426 Environmental, social and ethical policies 79 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Governance at a glance Governance at a glance Our Board The Board has 11 directors comprising the Chairman, two executive directors and eight independent non-executive directors. Biographies of the directors are available on pages 98 to 101 and at natwestgroup.com. Board governance framework The Board is collectively responsible for promoting the long-term success of NatWest Group plc, driving both shareholder value and contribution to society. To assist in providing effective oversight and leadership, the Board has established the following committees: NatWest Group plc Board Group Audit Committee see report – page 116 Group Board Risk Committee see report – page 124 Group Nominations and Governance Committee see report – page 114 Group Performance and Remuneration Committee see report – page 136 Group Sustainable Banking Committee see report – page 132 Technology and Innovation Committee see report – page 134 The Group CEO has established the Group Executive Committee to support her in discharging her responsibilities in managing NatWest Group’s businesses day to day. – Further information on our governance structure is available on pages 102 to 187. – Information on how stakeholders have influenced Board discussions and decision-making during 2021 is available in our section 172(1) statement on pages 52 to 53. – Various corporate documents including our Articles of Association and terms of reference for the Board and Board Committees are available at natwestgroup.com. Executive directors – Alison Rose (Group CEO) – Katie Murray (Group CFO) Independent non- executive directors – Frank Dangeard – Patrick Flynn – Morten Friis – Robert Gillespie – Yasmin Jetha – Mike Rogers – Mark Seligman (Senior Independent Director) – Lena Wilson Company Secretary – Jan Cargill Francesca Barnes, Graham Beale and Ian Cormack are the three additional independent non-executive directors of NatWest Holdings Limited and also attend NatWest Group plc Board meetings and relevant Board Committee meetings as observers. Further information can be found in the Corporate governance report on pages 102-113. Chairman – Howard Davies 80 NatWest Group 2021 Annual Report and Accounts Board composition The charts below describe our Board’s composition by gender, tenure, age, and skills and experience as at 31 December 2021. Female e x ecutive direct ors: 2 Female non-e x ecutive directors : 2 Male Chairman + non-ex ecutive directors : 7 Board composition b y gender 2 2 7 0-3 years : 2 3-6 years: 6 6-9 years : 3 Board tenur e 2 6 3 45-55: 2 56-65: 5 66-75: 4 Board age r ange 2 5 4 Board diversity and inclusion The Board operates a Boardroom Inclusion Policy (available at natwestgroup.com) which reflects the most recent industry targets and is aligned to the NatWest Group Inclusion Policy and Principles applying to the wider bank. Throughout 2021 the Board met the recommendation of the Parker Review with at least one member of the Board being of Black, Asian or Minority Ethnic background and it intends to continue to meet that recommendation (9% of the Board at the end of 2021). At the end of 2021 the Board exceeded the recommendation of the FTSE Women Leaders Review (formerly the Hampton- Alexander Review) of 33% female representation on the board, with 36% of the Board being female. Board skills and experience The Board is structured to ensure that the directors provide NatWest Group plc with the appropriate combination of skills, experience and knowledge as well as independence. The bar chart opposite is an extract from our Board skills matrix, which is reviewed by the Group Nominations and Governance Committee and approved by the Board annually. The matrix reflects our directors’ self-assessment of the skills and experience they bring to Board discussions, in line with pre-determined criteria aligned to current and future strategic priorities. The 2021 external Board evaluation did not identify any immediate or material gaps in Board skills and experience, however it was acknowledged that the Board would benefit from additional technology expertise. The Board and Group Nominations and Governance Committee will continue to keep Board skills and composition under review during 2022. UK Corporate Governance Code Throughout 2021, NatWest Group plc applied the principles and complied with all of the provisions of the 2018 UK Corporate Governance Code with the following exceptions: – Provision 17 – that the Group Nominations and Governance Committee should ensure plans are in place for orderly succession to both the board and senior management positions, and oversee the development of a diverse pipeline for succession; and – Provision 33 – that the Group Performance and Remuneration Committee should have delegated responsibility for setting remuneration for the Chairman and executive directors. The Board considers these are matters that should be reserved for the Board. Our full 2018 UK Corporate Governance Code compliance statement is available on page 181. Our full Corporate governance report is available on pages 102 to 187 and includes our Board Committee reports, the Directors’ remuneration report and the Report of the directors. Board skills and e xp erience Skills and experience Number of directors 0 2 4 6 11 10 8 Risk management Broad Financial Services T ransformation Financial Mark ets / Inves tment Banking Environment al, Social and Governanc e (incl climate) CEO / Senior Executiv e Management Customer e xperience Government / r egulatory / public sector Retail / C ommercial / Private Banking Digital and Innov ation CFO / A ccountant T echnology (infrastructure, cyber) 81 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Financial review Chief Financial Officer’s review 84 Financial summary 86 Summary consolidated balance sheet 87 Segment summary income statements 88 Segment performance 95 Summary financial statements We have delivered a strong operating performance in 2021. Group RoTE was 9.4%, benefiting from a £1.3 billion net impairment release. We achieved our Group cost reduction target of 4.0% and lending growth across our UK and RBSI retail and commercial businesses was 2.6%, excluding UK Government financial support schemes. Our capital and liquidity position remains strong after returning £3.8 billion to shareholders, and default levels have remained low across all our portfolios. The CET1 ratio was 18.2%, reducing to 15.9% on 1 January 2022 following regulatory RWA and capital changes. We have made good progress on our phased withdrawal from the Republic of Ireland and will focus the financial commentary below on the Group excluding Ulster Bank RoI (Go-forward group). Total income, excluding notable items, in the Go-forward group was 5.6% lower than prior year. Across the UK and RBSI retail and commercial businesses income increased by 1.4% reflecting strong balance sheet growth, principally in our mortgage book. NWM income was below expectations, down by 61.5%, compared with 2020, reflecting continued weakness in Fixed Income, impacted by subdued levels of customer activity and ongoing reshaping of the business, and exceptional levels of market activity in the prior year. Bank NIM (1) of 2.39% was 7 basis points lower than 2020 impacted by reduced structural hedge income, yield curve movements and lower unsecured balances. We delivered a cost reduction of £256 million, or 4.0%, in 2021, in line with our target for the year. This has been achieved by transformation across our customer journeys and NWM business, in line with the strategic announcement made in February 2020 and a £68 million reduction in the bank levy charge. A net impairment release of £1,278 million reflects the low levels of realised losses we have seen across the year. Total impairment provisions reduced by £2.4 billion to £3.8 billion during 2021 and as a result ECL coverage ratio decreased from 1.66% to 1.03%. We are pleased to report a 2021 attributable profit of £2,950 million, with earnings per share of 25.4 pence and a RoTE of 9.4%. A final dividend of 7.5 pence per share is proposed, bringing our total 2021 paid and proposed capital distributions to £3.8 billion through a combination of ordinary dividends, directed buybacks of the UK Government stake and our on-market buyback programme. Across the UK and RBSI retail and commercial businesses, and excluding UK Government support schemes, net lending increased by 2.6%. Mortgage growth exceeded the market, however commercial lending was behind market as we have sought to reduce certain exposures, through targeted sector reductions and capital actions, whilst continuing to focus on supporting customers through sustainable lending. Customer deposits in the Go-forward group increased by £49.3 billion, or 12.0%, in 2021 including £9.4 billion related to Treasury repo activity. Across the UK and RBSI retail and commercial businesses customer deposits increased by 10.0%, as customers continued to build and retain liquidity. Katie Murray Chief Financial Officer 82 NatWest Group 2021 Annual Report and Accounts Continuing operations Two legally binding agreements for the sale of the UBIDAC business were announced in 2021 as part of the phased withdrawal from the Republic of Ireland: the sale of commercial lending to Allied Irish Banks p.l.c. (AIB) and the performing non-tracker mortgages, performing micro-SME loans, UBIDAC’s asset finance business and 25 of its branch locations to Permanent TSB p.l.c (PTSB). The business activities relating to these sales that meet the requirements of IFRS 5 are presented as a discontinued operation and as a disposal group on 31 December 2021. The Financial review presents the results of the Group’s continuing operations. For further details refer to Note 8 Discontinued operations and assets and liabilities of disposal groups in the Notes to the consolidated financial statements. Year ended 2021 £m 2020 (1) £m Variance £m Continuing operations Go-forward group income (2,3) 10,284 10,286 (2) Total income 10,512 10,508 4 Operating expenses (7,758) (7,858) (100) Profit before impairment releases/(losses) 2,754 2,650 104 Operating profit/(loss) before tax 4,032 (481) 4,513 Profit/(loss) attributable to ordinary shareholders 2,950 (753) 3,703 Excluding notable items within total income (4) Go-forward group income excluding notable items (2,3) 10,074 10,670 (596) Total income excluding notable items (3) 10,267 10,892 (625) Operating expenses (7,758) (7,858) 100 Profit before impairment releases/(losses) excluding notable items 2,509 3,034 (525) Operating profit/(loss) before tax excluding notable items 3,787 (97) 3,884 UK and RBSI retail and commercial businesses income excluding notable items (3) 9,620 9,486 134 Performance key metrics and ratios Bank net interest margin (3,5) 2.39% 2.46% (0.07%) Bank average interest earning assets (3,5) £314bn £301bn £13bn Cost:income ratio (3) 73.4% 74.4% (1.1%) Loan impairment rate (3) (35bps) 85bps (120bps) Total earnings per share attributable to ordinary shareholders – basic 25.4p (6.2p) 31.6p Go-forward group return on tangible equity (2) 10.0% (1.3%) 11.3% Return on tangible equity (3) 9.4% (2.4%) 11.8% Balance sheet Go-forward group customer deposits (2,3) £461.4bn £412.1bn £49.3bn UK and RBSI retail and commercial net lending excluding UK Government support schemes (3) £305.7bn £297.9bn £7.8bn Capital, liquidity and funding Common Equity Tier (CET1) ratio (6) 18.2% 18.5% (0.3%) Risk-weighted assets (RWAs) £157.0bn £170.3bn (£13.3bn) Liquidity coverage ratio (LCR) 172% 165% 7% Total wholesale funding (3) £77bn £71bn £6bn Tangible net asset value (TNAV) per ordinary share (3) 272p 261p 11p (1) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8 to the consolidated financial statements. (2) Go-forward group excludes Ulster Bank RoI and discontinued operations. (3) Refer to the Non-IFRS financial measures section for details of the basis of preparation and reconciliation of non-IFRS financial measures. (4) Refer to page 84 for details of notable items within total income. (5) NatWest Group excluding NatWest Markets, Ulster Bank RoI and liquid asset buffer. (6) Based on CRR end-point including the IFRS 9 transitional adjustment of £0.6 billion (31 December 2020 – £1.7 billion). Excluding this adjustment, the CET1 ratio would be 17.8% (31 December 2020 – 17.5%.) TNAV per share increased by 3 pence in the quarter to 272 pence largely reflecting the attributable profit partially offset by movements in the cash flow hedging reserve. Capital, funding and liquidity The CET1 ratio remains strong at 18.2%, or 17.8% excluding IFRS 9 transitional relief. The 30 basis points reduction in the year includes capital distributions of c.240 basis points, partially offset by the reduction in RWAs, c.170 basis points, and the attributable profit net of IFRS 9 transitional relief and other capital movements. RWAs of £157.0 billion reduced by £13.3 billion in 2021 mainly reflecting business movements in Commercial Banking, including targeted sector reductions, improvement in risk parameters and active capital management. On 1 January 2022, the proforma CET1 ratio was 15.9% including the impact of regulatory RWA inflation, 200 basis points, the removal of the software development costs capital benefit, 20 basis points, and the tapering of IFRS 9 transitional relief, 10 basis points. RWAs increased by £18.8 billion, including £14.8 billion associated with mortgage risk weight changes. The liquidity coverage ratio (LCR) of 172%, representing £89.9 billion headroom above 100% minimum requirement, increased by 7 percentage points compared with 2020. Total wholesale funding increased by £6.0 billion in the year to £76.7 billion. (1) Excludes NatWest Markets, liquid asset buffer and Ulster Bank RoI. 83 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Financial review continued N N a a t t W W e e s s t t G G r r o o u u p p Annual Report and Accounts 2021 84 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial summary 2021 2020 (1) Variance Income - Continuing operations £m £m £m % Interest receivable (2) 9,313 9,798 (485) (4.9) Interest payable (2) (1,699) (2,322) 623 (26.8) Net interest income 7,614 7,476 138 1.8 Net fees and commissions 2,124 2,000 124 6.2 Income from trading activities 323 1,125 (802) (71.3) Other non-interest income 451 (93) 544 nm Non-interest income 2,898 3,032 (134) (4.4) Total income 10,512 10,508 4 nm Go-forward group income excluding notable items (3) 10,074 10,670 (596) (5.6) Total income excluding notable items (3) 10,267 10,892 (625) (5.7) Notable items within total income (3) Retail Banking Retail Banking debt sale gain — 8 Metro Bank mortgage portfolio acquisition loss — (58) Private Banking Consideration on the sale of the Adam & Company investment management business 54 — Commercial Banking Commercial Banking fair value and disposal loss (22) (37) Commercial Banking tax variable lease repricing 32 — NatWest Markets NatWest Markets asset disposals/strategic risk reduction (4) (64) (83) Own credit adjustments (OCA) 6 (24) Central items & other Share of associate profit/(loss) for Business Growth Fund 219 (22) Liquidity Asset Bond sale gains 120 113 Loss on redemption of own debt (138) (324) IFRS volatility in Central items & other (5) 47 83 Property strategy update (44) — FX recycling loss in Central items & other — (40) Ulster Bank RoI Ulster Bank RoI gain arising from the restructuring of structural hedges 35 — Total 245 (384) (1) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8 to the consolidated financial statements. (2) Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities. (3) Refer to the Non-IFRS financial measures section for details of the basis of preparation and reconciliation of Non-IFRS financial and performance measures (4) Asset disposals/strategic risk reduction in 2020 relates to the cost of exiting positions and the impact of risk reduction transactions entered into, in respect of the strategic announcement on 14 February 2020. (5) IFRS volatility relates to loans which are economically hedged but for which hedge accounting is not permitted under IFRS. 2021 compared with 2020  Total income, excluding notable items, in the Go-forward group (1) was £596 million, or 5.6% lower than prior year. Across the UK and RBSI retail and commercial businesses income increased by 1.4% reflecting strong balance sheet growth, principally in our mortgage book. NWM income was below expectations, down £757 million, or 61.5% compared with 2020, reflecting continued weakness in Fixed Income, impacted by subdued levels of customer activity and ongoing reshaping of the business, and exceptional levels of market activity in the prior year. (1) Go-forward group excludes Ulster Bank RoI. (2) NatWest Group excluding NatWest Markets, liquid asset buffer and Ulster Bank RoI.  Bank NIM (2) of 2.39% was 7 basis points lower than 2020 impacted by reduced structural hedge income, yield curve movements and lower unsecured balances.  Structural hedges of £190 billion generated £1.3 billion of incremental net interest income for the year, compared with £1.1 billion of incremental net interest income on a balance of £159 billion in 2020. 84 NatWest Group 2021 Annual Report and Accounts Financial review continued N N a a t t W W e e s s t t G G r r o o u u p p Annual Report and Accounts 2021 85 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial summary continued 2021 2020 (1) Variance Operating expenses - Continuing operations £m £m £m % Staff expenses 3,265 3,416 (151) (4.4) Premises and equipment 1,030 989 41 4.1 Other administrative expenses 1,427 1,535 (108) (7.0) Strategic costs 787 1,013 (226) (22.3) Litigation and conduct costs 466 113 353 nm Depreciation and amortisation 783 792 (9) (1.1) Operating expenses 7,758 7,858 (100) (1.3) Excluding: Litigation and conduct costs 466 113 353 nm Strategic costs 787 1,013 (226) (22.3) Operating lease depreciation 140 145 (5) (3.4) Ulster Bank RoI direct costs 273 239 34 14.2 6,092 6,348 (256) (4.0) (1) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8 to the consolidated financial statements. 2021 compared with 2020  Operating expenses excluding litigation and conduct costs, strategic costs, operating lease depreciation and Ulster Bank RoI direct costs decreased by £256 million, or 4.0%, in line with our target for the year. This has been achieved by transformation across our customer journeys and NWM business, in line with the strategic announcement made in February 2020 and a £68 million reduction in the UK bank levy charge.  Strategic costs of £787 million included £237 million in NWM related to transformation, £124 million of redundancy charges, £88 million of technology spend and an £85 million goodwill impairment.  Litigation and conduct costs of £466 million represent the net impact of a number of remediation and litigation matters concluding. This amount includes penalties associated with the resolution of FCA’s investigation into potential breaches of the UK Money Laundering Regulations 2007. Refer to Note 27 for additional information on other litigation and regulatory matters. 2021 2020 Variance Impairments - Continuing operations (1) £m £m £m Loans - amortised cost and FVOCI 369,827 372,399 (2,572) (0.7%) ECL provisions 3,806 6,186 (2,380) (38.5%) ECL provisions coverage ratio (%) 1.03 1.66 (0.6) (38.0%) Impairment (releases)/losses ECL (release)/charge (2) (1,278) 3,131 (4,409) (140.8%) Amounts written off 876 937 (61) (6.5%) (1) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8 to the consolidated financial statements. (2) The table above summarises loans and related credit impairment measured on an IFRS 9 basis. Refer to Credit Risk – Banking activities in the Risk and capital management section for further details. 2021 compared with 2020  A net impairment release of £1,278 million reflects the low levels of realised losses we have seen across the year. Total impairment provisions reduced by £2.4 billion to £3.8 billion during 2021 and as a result ECL coverage ratio decreased from 1.66% to 1.03%. Whilst we are comfortable with the strong credit performance of our book, we continue to hold economic uncertainty post model adjustments (PMA) of £0.6 billion, or 15.3% of total impairment provisions. We will continue to assess this position throughout the year. 2021 2020 (1) Tax - Continuing operations £m £m Tax charge (996) (74) UK corporation tax rate 19.0% 19.0% Effective tax rate 24.7% (23.7%) (1) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8 to the consolidated financial statements. 2021 compared with 2020  A tax charge of £996 million for the year ended 31 December 2021 arises rather than the expected tax charge of £766 million based on the UK corporation tax rate of 19%. The higher tax charge reflects the UK banking surcharge, and other non- deductible items such as UK bank levy. These factors have been partially offset by the impact on the group's UK net deferred tax asset of the increased tax rate from 1 April 2023, enacted on 10 June 2021. Further details can be found in Note 7 to the consolidated financial statements. 85 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Financial review continued N N a a t t W W e e s s t t G G r r o o u u p p Annual Report and Accounts 2021 86 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Summary consolidated balance sheet as at 31 December 2021 2021 2020 Variance £m £m £m Assets Cash and balances at central banks 177,757 124,489 53,268 43% Trading assets 59,158 68,990 (9,832) (14%) Derivatives 106,139 166,523 (60,384) (36%) Settlement balances 2,141 2,297 (156) (7%) Loans to banks - amortised cost 7,682 6,955 727 10% Loans to customers - amortised cost 358,990 360,544 (1,554) (0%) Other financial assets 46,145 55,148 (9,003) (16%) Other assets (including intangible assets) 14,965 14,545 420 3% Assets of disposal groups 9,015 — 9,015 nm Total assets 781,992 799,491 (17,499) (2%) Liabilities Bank deposits 26,279 20,606 5,673 28% Customer deposits 479,810 431,739 48,071 11% Settlement balances 2,068 5,545 (3,477) (63%) Trading liabilities 64,598 72,256 (7,658) (11%) Derivatives 100,835 160,705 (59,870) (37%) Other financial liabilities 49,326 45,811 3,515 8% Subordinated liabilities 8,429 9,962 (1,533) (15%) Notes in circulation 3,047 2,655 392 15% Other liabilities 5,797 6,388 (591) (9%) Total liabilities 740,189 755,667 (15,478) (2%) Total equity 41,803 43,824 (2,021) (5%) Total liabilities and equity 781,992 799,491 (17,499) (2%) Tangible net asset value per ordinary share (pence) (1) 272p 261p 11p 4% (1) Tangible net asset value per ordinary share represents tangible equity divided by the number of ordinary shares.  Total assets of £782.0 billion as at 31 December 2021 decreased by £17.5 billion, 2%, compared with 31 December 2020. This was primarily driven by decreases in derivatives, trading assets and other financial assets partially offset by cash and balances at central banks.  Cash and balances at central banks increased by £53.3 billion, 43%, to £177.8 billion mainly as a result of a net customer funding surplus driven by significant deposit inflows flow in addition to £15.6 billion liquidity and debt portfolio optimisation activity.  Trading assets decreased by £9.8 billion, 14%, to £59.2 billion mainly driven by reductions in cash collateral and debt securities. Trading liabilities decreased by £7.7 billion, 11%, to £64.6 billion due to reduction in cash collateral.  Derivative assets decreased £60.4 billion, 36%, to £106.1 billion, and liabilities, decreased by £59.9 billion, 37%, to £100.8 billion. These movements were driven by a decrease in underlying volumes due to matured trades and buyouts exceeding new trades and lower mark-to-market valuations due to higher interest rates for major currencies in the year.  Loans to customers - amortised cost, decreased by £1.6 billion, to £359.0 billion including £11.3 billion decrease in Ulster Bank ROI predominantly due to a reclassification of banking portfolio loans to assets of disposal groups, partially offset by an £9.9 billion increase in Retail Banking driven by strong gross mortgage lending.  Other financial assets, which includes debt securities, equity shares and other loans, decreased by £9.0 billion, 16%, to £46.1 billion, primarily due to reductions in debt securities.  Customer deposits increased by £48 billion, 11%, to £479.8 billion including increases of £17.1 billion in Retail Banking, £10 billion in Commercial Banking and £7.0 billion in Private Banking as customers retained liquidity in light of the COVID-19 economic uncertainty. Treasury reflected a £9.4 billion increase in customer facing repos due to prevailing market conditions.  Other financial liabilities, which includes customer deposits at fair value through profit and loss and debt securities in issue, increased by £3.5 billion, 8%, to £49.3 billion.  Subordinated liabilities have decreased by £1.5 billion, 15%, to £8.4 billion due to redemptions partially offset by new issuances.  Other liabilities decreased by £0.6 billion, 9%, to £5.8 billion mainly due to lower lease liabilities in the year.  Owners’ equity decreased by £2.0 billion, 5%, to £41.8 billion, driven by share repurchase, ordinary and paid-in- equity dividends paid, partially offset by the attributable profit for the year. 86 NatWest Group 2021 Annual Report and Accounts Financial review continued N N a a t t W W e e s s t t G G r r o o u u p p Annual Report and Accounts 2021 87 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Segmental summary income statements Continuing operations Go-forward group Total Central excluding Total Retail Private Commercial RBS NatWest items Ulster Ulster NatWest Banking Banking Banking International Markets & other Bank RoI Bank RoI Group 2021 £m £m £m £m £m £m £m £m £m Net interest income 4,074 480 2,582 383 9 (14) 7,514 100 7,614 Non-interest income 371 336 1,293 165 406 199 2,770 128 2,898 Total income 4,445 816 3,875 548 415 185 10,284 228 10,512 Other expenses (2,250) (504) (2,153) (228) (907) (42) (6,084) (421) (6,505) Strategic costs (187) (19) (93) (11) (254) (201) (765) (22) (787) Litigation and conduct costs (76) 3 (108) (3) — (243) (427) (39) (466) Operating expenses (2,513) (520) (2,354) (242) (1,161) (486) (7,276) (482) (7,758) Impairment releases 36 54 1,073 52 35 — 1,250 28 1,278 Operating profit/(loss) 1,968 350 2,594 358 (711) (301) 4,258 (226) 4,032 Total income excluding notable items 4,445 762 3,865 548 473 (19) 10,074 193 10,267 Return on tangible equity (1) na na na na na na 10.0% na 9.4% Return on equity (2) 26.1% 17.0% 22.0% 22.5% (13.1%) nm nm nm na Cost:income ratio (1) 56.5% 63.7% 59.3% 44.2% 279.8% nm 70.3% nm 73.4% Customer deposits (£bn) 188.9 39.3 177.7 37.5 2.3 15.7 461.4 18.4 479.8 Average interest earning assets (£bn) 196.0 27.2 168.1 37.8 32.7 nm nm 15.9 524.9 Net interest margin (1) 2.08% 1.76% 1.54% 1.01% nm nm nm nm nm Third party customer asset rate (3) 2.66% 2.36% 2.71% 2.26% nm nm nm nm nm Third party customer funding rate (3) (0.06%) — (0.01%) 0.08% nm nm nm 0.02% nm 2020 (4) Continuing operations Net interest income 3,868 489 2,740 371 (57) (57) 7,354 122 7,476 Non-interest income 313 274 1,218 126 1,180 (179) 2,932 100 3,032 Total income 4,181 763 3,958 497 1,123 (236) 10,286 222 10,508 Other expenses (2,295) (466) (2,261) (244) (1,038) (19) (6,323) (409) (6,732) Strategic costs (226) (15) (179) (49) (267) (252) (988) (25) (1,013) Litigation and conduct costs (19) 26 10 2 (5) (120) (106) (7) (113) Operating expenses (2,540) (455) (2,430) (291) (1,310) (391) (7,417) (441) (7,858) Impairment losses (792) (100) (1,927) (107) (40) (26) (2,992) (139) (3,131) Operating profit/(loss) 849 208 (399) 99 (227) (653) (123) (358) (481) Total income excluding notable items 4,231 763 3,995 497 1,230 (46) 10,670 222 10,892 Return on tangible equity (1) na na na na na na (1.3%) na (2.4%) Return on equity (2) 10.2% 10.3% (4.5%) 6.1% (3.8%) nm nm nm na Cost:income ratio (1) 60.8% 59.6% 59.9% 58.6% 116.7% nm 71.7% nm 74.4% Customer deposits (£bn) 171.8 32.4 167.7 31.3 2.6 6.3 412.1 19.6 431.7 Average interest earning assets (£bn) 181.4 23.8 163.1 31.7 37.9 nm nm 16.6 483.7 Net interest margin (1) 2.13% 2.05% 1.68% 1.17% nm nm nm nm nm Third party customer asset rate (3) 2.89% 2.53% 2.86% 2.51% nm nm nm nm nm Third party customer funding rate (3) (0.19%) (0.11%) (0.08%) (0.01%) nm nm nm (0.04%) nm nm = not meaningful (1) Refer to the Non-IFRS financial measures section for details of the basis of preparation. (2) NatWest Group’s CET1 target is approximately 14% but for the purposes of computing segmental return on equity (ROE), to better reflect the differential drivers of capital usage, segmental operating profit adjusted for preference share dividends and tax is divided by average notional equity allocated at different rates of 14.5% (Retail Banking), 15.5% (Ulster Bank RoI), 11.5% (Commercial Banking), 12.5% (Private Banking), 16% (RBS International) and 15% for all other segments, of the period average of segmental risk-weighted assets equivalents (RWAe) incorporating the effect of capital deductions. NatWest Group return on equity is calculated using profit attributable to ordinary shareholders. Refer to the Non- IFRS financial measures section for details of the basis of preparation. (3) Third party customer asset rate is calculated as annualised interest receivable on third-party loans to customers as a percentage of third-party loans to customers. This excludes assets of disposal groups, intragroup items, loans to banks and liquid asset portfolios. Third party customer funding rate reflects interest payable or receivable on third-party customer deposits, including interest bearing and non-interest bearing customer deposits. Intragroup items, bank deposits, debt securities in issue and subordinated liabilities are excluded from the customer funding rate calculation. Net interest margin is calculated as net interest income as a percentage of the average interest-earning assets, excluding assets of disposal groups and without these remaining exclusions. (4) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8 to the consolidated financial statements. 87 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Financial review continued N N a a t t W W e e s s t t G G r r o o u u p p Annual Report and Accounts 2021 88 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Segment performance Retail Banking 2021 2020 Variance Income statement £m £m £m % Net interest income 4,074 3,868 206 5 Non-interest income 371 313 58 19 Total income 4,445 4,181 264 6 Other expenses (2,250) (2,295) 45 (2) Strategic costs (187) (226) 39 (17) Litigation and conduct costs (76) (19) (57) 300 Operating expenses (2,513) (2,540) 27 (1) Impairment releases/(losses) 36 (792) 828 (105) Operating profit 1,968 849 1,119 132 Performance ratios Return on equity (1) 26.1% 10.2% 15.9% Net interest margin 2.08% 2.13% (0.05%) Cost:income ratio 56.5% 60.8% (4.3%) Loan impairment rate (2bps) 45bps (47bps) (1) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 14.5% of the period average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes), assuming a 28% tax rate. 2021 2020 Variance Capital and balance sheet £bn £bn £m % Loans to customers (amortised cost) - personal advances 7.1 7.3 (0.2) (3) - mortgages 172.8 163.0 9.8 6 - cards 3.8 3.8 — — Total loans to customers (amortised cost) 183.7 174.1 9.6 6 Loan impairment provisions (1.5) (1.8) 0.3 (17) Net loans to customers (amortised cost) 182.2 172.3 9.9 6 Total assets 210.0 197.6 12.4 6 Customer deposits 188.9 171.8 17.1 10 Risk-weighted assets 36.7 36.7 — — 2021 compared with 2020  In 2021, Retail Banking continued to grow net lending with an measured approach to risk, delivering a return on equity of 26.1% and operating profit of £1,968 million. Lending growth was supported by a strong performance in mortgages and a return to unsecured lending growth in the second half of 2021.  Retail Banking completed £1.1 billion of Climate and Sustainable Funding and Financing in 2021, which will contribute towards the new NatWest Group target of £100 billion of Climate and Sustainable Funding and Financing between 1 July 2021 and the end of 2025.  Total income was £264 million, or 6.3%, higher than 2020 reflecting mortgage balance and margin improvement, higher transactional-related fee income and non-repeat of loss on acquisition, partially offset by the impact of the lower interest rate environment on deposit returns, lower average unsecured balances and the annualised impact of regulatory changes on fee income.  Net interest margin was 5 basis points lower than 2020 reflecting lower deposit returns and lower average unsecured balances, partly offset by higher mortgage margins.  Other expenses decreased by £45 million, or 2.0%, compared with 2020 primarily reflecting an 8.8% reduction in headcount as a result of continued customer digital adoption, automation and improvement of end-to-end customer journeys, including digitalising the customer account opening processes, leading to an increase in straight through processing within journeys from 45% in December 2020 to 70% in December 2021.  Strategic costs of £117 million in Q4 2021 include an £85 million impairment of goodwill, reflecting a legacy business in accelerated run down within Retail Banking.  An impairment release of £36 million primarily reflects ECL provision releases in the non-defaulted portfolio.  Net loans to customers increased by £9.9 billion, or 5.7%, compared with 2020 as a result of strong gross new mortgage lending and improved retention. Gross new mortgage lending was £36.0 billion with flow share of 11.5%, supporting mortgage balance growth of £9.8 billion or 6.0%, representing a stock share of 11.0%. Cards were stable however, we have seen improved customer spend and demand in the second half of 2021. Personal advances reduced by £0.2 billion as customers made higher overdraft repayments in H1 2021, reflecting the impact of UK Government restrictions partly offset by growth in H2 2021 as customer demand for personal loans increased as the UK economy recovered.  Customer deposits increased by £17.1 billion, or 10.0%, compared with 2020 as UK Government schemes combined with Covid related restrictions resulted in lower customer spend and increased savings in H1 2021.  RWAs were broadly stable compared with 2020 primarily reflecting lending growth, offset by continued quality improvements. 88 NatWest Group 2021 Annual Report and Accounts Financial review continued N N a a t t W W e e s s t t G G r r o o u u p p Annual Report and Accounts 2021 89 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Segment performance continued Private Banking 2021 2020 Variance Income statement £m £m £m % Net interest income 480 489 (9) (2) Non-interest income 336 274 62 23 Total income 816 763 53 7 Other expenses (504) (466) (38) 8 Strategic costs (19) (15) (4) 27 Litigation and conduct costs 3 26 (23) (88) Operating expenses (520) (455) (65) 14 Impairment releases/(losses) 54 (100) 154 (154) Operating profit 350 208 142 68 Performance ratios Return on equity (1) 17.0% 10.3% 6.7% Net interest margin 1.76% 2.05% (0.29%) Cost:income ratio 63.7% 59.6% 4.1% Loan impairment rate (29bps) 58bps (87bps) (1) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 12.5% of the period average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes), assuming a 28% tax rate. 2021 2020 Variance Capital and balance sheet £bn £bn £m % Loans to customers (amortised cost) - personal 2.3 2.2 0.1 5 - mortgages 11.8 10.7 1.1 10 - other 4.4 4.2 0.2 5 Total loans to customers (amortised cost) 18.5 17.1 1.4 8 Loan impairment provisions (0.1) (0.1) — — Net loans to customers (amortised cost) 18.4 17.0 1.4 8 Total assets 29.9 26.2 3.7 14 Assets under management (AUMs) (2) 30.2 27.0 3.2 12 Assets under administration (AUAs) (2) 5.4 5.1 0.3 6 Assets under management and administration (AUMA) (2) 35.6 32.1 3.5 11 Customer deposits 39.3 32.4 6.9 21 Loan:deposit ratio 47% 52% (5%) (10) Risk-weighted assets 11.3 10.9 0.4 4 (2) The definition of AUMs/AUAs has been updated to provide clarity on assets where the investment management is undertaken by Private Banking. AUMs now comprises assets where the investment management is undertaken by Private Banking irrespective of the franchise the customer belongs to. AUAs now comprises third party assets held on an execution-only basis in custody. Total AUMA remain as before. 2021 compared with 2020  In 2021, Private Banking delivered strong growth across AUMA, lending and deposits which has supported a 2021 return on equity of 17.0% and operating profit of £350 million. Digital net new money across NatWest Invest, Royal Bank Invest and Coutts Invest of £0.8 billion in 2021 is more than double 2020. Approximately 2,114 new customers were onboarded into Private Banking, an increase of around 29% compared to 2020.  NatWest Group completed the sale of Adam & Company’s investment management business on 1 October 2021 for a total consideration of £54 million, which has been recorded as a notable item in the Q4 2021 results.  Total income was £53 million, or 6.9%, higher than 2020 reflecting a £54 million consideration from the sale of the Adam & Company investment management business in Q4 2021 and strong balance growth partially offset by lower deposit returns in a lower interest rate environment.  Net interest margin decreased by 29 basis points reflecting lower deposit returns and higher liquidity portfolio costs.  Other expenses were £38 million, or 7.9%, higher than 2020 principally due to investment in digital infrastructure and an increase in headcount related to the enhancement of AUMA growth propositions.  A net impairment release of £54 million in 2021 mainly reflects ECL provision releases in non-default portfolios.  Net loans to customers increased by £1.4 billion, or 8.2%, compared with 2020 driven by continued strong mortgage lending growth of £1.1 billion or 10.3%, including gross new lending of £3.3 billion. RWAs increased by £0.4 billion, or 3.7%.  Customer deposits increased by £6.9 billion, or 21.3%, compared with 2020 reflecting strong personal and commercial inflows as UK Government restrictions resulted in clients continuing to build and retain liquidity.  AUMAs increased by £3.5 billion, or 10.9%, driven by an increase in AUM net new money (NNM) of £3.0 billion and AUM positive investment performance of £2.1 billion, partially offset by the £1.8 billion impact of the sale of Adam & Company’s investment management business and £0.2 billion EEA resident client outflows following the UK’s exit from the EU. AUM NNM of £3.0 billion represents 9.3% of opening AUMAs, which is double NNM in 2020. 89 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Financial review continued N N a a t t W W e e s s t t G G r r o o u u p p Annual Report and Accounts 2021 90 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Segment performance continued Commercial Banking 2021 2020 Variance Income statement £m £m £m % Net interest income 2,582 2,740 (158) (6) Non-interest income 1,293 1,218 75 6 Total income 3,875 3,958 (83) (2) Other expenses (excluding operating lease depreciation) (2,013) (2,116) 103 (5) Strategic costs (93) (179) 86 (48) Litigation and conduct costs (108) 10 (118) (1,180) Operating expenses (2,354) (2,430) 76 (3) Impairment releases/(losses) 1,073 (1,927) 3,000 (156) Operating profit/(loss) 2,594 (399) 2,993 (750) Performance ratios Return on equity (1) 22.0% (4.5%) 26.5% Net interest margin 1.54% 1.68% (0.14%) Cost:income ratio 59.3% 59.9% (0.6%) Loan impairment rate (104bps) 173bps (277bps) (1) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 11.5% of the period average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes), assuming a 28% tax rate. 2021 2020 Variance Capital and balance sheet £bn £bn £m % Loans to customers (amortised cost) - business banking 14.3 13.5 0.8 6 - SME & mid corporates 34.6 32.4 2.2 7 - specialised business 15.5 14.8 0.7 5 - large corporates & institutions (1) 18.8 21.4 (2.6) (12) - real estate (2) 18.6 21.5 (2.9) (13) - commercial - EU divestment (3) — 5.9 (5.9) (100) - other (4) 0.9 1.6 (0.7) (44) Total loans to customers (amortised cost) 102.7 111.1 (8.4) (8) Loan impairment provisions (1.5) (2.9) 1.4 (48) Net loans to customers (amortised cost) 101.2 108.2 (7.0) (6) Total assets 184.6 187.4 (2.8) (1) Customer deposits 177.7 167.7 10.0 6 Loan:deposit ratio 57% 65% (8%) (12) Risk-weighted assets 66.4 75.1 (8.7) (12) (1) Segment reporting for income, impairments and loans to customers for large corporates & institutions (LC&I) includes the Western European business segment. (2) Real estate includes commercial real estate and housing associations. (3) EU Divestment balances from Q2 2021 integrated within business banking (Q3 2020 - £0.9 billion, Q4 2020 - £1.1 billion) and SME & mid corporates (Q3 2020 - £5.0 billion, Q4 2020 - £4.8 billion), as the Incentivised Switching Scheme (ISS) closed at the end of June 2021. (4) Other includes shipping and project finance. 2021 compared with 2020  Commercial Banking delivered a resilient performance with a return on equity of 22.0% and operating profit of £2,594 million including a £1,073 million impairment release as the UK economy continued to recover. Returns have improved through active capital management, pricing discipline, and a targeted sector strategy linked to our purpose.  Growth in Tyl, our innovative merchant acquiring platform saw over £1.5 billion of transactions in 2021, three times 2020 levels, as transaction activity recovered and customers favoured digital payment solutions and reduced their reliance on cash and branch.  Commercial Banking completed £5.2 billion of Climate and Sustainable Funding and Financing in 2021, including £2.7 billion in H2 2021 which will contribute towards the new NatWest Group target of £100 billion between 1 July 2021 and the end of 2025.  Total income was £83 million, or 2.1%, lower than 2020 due to reduced deposit returns in a low interest rate environment and lower lending volumes, partially offset by a recovery in transactional banking fee income in H2 2021 driven by the UK economy.  Net interest margin decreased by 14 basis points in 2021 reflecting lower deposit returns.  Other expenses, excluding OLD, decreased by £103 million, or 4.8%, compared with 2020 reflecting cost efficiencies and simplifying our operating model enabling better service to our customers including building momentum in our digital service, whilst reducing our headcount by 9.8%.  Impairment release of £1,073 million primarily reflects ECL provision releases related to the improved economic outlook with Stage 3 defaults remaining at low levels.  Net loans to customers decreased by £7.0 billion, or 6.4%, compared with 2020 primarily reflecting and targeted sector reductions including real estate, retail and leisure and active capital management of £1.0 billion. Customer liquidity resulted in net revolving credit facility (RCF) repayments of £1.7 billion driven by large corporates & institutions and real estate as well as UK Government financial support scheme repayments of £1.3 billion. RCF utilisation was approximately 19% of committed facilities in 2021, significantly below pre-COVID-19 levels of approximately 27%. These items were partially offset by £1.4 billion lower loan provisions and growth in specialist businesses of £0.7 billion.  Customer deposits increased by £10.0 billion, or 6.0%, compared with 2020 reflecting customer behaviour to build and retain liquidity.  RWAs decreased by £8.7 billion, or 11.6%, compared with 2020 mainly reflecting business movements including targeted sector reductions in real estate and retail, improvement in risk parameters and active capital management of £1.5 billion. 90 NatWest Group 2021 Annual Report and Accounts Financial review continued N N a a t t W W e e s s t t G G r r o o u u p p Annual Report and Accounts 2021 91 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Segment performance continued RBS International 2021 2020 Variance Income statement £m £m £m % Net interest income 383 371 12 3 Non-interest income 165 126 39 31 Total income 548 497 51 10 Other expenses (228) (244) 16 (7) Strategic costs (11) (49) 38 (78) Litigation and conduct costs (3) 2 (5) (250) Operating expenses (242) (291) 49 (17) Impairment releases/(losses) 52 (107) 159 (149) Operating profit 358 99 259 262 Performance ratios Return on equity (1) 22.5% 6.1% 16.4% Net interest margin 1.01% 1.17% (0.16%) Cost:income ratio 44.2% 58.6% (14.4%) Loan impairment rate (33bps) 80bps (113bps) (1) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 16% of the period average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes), assuming a 17.5% (14% prior to Q1 2021) tax rate. 2021 2020 Variance Capital and balance sheet £bn £bn £m % Loans to customers (amortised cost) - corporate 12.7 10.4 2.3 22 - mortgages 2.4 2.5 (0.1) (4) - other 0.5 0.5 — — Total loans to customers (amortised cost) 15.6 13.4 2.2 16 Loan impairment provisions (0.1) (0.1) — — Net loans to customers (amortised cost) 15.5 13.3 2.2 17 Total assets 40.6 34.0 6.6 19 Customer deposits 37.5 31.3 6.2 20 Risk-weighted assets 7.5 7.5 — — Depositary assets (1) 479.4 427.5 51.9 12 (1) Assets held by RBSI as an independent trustee and in a depositary service capacity. 2021 compared with 2020  During 2021 RBS International (RBSI) delivered £358 million of operating profit with return on equity of 22.5% through strong lending and deposit volumes, an impairment release and continued growth in our depositary offering. This was achieved while continuing investment in our digital offering to customers including new payment features on the mobile app for both personal and business customers and the extension of our video banking proposition delivered in 2021.  RBSI completed £1.5 billion of Climate and Sustainable Funding and Financing in 2021, including £0.9 billion in H2 2021 which will contribute towards the new NatWest Group target of £100 billion between 1 July 2021 and the end of 2025.  Total income increased by £51 million, or 10.3%, compared with 2020 as a result of higher average lending balances in Institutional Banking, including higher non-utilisation fees, and higher depositary fee income.  Net interest margin decreased by 16 basis points in 2021 reflecting a higher proportion of lower yielding assets with central banks due to the higher volume of short term customer deposits in the year.  Other expenses decreased by £16 million, or 6.6%, compared with 2020 primarily reflecting the reduction in the bank levy charge for 2021.  An impairment release of £52 million in 2021 largely reflects releases across Stage 1 and 2 within the wholesale sector.  Net loans to customers increased by £2.2 billion, or 16.5%, compared with 2020 as a result of higher Institutional Banking sector volumes.  Customer deposits increased by £6.2 billion, or 19.8%, compared with 2020 as a result of higher call balances in the Institutional Banking sector throughout the year.  Depositary assets were £51.9 billion, or 12.1%, higher than 2020 reflecting strong performance in the funds sector primarily in the UK.  RWAs of £7.5 billion are broadly stable compared with 2020 as a result of lending volume growth primarily in the Institutional Banking sector, offset by model updates in the period. 91 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Financial review continued N N a a t t W W e e s s t t G G r r o o u u p p Annual Report and Accounts 2021 92 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Segment performance continued NatWest Markets (1) 2021 2020 Variance Income statement £m £m £m % Net interest income 9 (57) 66 (116) Non-interest income 406 1,180 (774) (66) Total income 415 1,123 (708) (63) Other expenses (907) (1,038) 131 (13) Strategic costs (254) (267) 13 (5) Litigation and conduct costs — (5) 5 (100) Operating expenses (1,161) (1,310) 149 (11) Impairment releases/(losses) 35 (40) 75 (188) Operating loss (711) (227) (484) 213 Analysis of income by product (2) Fixed income (64) 518 (582) (112) Currencies 427 583 (156) (27) Capital Markets 336 384 (48) (13) Capital Management Unit & other (29) (62) 33 (53) Income before revenue share paid, asset disposals and OCA 670 1,423 (753) (53) Revenue share with other NatWest Group segments (197) (193) (4) 2 Income excluding asset disposals and OCA 473 1,230 (757) (62) Asset disposals/strategic risk reduction (3) (64) (83) 19 (23) Own credit adjustments (OCA) 6 (24) 30 (125) Total income 415 1,123 (708) (63) Performance ratios Return on equity (4) (13.1)% (3.8)% (9.3)% Cost:income ratio 279.8% 116.7% 163.1% 2021 2020 Variance Capital and balance sheet £bn £bn £bn % Loans to customers (amortised cost) 7.5 8.4 (0.9) (11) Total assets 200.7 270.1 (69.4) (26) Funded assets 96.1 105.9 (9.8) (9) Risk-weighted assets 24.2 26.9 (2.7) (10) (1) The NatWest Markets operating segment is not the same as the NatWest Markets Plc legal entity (NWM Plc) or group (NWM or NWM Group) because the NatWest Markets segment excludes the Central items & other segment. (2) Product performance includes gross income earned on a group-wide basis, including amounts contributed to other segments. (3) Asset disposals/strategic risk reduction relates to the cost of exiting positions, which includes changes in carrying value to align to the expected exit valuation, and the impact of risk reduction transactions entered into, in respect of the strategic announcement on 14 February 2020. (4) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 15% of the period average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAe), assuming a 28% tax rate. 2021 compared with 2020  NatWest Markets has supported its customers’ evolving needs with innovative solutions and continued to deliver a more integrated customer proposition across NatWest Group. NatWest Markets has made good progress on building a refocused, sustainable business from which it can grow. NatWest Markets incurred an operating loss in 2021 but has largely completed its RWA reduction and continued to reduce operating expenses, and in Q4 2021, introduced changes to Rates which will improve the strategic alignment with the rest of the business and drive income growth. NatWest Markets performance at the beginning of 2022 has been in line with expectations.  NatWest Markets completed £9.7 billion of Climate and Sustainable Funding and Financing in 2021, including £3.3 billion in H2 2021 which will contribute towards the new NatWest Group target of £100 billion between 1 July 2021 and the end of 2025.  Income excluding asset disposals/strategic risk reduction and OCA was £757 million, or 61.5% lower than 2020. The performance of Fixed Income was weak in 2021 impacted by subdued levels of customer activity and the reshaping of the business, in contrast to the prior year which benefitted from exceptional levels of market activity generated by the initial spread of the COVID-19 virus. Both Currencies and Capital Markets income were lower than in 2020 but performed broadly in line with expectations.  Other expenses decreased by £131 million, or 12.6%, compared with 2020 reflecting continued reductions in line with the strategic announcement in February 2020.  A net impairment release of £35 million in 2021 reflects releases against a number of cases throughout the year.  RWAs decreased by £2.7 billion, or 10.0%, compared with 2020 reflecting lower levels of market risk and counterparty credit risk, including the impact of capital optimisation actions taken throughout the year. 92 NatWest Group 2021 Annual Report and Accounts Financial review continued N N a a t t W W e e s s t t G G r r o o u u p p Annual Report and Accounts 2021 93 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Segment performance continued Ulster Bank RoI Continuing operations 2021 2020 (1) Variance 2021 2020 (1) Variance Income statement €m €m €m % £m £m £m % Net interest income 116 137 (21) (15) 100 122 (22) (18) Non-interest income 149 113 36 32 128 100 28 28 Total income 265 250 15 6 228 222 6 3 Other expenses (487) (462) (25) 5 (421) (409) (12) 3 Strategic costs (25) (28) 3 (11) (22) (25) 3 (12) Litigation and conduct costs (45) (8) (37) 463 (39) (7) (32) 457 Operating expenses (557) (498) (59) 12 (482) (441) (41) 9 Impairment releases/(losses) 33 (157) 190 (121) 28 (139) 167 (120) Operating loss (259) (405) 146 (36) (226) (358) 132 (37) Average exchange rate - €/£ 1.163 1.125 (1) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8 to the consolidated financial statements. 2021 2020 Variance 2021 2020 Variance Capital and balance sheet €bn €bn €bn % £bn £bn £m % Loans to customers (amortised cost) - mortgages 7.3 15.2 (7.9) (52) 6.2 13.7 (7.5) (55) - other lending 1.1 5.7 (4.6) (81) 1.0 5.1 (4.1) (80) Total loans to customers (amortised cost) 8.4 20.9 (12.5) (60) 7.2 18.8 (11.6) (62) Loan impairment provisions (0.5) (0.9) 0.4 (44) (0.5) (0.8) 0.3 (38) Net loans to customers (amortised cost) 7.9 20.0 (12.1) (61) 6.7 18.0 (11.3) (63) Total assets 27.2 29.6 (2.4) (8) 22.8 26.6 (3.8) (14) Funded assets 27.2 29.6 (2.4) (8) 22.8 26.6 (3.8) (14) Customer deposits 21.9 21.8 0.1 0.5 18.4 19.6 (1.2) (6) Risk-weighted assets 10.9 13.2 (2.3) (17) 9.1 11.8 (2.7) (23) Spot exchange rate - €/£ 1.190 1.113 2021 compared with 2020  Ulster Bank RoI continues to make progress on its phased withdrawal from the Republic of Ireland. On 17 December 2021 UBIDAC entered a legally binding agreement with Permanent TSB p.l.c. (PTSB) for the proposed sale of approximately €7.6 billion of gross performing loans as at 30 June 2021, comprising performing non-tracker mortgages, performing loans in the micro-SME business, the UBIDAC Asset Finance business, including its digital platform, and 25 Ulster Bank branch locations. Completion of the sale is subject to obtaining competition, regulatory and other approvals, including PTSB's holding company shareholder approval, and other conditions being satisfied. The transaction is expected to occur in phases between Q4 2022 and Q1 2023 with the majority of loans expected to transfer by Q4 2022.  Progress continues with Allied Irish Banks, p.l.c. (AIB) for the transfer of approximately €4.2 billion, plus up to €2.8 billion of undrawn exposures, of performing commercial lending. A key part of the process is to complete the regulatory approvals and the Competition and Consumer Protection Commission (CCPC) has already carried out an extended preliminary investigation and on 31 December 2021 announced its decision to carry out a Phase 2 investigation into the proposed sale. There is no firm date for the completion of this process. Discussions are ongoing with other counterparties about their potential interest in other parts of the bank.  The values shown above represent the continuing operations of Ulster Bank RoI, including re-presented comparatives for the income statement. The re- presentation is in accordance with IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’.  Total income was €15 million, or 6.0%, higher than 2020 reflecting gains arising from the adjustment of the swap hedging portfolio to align the modelled maturity position of deposits and other balances to the withdrawal plan, offset by lower lending levels and fee income as a result of the decision to withdraw from the RoI market.  Other expenses were €25 million, or 5.4%, higher than 2020, due to higher VAT costs and regulatory levies, partially offset by a 15% reduction in headcount, lower advertising spend and back office operational costs.  A net impairment release of €33 million in 2021 reflects improvements in the reducing loan portfolios and economic forecasts.  Net loans to customers decreased by €12.1 billion primarily due to the reclassification of €10.7 billion of loans to the disposal group. 93 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Financial review continued N N a a t t W W e e s s t t G G r r o o u u p p Annual Report and Accounts 2021 94 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Segment performance continued Central items & other 2021 2020 Variance £m £m £m % Central items not allocated (301) (653) 352 (54) Funding and operating costs have been allocated to operating segments based on direct service usage, the requirement for market funding and other appropriate drivers where services span more than one segment. Residual unallocated items relate to volatile corporate items that do not naturally reside within a segment. 2021 compared with 2020  Central items not allocated represented a £301 million operating loss in 2021 principally reflecting litigation and conduct charges of £243 million, strategic costs of £201 million and losses on redemption of own debt of £138 million related to the repurchase of legacy instruments, partially offset by a £219 million share of gains under equity accounting for Business Growth Fund, and other Treasury income. 2020 included the day one loss on redemption of own debt of £324 million related to the repurchase of legacy instruments, property-related strategic costs and litigation and conduct charges. 94 NatWest Group 2021 Annual Report and Accounts Financial review continued N N a a t t W W e e s s t t G G r r o o u u p p Annual Report and Accounts 2021 95 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Summary financial statements NatWest Group’s financial statements are prepared in accordance with IFRS. Selected data under IFRS for each of the last three years is presented below. 2021 2020 (1) 2019 (1) Summary consolidated income statement £m £m £m Net interest income 7,614 7,476 7,799 Non-interest income 2,898 3,032 6,188 Total income 10,512 10,508 13,987 Operating expenses (7,758) (7,858) (9,280) Profit before impairment losses 2,754 2,650 4,707 Impairment releases/(losses) 1,278 (3,131) (724) Operating profit/(loss) before tax 4,032 (481) 3,983 Tax charge (996) (74) (439) Profit/(loss) from continuing operations 3,036 (555) 3,544 Profit from discontinued operations, net of tax 276 121 256 Profit/(loss) for the year 3,312 (434) 3,800 Attributable to: Ordinary shareholders 2,950 (753) 3,133 Preference shareholders 19 26 39 Paid-in equity holders 299 355 367 Non-controlling interests 44 (62) 261 3,312 (434) 3,800 (1) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8 to the consolidated financial statements. 2021 2020 2019 Summary consolidated balance sheet £m £m £m Cash and balances at central banks 177,757 124,489 80,993 Trading assets 59,158 68,990 76,745 Derivatives 106,139 166,523 150,029 Settlement balances 2,141 2,297 4,387 Loans to banks and customers - amortised cost 366,672 367,499 334,501 Other financial assets 46,145 55,148 61,452 Other and intangible assets 14,965 14,545 14,932 Assets of disposal groups 9,015 — — Total assets 781,992 799,491 723,039 Deposits 506,089 452,345 389,740 Trading liabilities 64,598 72,256 73,949 Settlement balances, derivatives, other financial liabilities and subordinated liabilities 160,658 222,023 206,147 Other liabilities 8,844 9,043 9,647 Owners' equity 41,796 43,860 43,547 Non-controlling interests 7 (36) 9 Total liabilities and equity 781,992 799,491 723,039 95 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Governance 96 NatWest Group 2021 Annual Report and Accounts 96 Governance 98 Our Board 102 Chairman’s introduction 103 Corporate governance 114 Report of the Group Nominations and Governance Committee 116 Report of the Group Audit Committee 124 Report of the Group Board Risk Committee 132 Report of the Group Sustainable Banking Committee 134 Report of the Technology and Innovation Committee 136 Directors’ remuneration report 158 Annual remuneration report 175 Other remuneration disclosures 181 Compliance report 184 Report of the directors 187 Statement of directors’ responsibilities 97 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Our Board Corporate governance Howard Davies Chairman Alison Rose Group Chief Executive Officer Date of appointment: 1 November 2019 Committee memberships N/A Contribution to the Board: Alison has been instrumental in leading NatWest Group’s progress and performance as a purpose-led organisation, since NatWest Group’s purpose was announced in February 2020. Having gained a wealth of frontline banking experience during her 29-year career with NatWest, Alison brings a strong customer focus to Board discussions alongside an essential stakeholder lens. Alison is a passionate supporter of diversity and is executive sponsor for NatWest Group’s employee-led networks. Relevant experience: Having joined as a graduate in 1992, Alison’s diverse career at NatWest Group has included a number of senior leadership roles, including Deputy CEO of NatWest Holdings; Chief Executive of Commercial & Private Banking; Head of Europe, Middle East and Africa, Markets & International Banking; and Global Head of International Banking Capital and Balance Sheet. In 2019, Alison was commissioned by the UK Government to report on the barriers to women starting businesses. She now sits on the Rose Review Board and is responsible for driving forward its recommendations. Current external appointments: – Board member of the Institute of International Finance – Member of the International Business Council for the World Economic Forum – Trustee of Business in the Community (BITC) and Chair of the Scottish BITC Advisory Board – Non-executive director of Great Portland Estates plc – Director of the Coutts Charitable Foundation – Member of the UK Government’s Help to Grow Advisory Council Date of appointment: 14 July 2015 (Board), 1 September 2015 (Chairman) Committee memberships Contribution to the Board: Howard brings substantial financial services knowledge and experience to the Board, together with a deep understanding of global economic, environmental and social issues. With extensive board level experience, Howard draws on his prior regulatory and supervisory expertise to contribute both strategic and practical insights to Board discussions and debate. Howard is also a highly adept Chairman with valuable leadership and stakeholder management skills. Relevant experience: Howard has held several regulatory roles during his career including Chairman of the UK Financial Services Authority and Deputy Governor of the Bank of England. Howard was Director of the London School of Economics and Political Science and is also Professor of Practice at the Paris Institute of Political Studies (Sciences Po). Howard has also previously served as a non-executive director of Morgan Stanley and Prudential plc, as Chairman of Phoenix plc and as Chair of the UK Airports Commission. Current external appointments: – Chairman of Inigo Limited – Member of the Regulatory and Compliance Advisory Board of Millennium Management LLC – Chair of the International Advisory Council of the China Securities Regulatory Commission – Member of the International Advisory Council of the China Banking and Insurance Regulatory Commission N Date of appointment: 1 January 2019 Committee memberships N/A Contribution to the Board: Katie is a Chartered Accountant with nearly 30 years experience in finance and accounting gained through several roles across the financial services industry. Katie’s deep knowledge and experience in specialist areas including capital management, investor relations and financial planning mean she is well placed to provide valuable input and expertise during Board discussions. Relevant experience: Katie joined NatWest Group as Director of Finance in 2015 and was appointed as Deputy Chief Financial Officer in March 2017. She was appointed as Chief Financial Officer in January 2019. Katie was previously the Group Finance Director for Old Mutual Emerging Markets, based in Johannesburg (2011 to 2015), having held various roles across Old Mutual from 2002. Prior to this Katie worked at KPMG for 13 years. She is a member of the Institute of Chartered Accountants in Scotland. Current external appointments: – Member of the Money and Pensions Service Advisory Group Katie Murray Group Chief Financial Officer Board Committees Group Nominations & Governance Committee S Group Sustainable Banking Committee A Group Audit Committee T Technology and Innovation Committee Ri Group Board Risk Committee Re Group Performance & Remuneration Committee Underline indicates Committee Chairman N 98 NatWest Group 2021 Annual Report and Accounts Date of appointment: 1 April 2017 (Board), 1 January 2018 (Senior Independent Director) Committee memberships Contribution to the Board: Mark, a former senior investment banker, brings comprehensive financial services knowledge and substantial FTSE 100 board experience to the Board. A former boardroom adviser, Mark contributes significant banking and corporate transformation expertise in particular, alongside a range of customer and wider stakeholder engagement skills. Relevant experience: Mark has held various senior roles at Credit Suisse/BZW during his executive career, including Deputy Chairman, CSFB Europe and Chairman, UK Investment Banking, CSFB. Mark has served as a non-executive director on company boards across a range of industry sectors, including BG Group plc, as Senior Independent Director of Kingfisher plc, and as Deputy Chairman of G4S plc. He has significant experience of chairing committees and as a Senior Independent Director. Current external appointments: – Non-executive director of Smiths Group plc – Non-executive director and trustee of The Brooklands Museum A Re N Date of appointment: 16 May 2016 Committee memberships Contribution to the Board: Frank is a former investment banker and technology company CEO with substantial global board expertise. This broad background enables Frank to make a valuable contribution to Board discussions, particularly in relation to technology, digital and innovation matters. Frank’s experience also encompasses key areas including customer experience, stakeholder engagement, ESG and risk. In April 2018, Frank assumed the role of Chairman of NatWest Markets Plc, which enables him to bring a unique perspective to Board debate. Relevant experience: During his executive career, Frank held various roles at Thomson S.A., including Chairman and Chief Executive Officer, and was Deputy Chief Executive Officer of France Telecom. Prior to that he was Chairman of SG Warburg France and Managing Director of SG Warburg. Frank has also held a number of non- executive roles at Crédit Agricole CIB, EDF, Home Credit, Orange, Sonaecom SGPS and Arqiva Group Limited. He was also Deputy Chairman and acting Chairman of Telenor ASA, an international media communications group. Current external appointments: – Chairman of NortonLifeLock Inc. – Non-executive director of IHS Holding Limited – Chairman of SPEAR Investments I B.V. – Chairman of the Advisory Board of STJ Advisors Re T Date of appointment: 1 June 2018 Committee memberships Contribution to the Board: Patrick contributes significant retail and commercial banking experience to the Board, together with a background in complex organisational restructuring and technology transformation. This experience enables Patrick to provide insightful contributions to Board discussions on complex matters, alongside his significant financial knowledge and expertise. Relevant experience: Patrick was the Chief Financial Officer and a member of the Executive Board of ING Group for over eight years to May 2017. Prior to that, he worked for HSBC for 20 years. Patrick is a Fellow of Chartered Accountants Ireland. Current external appointments: – Non-executive director and Senior Independent Director of Aviva plc A T Ri N Mark Seligman Senior Independent Director Frank Dangeard Independent non-executive director Patrick Flynn Independent non-executive director 99 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Morten Friis Independent non-executive director Robert Gillespie Independent non-executive director Corporate governance continued Yasmin Jetha Independent non-executive director Date of appointment: 2 December 2013 Committee memberships Contribution to the Board: Having run a global investment bank during his executive career, Robert has in-depth knowledge of banking and its role within the economy. As a Chartered Accountant, Robert understands complex organisations and demonstrates strong stakeholder management and leadership skills, which enable him to provide constructive views and contributions during Board discussions. Relevant experience: Robert’s career in investment banking specialised in corporate advisory work. He was also Director General of the Takeover Panel from 2010 until 2013. Prior to that Robert held a number of senior positions at UBS including being global head of investment banking, Chief Executive of UBS for EMEA and Vice Chairman of UBS Investment Bank. Robert began his career at Price Waterhouse (now PwC) and then S.G. Warburg which subsequently became part of UBS. Robert was also previously Chairman of The Boat Race Company Limited. Current external appointments: – Non-executive director of Burford Capital Limited – Professor of Practice at the University of Durham – Non-executive director of Social Finance Limited A Ri Re N Date of appointment: 10 April 2014 Committee memberships Contribution to the Board: Morten is a former frontline banker, who subsequently became a Chief Risk Officer in a universal bank. He has in-depth knowledge and expertise in risk management within the financial services industry, which enables him to make a substantial contribution to Board discussions and debate on risk matters. Morten is also knowledgeable in regulatory matters, capital markets, transformation management and corporate resolution. Relevant experience: Morten’s extensive executive career included various roles at Royal Bank of Canada and its subsidiaries, such as Senior Vice President, Group Risk Management, Chief Credit Officer and then Chief Risk Officer. Previously he was also a Director of RBC Bank (USA); Westbury Life Insurance Company; RBC Life Insurance Company; and RBC Dexia Investor Services Trust Company. Morten also served as a Non-executive director of Jackson National Life Insurance Company for five years, and was chair of its board risk committee and a member of its audit committee. Current external appointments: – Member of the board of directors of the Harvard Business School Club of Toronto A Ri N Date of appointment: 1 April 2020 Committee memberships Contribution to the Board: Yasmin brings a wealth of retail banking and customer experience to the Board, as well as valuable technology and innovation insights, and a strong background in general management. Yasmin adds strength and depth to the Board in these important areas, supporting challenge and debate and effective decision-making. On 1 April 2020 Yasmin re-joined the Board of NatWest Group plc, having first been appointed in June 2017. Yasmin stepped down in April 2018 in order to serve solely as a director of our key ring-fenced entities, and, like the majority of our directors, she continues to serve on these boards in addition to the Board of NatWest Group plc. Relevant experience: During her executive career, Yasmin held Chief Information Officer roles at Bupa and the Financial Times, where she later became the Chief Operating Officer. Prior to that Yasmin held a number of senior roles at Abbey National PLC, in a career spanning nearly 20 years, where latterly she served as an executive director on the board. Yasmin has also held a number of non-commercial roles including Vice Chair of the Board of Governors at the University of Bedfordshire (2008 to 2011) and Vice Chair of the National Committee of the Aga Khan Foundation (UK) Ltd, a non-denominational charity that works with communities in Africa, Asia and the Middle East. Current external appointments: – Non-executive director of Guardian Media Group plc – Non-executive director of Nation Media Group Limited S T 100 NatWest Group 2021 Annual Report and Accounts Mike Rogers Independent non-executive director Lena Wilson Independent non-executive director Jan Cargill Chief Governance Officer and Company Secretary Date of appointment: 26 January 2016 Committee memberships Contribution to the Board: Mike is an extremely experienced retail and commercial banker, with extensive boardroom experience. As a former Chief Executive, Mike brings a broad-based skillset and perspective to the Board, particularly in relation to customer experience, general management and stakeholder engagement. Relevant experience: During his executive career Mike was Chief Executive of Liverpool Victoria Group and he held a variety of roles, both in the UK and overseas, at Barclays Bank. This included roles in business banking, wealth management and retail banking where Mike was Managing Director of Small Business, Premier Banking and UK Retail Banking. Current external appointments: – Chairman of Experian plc – Chairman of Aegon UK plc Re S Date of appointment: 1 January 2018 Committee memberships Contribution to the Board: Lena contributes significant knowledge and experience to the Board drawn from a broad executive and non-executive career. She has extensive transformation and development skills, with experience in enterprise, internationalisation, stakeholder management, ESG and general management. As Chair of the NatWest Group Colleague Advisory Panel since it was established in 2018, Lena provides valuable insights on customer and people issues in particular. Relevant experience: Lena has a portfolio of Chair roles in the listed, private equity and professional services sectors. She has been a FTSE 100 non-executive director for 10 years and previously served on the boards of Scottish Power Renewables Limited and Intertek Group plc. Lena was Chief Executive of Scottish Enterprise from November 2009 until October 2017 and prior to that, was Senior Investment Advisor to The World Bank in Washington DC. Lena was a member of Scotland’s Financial Services Advisory Board and Chair of Scotland’s Energy Jobs Taskforce. In June 2015 she received a CBE for services to economic development in Scotland. Current external appointments: – Chair of Picton Property Income Limited – Chair of AGS Airports Limited – Senior Independent Director of Argentex Group plc – Member of the UK Prime Minister’s Business Council for 2022 – Chair of the Advisory Board of Turtle Pack Limited – Chair of Chiene + Tait LLP – Visiting Professor, University of Strathclyde Business School Re S Ri Date of appointment: 5 August 2019 Contribution to the Board: Jan works closely with the Chairman to ensure effective and efficient functioning of the Board and appropriate alignment and information flows between the Board and its Committees. She is responsible for advising the Board and individual directors on all governance matters, and also facilitates Board induction and directors’ professional development. Relevant experience: Jan is a chartered company secretary with over 20 years corporate governance experience. She was appointed Chief Governance Officer and Company Secretary in 2019, and prior to that held various roles in the legal and secretariat functions, including Head of Board and Shareholder Services. Jan has a law degree and is a Fellow of the Chartered Banker Institute. She is also an Associate of The Chartered Governance Institute and has an INSEAD Certificate in Corporate Governance. 101 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Chairman’s introduction Corporate governance continued Contents 98 Our Board 103 Corporate governance 114 Report of the Group Nominations and Governance Committee 116 Report of the Group Audit Committee 124 Report of the Group Board Risk Committee 132 Report of the Group Sustainable Banking Committee 134 Report of the Technology and Innovation Committee 136 Directors’ remuneration report 181 Compliance report 184 Report of the directors 187 Statement of directors’ responsibilities Dear Shareholder, I am pleased to present the Corporate Governance Report for 2021. The Board met mostly virtually during the year and while we missed the opportunity to meet and engage with colleagues in person, virtual meeting technology continued to offer an effective alternative which supported the efficient running of the Board. The Board spent significant time overseeing the implementation of our strategy and transformation programme alongside other key priorities including our ongoing withdrawal from the Republic of Ireland, capital distributions and financial crime. COVID-19 also remained a key area of focus for the Board in 2021, particularly the support being provided to our customers and colleagues. The three additional independent non-executive directors of NatWest Holdings Limited attend all Board and relevant Board Committee meetings as observers and contribute a ring-fenced bank perspective to Board and Committee discussions. Further details of the Board’s principal activities during 2021 can be found on page 104. As a Board, we know how important it is to engage with our stakeholders, to listen to them and to consider their interests during Board discussions and decision-making. Understanding the needs of our stakeholders is at the core of our purpose framework as shown on pages 12 to 13. Examples of how the Board has engaged with key stakeholders and considered their interests, including the impact on principal decisions, can be found on pages 14 to 17 and pages 52 to 53 of the Strategic report and later in this Corporate governance report. There were no changes to Board or Board Committee membership during 2021, however we continue to keep the composition, skills and experience of the Board under review. Board effectiveness In 2021, the Board and Committee evaluation was externally facilitated by Independent Board Evaluation. Further information on how the evaluation was conducted, key outcomes and actions arising can be found on page 112. UK Corporate Governance Code 2018 All directors are committed to observing high standards of corporate governance, integrity and professionalism. Information on how the company has applied the Principles and complied with the Provisions of the UK Corporate Governance Code 2018 (the Code) can be found in this Corporate governance report under the Code’s five main section headings. A formal statement of compliance with the Code can be found on page 181. In conclusion I would like to thank my fellow Board members for their outstanding contributions and commitment throughout the year. Howard Davies Chairman of the Board 17 February 2022 102 NatWest Group 2021 Annual Report and Accounts Board and Committee meetings The table below shows Board and Committee membership and directors’ meeting attendance during 2021. There were six scheduled Board meetings during 2021, the same number as in 2020. In addition to scheduled meetings, additional ad hoc meetings of the Board and some of its Committees were held throughout the year to receive updates and deal with time-critical matters. There were eight additional Board meetings held in 2021 compared to 16 additional meetings held in 2020. When directors are unable to attend meetings convened at short notice, they receive the papers and have the opportunity to provide their feedback in advance. In accordance with the Code, the Chairman and the non-executive directors met at least once without executive directors present. Board and Committee membership and meeting attendance in 2021 Board Group Audit Committee (GAC) Group Board Risk Committee (BRC) Group Nominations and Governance Committee (N&G) Group Performance and Remuneration Committee (RemCo) Group Sustainable Banking Committee (SBC) Technology and Innovation Committee (TIC) Director Scheduled Ad hoc Scheduled Ad hoc Scheduled Ad hoc Scheduled Ad hoc Scheduled Ad hoc Scheduled Ad hoc Scheduled Ad hoc Howard Davies 6/6 8/8 – – – – 4/4 – – – – – – – Alison Rose 6/6 8/8 – – – – – – – – – – – – Katie Murray 6/6 8/8 – – – – – – – – – – – – Frank Dangeard (1) 6/6 7/8 – – – – – – 8/8 3/3 – – 4/4 – Patrick Flynn 6/6 8/8 5/5 – 8/8 1/1 4/4 – – – – – 4/4 – Morten Friis 6/6 8/8 5/5 – 8/8 1/1 4/4 – – – – – – – Robert Gillespie 6/6 8/8 5/5 – 8/8 1/1 4/4 – 8/8 3/3 – – – – Yasmin Jetha 6/6 8/8 – – – – – – – – 5/5 2/2 4/4 – Mike Rogers (1) 6/6 7/8 – – – – – – 8/8 3/3 5/5 2/2 – – Mark Seligman 6/6 8/8 5/5 – – – 4/4 – 8/8 3/3 – – – – Lena Wilson 6/6 8/8 – – 8/8 1/1 – – 8/8 3/3 5/5 2/2 – – (1) Mr Dangeard and Mr Rogers were each unable to attend one ad hoc meeting, due to prior commitments. How the Board operated in 2021 The Board continued to meet largely virtually during 2021. A hybrid meeting was held in July and in September the full Board was able to meet in person for the first time since the start of the pandemic. At each scheduled Board meeting the directors received reports from the Chairman, Board Committee Chairmen, Group Chief Executive Officer (Group CEO), Group Chief Financial Officer (Group CFO), Group Chief Risk Officer and other members of the executive management team, as appropriate (referred to in the Board annual calendar which follows as ‘regular reports’). Other senior executives attended Board meetings throughout the year to present reports to the Board. This provided the Board with an opportunity to engage directly with management on key issues and support succession planning. The Board and Group Executive Committee (ExCo) operating rhythm continues to support a proactive and transparent agenda planning and paper preparation process. This process includes the following key elements: – A pre-Board meeting with the Chairman, Group CEO, Group CFO and Chief Governance Officer and Company Secretary to ensure the Board and executive management are aligned on Board agendas. – A post Board meeting with the Chairman, Group CEO and Chief Governance Officer and Company Secretary to discuss what went well or could be improved after each meeting. – A look ahead paper at each ExCo and Board meeting setting out key items that will be discussed at the next meeting. 103 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Corporate governance continued Board annual calendar for 2021 Spotlight and ad hoc items Scheduled items Training January (ad hoc) – Strategy updates – Capital distributions – Executive remuneration February – Strategy updates – Budget – Capital distributions – Banking Standards Board presentation (now Financial Services Culture Board or FSCB) – Regular reports – Business reviews – 2020 Annual Results (including ESG Supplement and Climate- related Disclosures Report) – Legal and regulatory report – Board business insights pack – 2021 Board objectives – 2021 Annual General Meeting arrangements March (ad hoc) – Talent engagement session – Strategy – One Bank transformation – Colleague Advisory Panel report – Directed share buyback – Internal Capital Adequacy Assessment Process – Internal Liquidity Adequacy Assessment Process – Board succession planning – Financial crime – Operational resilience – Consumer protection April – Strategy updates – One Bank transformation – Regular reports – Business reviews – Risk management framework – Risk appetite – Q1 2021 results – Legal and regulatory report – Board business insights pack – 2021 Annual General Meeting arrangements – Health and safety annual review – Governance Framework annual review Principal areas of Board focus in 2021 As in 2020, a short set of Board objectives was adopted for 2021, closely aligned to our purpose and strategic priorities. These have supported agenda planning and helped to guide how the Board spends its time, ensuring appropriate focus on the longer-term and strategic issues. Whilst our response to the COVID-19 pandemic continued to be a priority for the Board, there was a shift away from standalone pandemic-related updates towards integrated reporting on COVID-19 related matters across the Board agenda, including through our regular reports and business reviews. The Chief Governance Officer and Company Secretary maintains an annual agenda planner designed to ensure that all matters set out in the Board’s terms of reference are considered by the Board. The table below is an overview of the main matters considered by the Board during 2021 and also shows the Board training provided. In 2021, we introduced the use of videos into Board training and presentations which has been well received by the Board. They have been used, for example, to deliver background materials as well as insights from colleagues and customers to support Board discussions. Ad hoc meetings of the Board were held concurrently with scheduled meetings of the Board of NatWest Holdings Limited in March and September, to deal with any time critical matters or to support efficient review of items of mutual interest. 104 NatWest Group 2021 Annual Report and Accounts Spotlight and ad hoc items Scheduled items Training June – Talent and executive succession – Recovery plans – Capital distributions – Annual Board strategy session – Regular reports – Colleague Advisory Panel report – Business reviews – Legal and regulatory report – Board business insights pack – Group money laundering reporting officer report – Financial crime – 2020 Modern Slavery and Human Trafficking statement – Our View mid-year survey results – 2021 solvency stress test results – Directors’ duties in resolution July – Prudential Regulation Authority presentation and engagement session – Culture spotlight – One Bank transformation – Brand portfolio – Capital distributions – Resolvability Self-Assessment – On-market share buyback – Regular reports – Business reviews – H1 2021 results – Legal and regulatory report – Board business insights pack – Cyber security September (ad hoc) – One Bank transformation – Budget and stress scenarios – Climate Biennial Stress Test results – Financial crime – Financial crime October – Strategy updates – One Bank transformation – Our View annual survey results – Regular reports – Business reviews – Q3 2021 results – Talent and executive succession – Legal and regulatory report – Board business insights pack – Climate December – Strategy updates – One Bank transformation – Annual Board effectiveness review – Budget – Capital distributions – Operational resilience – Our values refresh – Culture measurement report – Annual purpose update – Brand portfolio – Board skills matrix – Executive performance and remuneration – Regular reports – Business reviews – Colleague Advisory Panel report – Risk management framework – Risk appetite – Board business insights pack – Financial crime – 2022 Annual General Meeting arrangements Online training Included video materials as part of training or Board materials. 105 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Subsidiary governance and ring-fencing NatWest Group plc is a listed company with equity listed on the London and New York stock exchanges. NatWest Holdings Limited (NWH) is the holding company for our ring-fenced operations, which include our retail, commercial and private banking businesses. A common board structure is operated such that the directors of NWH are also directors of The Royal Bank of Scotland plc and National Westminster Bank Plc. Known collectively as the NWH Sub Group, the boards of these three entities meet concurrently. On 3 May 2021, following Court approval, the business of Ulster Bank Limited was transferred into its immediate parent, National Westminster Bank Plc (NWB Plc). This reorganisation saw the Ulster Bank brand in Northern Ireland become a trading name of NWB Plc and simplified the NatWest Group by aligning the legal entity structure with the pre-existing management structure. The simplification ensured continuity of service under the Ulster Bank brand, with customers continuing to receive the same products and services through the same channels. Colleagues became employees of NWB Plc, with their existing benefits and conditions of employment remaining unchanged. An integral part of NatWest Group’s governance arrangements is the appointment of three double independent non-executive directors (DINEDs) to the boards, and board committees, of the NWH Sub Group. They are Francesca Barnes, Graham Beale, and Ian Cormack. The DINEDs are independent in two respects: (i) independent of management as non-executives; and (ii) independent of the rest of NatWest Group by virtue of their NWH Sub Group-only directorships. The DINEDs play a critical role in NatWest Group’s ring-fencing governance structure, and are responsible for exercising appropriate oversight of the independence and effectiveness of the NWH Sub Group’s governance arrangements, including the ability of each board to take decisions independently. The DINEDs attend NatWest Group plc Board and relevant Board Committee meetings in an observer capacity. The governance arrangements for the boards and board committees of NatWest Group plc and the NWH Sub Group have been designed to enable NatWest Group plc to exercise appropriate oversight and to ensure that, as far as is reasonably practicable, the NWH Sub Group is able to take decisions independently of the wider Group. NatWest Markets supports NatWest Group’s corporate and institutional customers through NatWest Markets Plc and its subsidiaries. RBS International serves retail, commercial and corporate customers and financial institutions and operates through The Royal Bank of Scotland International (Holdings) Limited and its subsidiaries. The Group Nominations and Governance Committee monitors the governance arrangements of NatWest Group plc and its subsidiaries and approves appointments to the boards of principal and material regulated subsidiaries, as described in the Group Nominations and Governance Committee report on page 114. 2018 UK Corporate Governance Code Throughout the year the company has applied the Principles and complied with the Provisions of the Code, except in relation to: – Provision 17 that the Group Nominations and Governance Committee should ensure plans are in place for orderly succession to both the board and senior management positions and oversee the development of a diverse pipeline for succession; and – Provision 33 that the Group Performance and Remuneration Committee should have delegated responsibility for setting remuneration for the Chairman and executive directors. In both instances, the Board considers that these are matters which should rightly be reserved for the Board, as set out in more detail in our statement of compliance on page 181. In addition, the Board has delegated two particular aspects of the Code’s provisions to Board Committees, with regular updates provided to the Board as appropriate: – The Group Audit Committee has delegated responsibility for reviewing and monitoring NatWest Group’s whistleblowing process. – The Group Sustainable Banking Committee has delegated responsibility for reviewing key workforce policies and practices (not related to pay) to ensure they are consistent with NatWest Group’s values and support long-term sustainable success. For further information please refer to the remainder of this report and the relevant Committee reports on the following pages. Further information on how the company has applied the Principles and complied with the Provisions of the Code is set out below under the Code’s five main section headings. Board leadership and company purpose Role of the Board The Board is collectively responsible for promoting the long-term sustainable success of the company, driving both shareholder value and contribution to wider society. The Board’s role is to provide leadership of the company within a framework of prudent and effective controls which enables risk to be assessed and managed. The Board establishes NatWest Group’s purpose, values and strategy and leads the development of NatWest Group’s culture. The Board sets the strategic aims of the company and its subsidiaries, ensures that the necessary resources are in place for NatWest Group to meet its objectives, is responsible for the raising and allocation of capital and reviews business and financial performance. It ensures that the company’s obligations to its shareholders and other key stakeholders are understood and met. Corporate governance continued 106 NatWest Group 2021 Annual Report and Accounts The Board terms of reference include a formal schedule of matters specifically reserved for the Board’s decision and are reviewed at least annually. They are available at natwestgroup.com. An internal review confirmed the Board had fulfilled its remit as set out in its terms of reference during 2021. Board Committees The Board has established a number of Board Committees with particular responsibilities. Please refer to the Committee Chairman reports for further details. Board Committee terms of reference are available at natwestgroup.com. Purpose, values, strategy and culture In February 2020, and following an extensive period of stakeholder engagement, the Board approved NatWest Group’s purpose and strategy. Throughout 2021, our purpose has continued to inform and drive our response to the pandemic, acting as an important point of reference during Board discussions, debate and decision-making. The Board received its annual purpose update in December 2021 which summarised progress in becoming a purpose-led bank against the three purpose focus areas of climate, enterprise and learning. It highlighted the progress to date on embedding purpose and delivering against public commitments; the key areas of focus for 2022; and an update on stakeholders’ perception of NatWest Group and its purpose aligned to the Blueprint for Better Business framework. Further information on progress against our purpose and strategic priorities can be found in the Strategic report. The Board assesses and monitors NatWest Group’s culture in several ways, as illustrated by the diagram below. NatWest Group plc – Board responsibilities in relation to culture – Leads the development of NatWest Group’s culture, values and standards. – Assesses and monitors culture. – Reviews and approves NatWest Group’s values. Board reporting on culture What did the Board receive? When did it receive it? Key areas of focus Banking Standards Board (BSB) presentation (now FSCB) February BSB’s 2020 Survey Annual Report and its review of the embedding of purpose in NatWest Group. Colleague Advisory Panel reports March June December Feedback on discussions from Colleague Advisory Panel meetings. Topics covered included wellbeing support for colleagues, retail banking strategy, purpose, remuneration (including executives and the wider workforce), climate and ways of working. One Bank Transformation Programme spotlight on organisation, skills and culture April October Future of work and strategic workforce planning. This covered new ways of working, colleague journeys, colleague experience, career development, skills and capability, learning, wellbeing and inclusion. Our View colleague survey June October December Insights from the colleague opinion surveys conducted in April and September 2021. Key measures included culture, purpose, building capability, inclusion, engagement and leadership. A follow up paper was presented to the Board in December to address an action from the Board on how to strengthen engagement with middle and senior mangers on leading through transformation. Culture spotlight July An update on the refresh of our values and the alignment to purpose and strategy as well as an overview of cultural strengths, behavioural weaknesses, operating model and future culture. Culture measurement report July December Insights and metrics to allow the Board to assess the status of NatWest Group’s culture and understand future priorities. The reports used the Blueprint for Better Business framework to report progress highlighting both positive trends and areas for improvement. Our values December The Board was asked to approve the refreshed values which had been updated to ensure greater alignment to purpose and strategy. Board business insights pack Each meeting Metrics to demonstrate how NatWest Group is delivering for colleagues (culture, purpose and inclusion). The activities described above have supported the Board in meeting the Code requirement to satisfy itself that the company’s purpose, values, strategy and culture are aligned. 107 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Corporate governance continued Stakeholder Group How stakeholder views have been communicated Examples of what was shared How did the Board use that information? Customers – Group CEO report – Business reviews – Ad hoc reports to the Board – Updates on customer engagement activity and customer sentiment. – Competition and Markets Authority service quality results and Net Promoter Scores. – Allowed the Board to oversee and challenge business performance more effectively and better understand performance versus peers. Colleagues – Group CEO report – Business reviews – Colleague specific papers presented to the Board – Ways of working updates. – Our View survey results. – Culture measurement reports. – Colleague input to the development of our refreshed values. – Allowed the Board to better understand colleague sentiment and levels of colleague engagement and, in the case of the values refresh, how colleagues’ views have been considered and influenced the final proposal. Communities – Board training – Ad hoc reports to the Board – Training materials on climate. – Launch of CareerSense. – The climate training session updated the Board on progress against our climate ambitions, goals and targets and supported a better understanding of regulatory and investor expectations on climate. – The CareerSense update was a good example of our purpose in action and NatWest Group’s support of young people and communities across the UK. Investors – Investor feedback reports – Group CFO report – Detailed investor feedback (both equity market reaction and fixed income market reaction) was shared each quarter following each results presentation. – Feedback on other investor presentations by management. – External market perspectives. – Investor feedback reports provided the Board with direct feedback from investors on NatWest Group’s strategy and financial performance. – The Group CFO kept the Board updated on external market perspectives which included share price performance and trading activity, allowing the Board to monitor investor activity. Regulators – Regulatory correspondence – Group CEO and Group CFO reports and business reviews – Relevant regulatory correspondence that regulators requested be shared with the Board and, where applicable, proposed management responses. – Updates on regulatory engagement. – Sharing the correspondence and proposed responses allowed the Board to understand key matters being raised by regulators and how management were addressing those. – Kept the Board informed on key topics being discussed by management with regulators, enhancing the Board’s understanding of key regulatory priorities. Suppliers – Business reviews – Regular updates on key supplier and partnership relationships and initiatives being undertaken with them. – Provided the Board with visibility on key supplier activity and how this is supporting our purpose, strategy, financial performance and our ambitions on climate and the environment. Stakeholder engagement In February 2021, the Board approved its annual objectives and confirmed the Board’s key stakeholder groups – customers, colleagues, communities, investors, regulators, and suppliers. The Board’s agenda and engagement plans were structured to enhance the Board’s understanding of stakeholders’ views and interests. This in turn has informed Board discussions and decision-making. Workforce engagement NatWest Group’s Colleague Advisory Panel (CAP) was set up in 2018 to help promote colleague voices in the boardroom and supports our compliance with Code requirements in relation to Board engagement with the workforce. Through the CAP, colleagues can engage directly with senior management and the Board on topics which are important to them, thereby strengthening the voice of colleagues in the Boardroom. The CAP is made up of 28 colleagues who represent employee-led networks, talent programmes, employee representative bodies or are self-nominated. In this way we ensure the panel is diverse, inclusive and representative of the workforce. The CAP met with representatives from the Board three times in 2021 to discuss issues such as wellbeing, remuneration (including executives and the wider workforce), climate, retail banking strategy, sustainability and purpose. The CAP continues to be highly regarded by those who attend and has proven to be an effective way of establishing two-way dialogue between colleagues and Board members. In 2022 we are reviewing our approach to how the Board engages with the workforce. The Stakeholder engagement section of the Strategic report on pages 14 to 17 includes examples of how the Board engaged directly with stakeholders, and our section 172(1) statement on pages 52 to 53 describes how stakeholder interests have been considered in board decision-making, including principal decisions. Set out below is an overview of further ways in which stakeholder views have been communicated to the Board, which often takes place indirectly via management updates. 108 NatWest Group 2021 Annual Report and Accounts The effectiveness of Board stakeholder engagement mechanisms is considered during the annual Board evaluation. Further details on NatWest Group’s approach to investing in and rewarding its workforce can be found on pages 58 to 61 of the Strategic report. Workforce policies and practices As referred to above, the Board has delegated certain Code provisions to Board Committees, with regular updates to the Board on relevant issues. In October 2021 the Group Sustainable Banking Committee considered key workforce policies and practices as part of its people and culture meeting, where a spotlight on living our purpose included updates on reward, career development, succession planning, recruitment, inclusion and learning frameworks. At that time, it was acknowledged that a refreshed set of values, aligned to our purpose, would be presented to the Board in December 2021 for approval and that workforce policies and practices would be updated where required to ensure ongoing alignment to NatWest Group’s values. The Group Audit Committee retains responsibility for reviewing and monitoring NatWest Group’s whistleblowing process. Conflicts of interest The Directors’ Conflicts of Interest policy sets out procedures to ensure that the Board’s management of conflicts of interest and its powers for authorising certain conflicts are operating effectively. Each director is required to notify the Board of any actual or potential situational or transactional conflict of interest and to update the Board with any changes to the facts and circumstances surrounding such conflicts. Situational conflicts can be authorised by the Board in accordance with the Companies Act 2006 and the company’s Articles of Association. The Board considers each request for authorisation on a case-by-case basis and has the power to impose conditions or limitations on any authorisation granted as part of the process. Details of all directors’ conflicts of interest are recorded in a register which is maintained by the Chief Governance Officer and Company Secretary and reviewed annually by the Board. Division of responsibilities The Board has 11 directors comprising the Chairman, two executive directors and eight independent non-executive directors, one of whom is the Senior Independent Director. Director biographies and details of the Board Committees of which they are members can be found on pages 98 to 101. Non-executive director independence The Board considers that the Chairman was independent on appointment and that all current non-executive directors are independent for the purposes of the Code. Chairman and Group CEO The role of Chairman is distinct and separate from that of the Group CEO and there is a clear division of responsibilities, with the Chairman leading the Board and the Group CEO managing the business day to day. Senior Independent Director Throughout 2021, Mark Seligman, as Senior Independent Director, acted as a sounding board for the Chairman, and as an intermediary for other directors when necessary. He was also available to shareholders to discuss any concerns they may have had, as appropriate. Non-executive directors Along with the Chairman and executive directors, the non-executive directors are responsible for ensuring the Board fulfils its responsibilities under its terms of reference. The non-executive directors combine broad business and commercial experience with independent and objective judgment. They provide constructive challenge, strategic guidance, and specialist advice to the executive directors and the executive management team and hold management to account. The balance between non-executive and executive directors enables the Board to provide clear and effective leadership across NatWest Group’s business activities and ensures no one individual or small group of individuals dominates the Board’s decision-making. The Chairman and non-executive directors meet at least once every year without the executive directors present. Details of the key responsibilities of the Chairman, Group CEO, Senior Independent Director and non-executive directors are available at natwestgroup.com. The performance of the Chairman and non-executive directors is evaluated annually and further details of the process undertaken can be found on page 113. Chief Governance Officer and Company Secretary The Chief Governance Officer and Company Secretary, Jan Cargill, works closely with the Chairman to ensure effective and efficient functioning of the Board and appropriate alignment and information flows between the Board and its Committees. The Chief Governance Officer and Company Secretary is responsible for advising the Board and individual directors on all governance matters, and also facilitates Board induction and directors’ professional development. Executive management The Group CEO is supported by Group ExCo, which considers strategic, financial, capital, risk and operational issues affecting NatWest Group and reviews relevant matters in advance of Board submission. Group ExCo’s membership comprises the Group CEO, Group CFO and the Group Chief Risk Officer; who are also members of the wider executive management team. Biographies of the executive management team can be found at natwestgroup.com. 109 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Time commitment and external appointments It is anticipated that non-executive directors will allocate sufficient time to the company to discharge their responsibilities effectively and will devote such time as is necessary to fulfil their role. Directors have been briefed on the limits on the number of other directorships that they can hold under the requirements of the fourth Capital Requirements Directive. The Code emphasises the importance of ensuring directors have sufficient time to meet their board responsibilities. Prior to appointment, significant commitments require to be disclosed with an indication of the time involved. External appointments require prior Board approval, with the reasons for permitting significant appointments explained in the Annual Report and Accounts. Lena Wilson and Frank Dangeard both re-organised their portfolios of appointments and took up new appointments in 2021. Ms Wilson was appointed as a non-executive director and subsequently Chair of Picton Property Income Limited and as a non-executive director and Chair of AGS Airports Limited and Mr Dangeard was appointed Chairman of SPEAR Investments I B.V. These appointments were approved by the Board in advance and the Board considered both potential conflicts and time commitment and was satisfied that each would be able to continue to meet their commitments to NatWest Group given the other changes to their respective portfolios. The Board continues to monitor the commitments of the Chairman and directors and is satisfied that they are able to allocate sufficient time to enable them to discharge their duties and responsibilities effectively. Information All directors receive accurate, timely and clear information on all relevant matters and have access to the advice and services of the Chief Governance Officer and Company Secretary. In addition, all directors are able, if necessary, to obtain independent professional advice at the company’s expense. Our Board and Committee paper template includes a section for authors to explain how the proposal or update aligns with our purpose and a separate section for them to include an assessment of the relevant stakeholder impacts for the directors to consider. This aligns with the directors’ duties under section 172(1) of the Companies Act 2006 and further details on how the directors have complied with their section 172(1) duties can be found on pages 52 to 53 of the Strategic report. Our directors are mindful that it is not always possible to achieve an outcome which meets the requirements, needs and/or expectations of all stakeholders who are, or may be, impacted. For decisions which are particularly challenging or complex, we introduced an additional page to our paper template in 2021 which provides directors with further information to support purposeful decision-making. This additional page uses Blueprint for Better Business as a base and is aligned to our broader purpose framework. Induction and professional development Each new director receives a formal induction on joining the Board, which is coordinated by the Chief Governance Officer and Company Secretary and tailored to suit the requirements of the individual concerned. This includes visits to NatWest Group’s major businesses and functions and meetings with directors and senior management. Meetings with external auditors, counsel and stakeholders are also arranged as appropriate. All new directors receive a copy of the NatWest Group Director Handbook. The Handbook operates as a consolidated governance support manual for directors of NatWest Group plc and the NWH Sub Group, providing both new and current directors with a single source of information relevant to their role. It covers a range of topics including NatWest Group’s corporate structure; the Board and Board Committee operating model; Board policies and processes; and a range of technical guidance on relevant matters including directors’ duties, conflicts of interest, and the UK Senior Managers and Certification Regime. The Handbook forms part of a wider library of reference materials available via our resources portal. Directors have access to a wide range of briefing and training sessions and other professional development opportunities. Internal training relevant to the business of NatWest Group is also provided. Directors undertake the training they consider necessary to assist them in carrying out their duties and responsibilities. The non-executive directors discuss their training and professional development with the Chairman at least annually. Details of the training and development undertaken by directors during 2021, which is co-ordinated by the Chief Governance Officer and Company Secretary, can be found on pages 104 to 105 (Board annual calendar for 2021). Composition, succession and evaluation Composition The Board is structured to ensure that the directors provide NatWest Group plc with the appropriate combination of skills, experience, knowledge and diversity, as well as independence. Given the nature of NatWest Group’s businesses, experience of banking and financial services is clearly of benefit, and the Board has a number of directors with substantial experience in those areas. Our directors also possess substantial skills and experience in the areas of Transformation, Financial Markets/ Investment Banking, and Environmental, Social and Governance (including climate). In December 2021 the Group Nominations and Governance Committee reviewed, and the Board approved, a refreshed version of our Board skills matrix, a summary view of which is set out below. The Board skills matrix reflects directors’ self-assessment of the skills and experience they bring to Board discussions, in line with pre-determined criteria aligned to current and future strategic priorities, and will continue to be considered by the Group Nominations and Governance Committee, and the Board, at least once a year. Corporate governance continued 110 NatWest Group 2021 Annual Report and Accounts Board skills and e xp erience 0 2 4 6 10 8 Risk management Broad Financial Services T ransformation Financial Mark ets / Inves tment Banking Environment al, Social and Governanc e (incl climate) CEO / Senior Executiv e Management Customer e xperience Government / r egulatory / public sector Retail / C ommercial / Private Banking Digital and Innov ation CFO / A ccountant T echnology (infrastructure, cyber) 11 Skills and experience Number of directors Board Committees also comprise directors with a variety of skills and experience so that no undue reliance is placed on any one individual. Succession As set out in its terms of reference the Board is responsible for ensuring adequate succession planning for the Board and senior management, so as to maintain an appropriate balance of skills and experience within NatWest Group and on the Board. In 2021 the Board received two updates on talent and executive succession planning which enabled them to monitor the internal talent pipeline and provide feedback. These updates included a detailed analysis of the diversity of the talent pool, with a view towards continuing to improve diversity over the longer term. The Board also held a talent session with potential Executive Committee successors, and members of the Group Sustainable Banking Committee held an informal session with executive talent. These sessions helped our non-executive directors to get to know potential future leaders, through focused debates on strategic topics. The Group Nominations and Governance Committee supports the Board on Board succession planning, including making recommendations to the Board on Board appointments and Board Committee membership. In February 2021 (following review and recommendation by the Group Nominations and Governance Committee), the Board approved succession plans for the roles of Senior Independent Director and Committee Chairs, covering orderly transition plans for the short and medium term, and contingency arrangements which could be implemented in case of an emergency. These succession plans are reviewed by the Group Nominations and Governance Committee and approved by the Board at least once a year. Further information on the role of the Group Nominations and Governance Committee and its activities during 2021 can be found in the Committee Chairman’s report on page 114. Election and re-election of directors In accordance with the provisions of the Code, all directors stand for election or re-election by shareholders at the company’s AGM. In accordance with the UK Listing Rules, the election or re-election of independent directors also requires approval by a majority of independent shareholders. Evaluation In accordance with the Code, an evaluation of the performance of the Board, its Committees, the Chairman and individual directors takes place annually. The evaluation is externally facilitated every three years, with internal evaluations in the intervening years. An external evaluation was conducted in 2018 by Independent Board Evaluation (IBE), with internal evaluations taking place in 2019 and 2020. IBE returned in 2021 to facilitate their second external Board and Committee evaluation for NatWest Group. Further details on how IBE was selected in 2021, how the 2021 evaluation was conducted and the outcomes and actions arising from that process are set out in this section. Progress following the 2020 internal Board evaluation A number of actions were progressed during 2021 in response to the findings of the 2020 internal Board evaluation. 2020 actions 2021 progress Agree a shorter and more focused set of Board objectives for 2021. – A more concise set of Board objectives was agreed for 2021, supporting effective management of Board priorities and agenda planning. Explore different options for directors to engage with customers. – Through a customer engagement programme a number of non-executive directors observed customer facing colleagues in action and heard customer feedback as part of a focus group or customer listening surgery. Review potential enhancements to Board Management Information on customers and suppliers – Board reporting was enhanced to include customer measures aligned to purpose and transformation targets, and enhanced tracking of progress against customer advocacy and satisfaction targets. – There was also a review and alignment of customer measures used across the businesses, to ensure greater consistency of reporting. – Our business review template was updated to provide for more detailed reporting on supplier relationships. Enhance Board visibility of Executive Committee successors. – Board visibility of the executive talent pipeline was enhanced through Board and Group Sustainable Banking Committee talent sessions. – Senior executives below Executive Committee level continued to present papers at Board meetings, further contributing to their profile in the Boardroom. Details of progress made against the actions arising from the 2020 internal Committee evaluations can be found in the relevant Committee Chairman Reports. 111 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Corporate governance continued 2021 Board evaluation – outcomes and actions The IBE report identified positive changes in Boardroom culture and dynamics since the last external review in 2018. Board relationships with management were more transparent, and there was a better balance between support and challenge from the Board. Care would be required to ensure this balance was maintained. Whilst working remotely remained challenging and directors missed the opportunity for informal interaction, they were pleased at how quickly and effectively they had been able to adapt. After a period of stability in terms of Board composition, the IBE report highlighted the importance of prioritising Board succession planning in future. IBE highlighted scope to enhance the Board’s technology experience, and the importance of ensuring appropriate focus on diversity (with respect to age, gender, experience and ethnicity). These are matters which the Board and Group Nominations and Governance Committee will keep under review during 2022. IBE also observed that NatWest Group’s ring-fencing governance arrangements, which had just been introduced at the time of the 2018 evaluation, were now considered to be operating effectively with no significant issues or concerns raised. 2021 External Board Committee evaluation IBE were engaged to facilitate the external evaluation in 2021. IBE had previously conducted the 2018 evaluation and at that time, NatWest Group’s corporate governance arrangements were undergoing significant change in preparation for the implementation of ring-fencing. Following a recommendation from the Group Nominations and Governance Committee, the Board agreed that the 2021 evaluation should be conducted externally in accordance with the Code and that IBE should be appointed again to provide important continuity. The Board concluded that IBE’s appointment would also provide a helpful opportunity to review how ring-fencing governance arrangements had embedded since the 2018 exercise. IBE has no other connection with NatWest Group. The sections of this report which describe the process followed or which attribute opinions to the external facilitator have been agreed with IBE prior to publication. How the evaluation was conducted Objectives and scope – The Chairman, Group CEO and Chief Governance Officer and Company Secretary briefed IBE on the objectives of the 2021 Board and Committee evaluation. – The NatWest Group plc and NWH Sub Group Boards and Board Committees were confirmed to be in scope for a comprehensive performance review. Focus areas included Board culture, Board composition and succession planning (including skills, diversity and experience), strategy (oversight and implementation), Board focus and priorities, induction, risk management, stakeholder engagement, and quality of meetings and papers. Information gathering – IBE held interviews with all of the directors, members of senior management, external advisers and auditors. – The lead evaluator observed the main Board and Committee meetings in October 2021. – The Chief Governance Officer and Company Secretary provided copies of Board and Committee papers and other supporting materials to IBE. Report preparation – IBE prepared draft reports for the Board and Board Committees. – IBE’s recommendations were based on best practice as described in the Code and other relevant guidelines. – Draft conclusions were discussed with the Chairman and Committee Chairmen in advance of report circulation. Review and action planning – Board and Committee reports were presented and discussed at the December 2021 Board and Committee meetings. – In February 2022, the Board agreed an action plan in response to the recommendations set out in IBE’s report. 112 NatWest Group 2021 Annual Report and Accounts In February 2022 the Board agreed a detailed action plan in response to the recommendations set out in IBE’s 2021 external Board evaluation report, which included the following:- Theme 2022 actions Strategy Introduce a new operating rhythm for Board engagement and oversight with more frequent sessions during the year focused on key strategic topics. Board focus and priorities Agree a new set of Board objectives for 2022. Identify opportunities to streamline the Board agenda and other Board activities to facilitate effective management of Board priorities. Engagement with the business and stakeholders Identify further opportunities for non-executive directors to engage with the business and key stakeholders either through participation in existing business initiatives or Board specific activity. Colleague engagement Review the Board’s overall approach to colleague engagement, including the role of the Colleague Advisory Panel, to ensure it remains fit for purpose. Implementation of the 2021 Board evaluation action plan will be overseen by the Group Nominations and Governance Committee during 2022. 2021 Board Committee evaluations – outcomes and actions Details of the outcomes of the 2021 external Board Committee evaluations can be found in the relevant Committee Chairman reports. Progress against these actions will be tracked at Committee level during 2022. 2021 Individual director and Chairman effectiveness reviews The Chairman met each director individually to discuss their own performance and continuing professional development and establish whether each director continues to contribute effectively to the company’s long-term sustainable success. The Chairman also shared peer feedback provided to IBE as part of the evaluation process. Separately, the Senior Independent Director, together with the Senior Independent Director of the ring-fenced bank, sought feedback on the Chairman’s performance from the non-executive directors, executive directors and other key internal and external stakeholders and discussed it with the Chairman. This included peer feedback provided to IBE by directors as part of the evaluation process. Audit, risk & internal control Information on how the company has applied the Principles and complied with the Provisions set out in this section of the Code can be found throughout the Annual Report and Accounts. The following sections are of particular relevance: – the Group Audit Committee Chairman’s letter and the report of the Committee (page 116) which sets out the process undertaken to evaluate the effectiveness of both the Internal Audit function and the external auditors in 2021, and the principal findings thereof. It also explains the approach taken to ensuring the integrity of financial and narrative statements, and confirms that it supports the Board in the assessment of NatWest Group’s disclosures to be fair, balanced and understandable; – the viability statement (page 76) which details how the Board has assessed the future prospects of NatWest Group plc and the ways in which risks are considered and managed in order to achieve its strategic objectives; – the Compliance report (page 181), which explains the internal control framework in place; and – the Group Board Risk Committee Chairman’s letter and report of the Committee (page 124) which explains how the Board oversees the principal and emerging risks facing NatWest Group and how management addresses these. Remuneration The Directors’ remuneration report on pages 136 to 139 provides information on the activities of the Group Performance and Remuneration Committee, the decisions taken on remuneration during the year and why the Committee believes these are the right outcomes in the circumstances. The report also details how the remuneration policy for executive directors supports the delivery of the company’s strategic goals and purpose, with significant delivery in shares to provide long-term alignment with shareholders. Information is also included on wider workforce remuneration and the steps taken to engage with the workforce around remuneration and ensure fair pay and a healthy culture. 113 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Report of the Group Nominations and Governance Committee Corporate governance continued Dear Shareholder, As Chairman of the Board and Chairman of the Group Nominations and Governance Committee I am pleased to present our report on the Committee’s activity during 2021. Role and responsibilities The Committee is responsible for reviewing the structure, size and composition of the Board, and membership and chairmanship of Board Committees and recommends appointments to the Board. In addition, the Committee monitors NatWest Group’s governance arrangements to ensure that best corporate governance standards and practices are upheld and considers developments relating to banking reform and analogous issues affecting NatWest Group. The Committee makes recommendations to the Board in respect of any consequential amendments to NatWest Group’s operating model. The terms of reference of the Committee are reviewed annually, approved by the Board and are available at natwestgroup.com. Principal activity during 2021 There were no changes to the composition of the Board during 2021. The Committee nevertheless acknowledges the tenure of a number of current Board directors and therefore made succession planning a priority in 2021. The Committee reviewed the contribution of a number of Board members under the Board Appointment Policy which sees non-executive directors appointed for an initial three year term, subject to annual re-election at the AGM. Following assessment by the Committee, they may then be appointed for a further three year term. Non-executive directors may continue to serve beyond six years, subject to a maximum tenure of nine years. The tenures of current Board directors is set out on page 81. In addition to reviewing the structure, size and composition of the NatWest Group plc Board, the Committee has also continued to oversee work aimed at further enhancing NatWest Group’s subsidiary governance framework. A number of our material regulated subsidiaries made appointments to their boards during 2021, which the Committee has overseen. Spencer Stuart and Green Park have both been engaged during the year to support NatWest Group’s subsidiary board search activity. The firms are members of the retained executive search panel of suppliers (managed by NatWest Executive Search). Spencer Stuart also provide leadership advisory and senior executive search and assessment services to the Human Resources function within NatWest Group. In addition to succession planning, the Committee has overseen the process to reach agreement with the PRA in respect of the renewal of regulatory modifications which ensure the continuation of a governance model that is compatible with ring-fencing legislation. During the year the Committee continued to monitor NatWest Group’s governance arrangements to ensure that they remain appropriate by reference to best practices in corporate governance (having regard to relevant legislation, guidelines, industry practice and developments affecting NatWest Group in the markets where it operates). During 2021 the Committee considered a number of external policy developments and the potential impacts on NatWest Group’s corporate governance framework, including HM Treasury’s independent review of ring-fencing and proprietary trading, as well as discussion and consultation papers issued by the FCA, PRA and Bank of England on proposals to enhance diversity and inclusion in the financial sector. Membership and meetings Throughout 2021 the Committee comprised the Chairman of the Board and four independent non-executive directors. Graham Beale also observes meetings of the Committee in his capacity as Senior Independent Director of NWH Ltd and member of the NWH Ltd Nominations Committee. The Committee holds a minimum of four meetings per year and meets on an ad hoc basis as required. In 2021, there were four meetings. Individual attendance by directors at these meetings is shown in the table on page 103. Letter from Howard Davies Chairman of the Group Nominations and Governance Committee 114 NatWest Group 2021 Annual Report and Accounts Performance evaluation The 2021 review of the effectiveness of the Board and its senior Committees was facilitated by Independent Board Evaluation, a specialist board evaluation consultancy. The Committee has considered and discussed the outcomes of the evaluation and accepts the findings, more information on which can be found on page 112. Overall, the review concluded that the Committee’s responsibilities had been discharged effectively with no material recommendations being identified for action. The Committee will continue to ensure that the full Board is appropriately sighted on the work of the Committee, including the Board succession activity that will be a key priority for the Committee during 2022. The outcomes of the evaluation have been reported to the Board and the Committee will track progress during the year. Boardroom Inclusion Policy As noted on page 81, the Board operates a Boardroom Inclusion Policy which reflects the most recent industry targets and is aligned to the NatWest Group Inclusion Policy and Principles applying to the wider bank. The policy currently applies to the most senior NatWest Group boards: NatWest Group plc, NWH Ltd, NWB Plc and RBS plc. A copy of the Boardroom Inclusion Policy is available at natwestgroup.com/ who-we-are. Objectives and targets The Boardroom Inclusion Policy’s objectives ensure that the Board, and any Committee to which it delegates nomination responsibilities, follows an inclusive process when making nomination decisions. That includes ensuring that the nomination process is based on the principles of fairness, respect and inclusion, that all nominations and appointments are made on the basis of individual competence, skills and expertise measured against identified objective criteria and that searches for Board candidates are conducted with due regard to the benefits of diversity and inclusion. Monitoring and reporting Throughout 2021 the Board met the recommendation of the Parker Review with at least one member of the Board being of Black, Asian or Minority Ethnic background and it intends to continue to meet that recommendation. At the end of 2021 the Board exceeded the recommendation of the FTSE Women Leaders Review ((formerly the Hampton- Alexander Report) 33% female representation on the boards), with 36% of the Board being female. The boards of NatWest Group plc and the NWH Group meet consecutively and share a largely common membership. When considered together, the director population across both boards currently meets the Parker target and exceeds the FTSE Woman Leaders target with a female representation of 36%. Diversity and inclusion progress, including information about the appointment process, will continue to be reported in the Group Nominations and Governance Committee’s report in the NatWest Group plc Annual Report and Accounts. The balance of skills, experience, independence, knowledge and diversity on the Board, and how the Board operates together as a unit, is reviewed annually as part of the Board evaluation. Where appropriate, findings from the evaluation will be considered in the search, nomination and appointment process. Further details on NatWest Group’s approach to diversity can be found on page 59. Howard Davies Chairman of the Group Nominations and Governance Committee 17 February 2022 115 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Report of the Group Audit Committee Corporate governance continued Membership Full biographical details of the members of the Committee during 2021 are set out on pages 98 and 101. The members are all independent non-executive directors who also sit on other Board committees in addition to the GAC (as set out in their biographies). This common membership helps facilitate effective governance across all finance, risk and remuneration matters and ensures that agendas are aligned and duplication of responsibilities is avoided. Members of the GAC are selected with a view to the expertise and experience of the Committee as a whole and with proper regard to the key issues and challenges facing NatWest Group. As NatWest Group plc is a listed company on the London and New York stock exchanges it has certain obligations as to the expertise and qualifications of the Audit Committee. The Board is satisfied that all GAC members have recent and relevant financial experience and are independent as defined in the SEC rules under the US Securities Exchange Act of 1934 (the ‘Exchange Act’) and related guidance. The Board has further determined that Patrick Flynn, Mark Seligman and Robert Gillespie are all ‘financial experts’ for the purposes of compliance with the Exchange Act Rules and the requirements of the New York Stock Exchange, and that they have competence in accounting and/or auditing as required under the Disclosure Guidance and Transparency Rules. Dear Shareholder, In 2021 the Group Audit Committee (GAC) has continued to operate effectively, supporting NatWest Group to help people, families and businesses to thrive. This report sets out the key areas of focus for the GAC during the year and explains how the Committee discharged its key responsibilities. A core function of the Committee is to oversee and challenge the processes undertaken by management in the preparation of the published financial and relevant non-financial information. The Committee also assists the NatWest Group Board in carrying out its responsibilities relating to accounting policies and internal control functions. More detail on the remit of the Committee can be found in its terms of reference which are reviewed annually and available at natwestgroup.com. Scrutinising the integrity and quality of the financial results released by NatWest Group over the course of the year continued to be a priority for the Committee. As part of its review of disclosures such as the quarterly, interim and full year results, the Committee also considered detailed reports from management on the judgments applied during the preparation of the information and legal and regulatory developments. Consideration was also given to management’s assessment of the internal controls over financial reporting and the GAC also received reports from both the internal auditors on the internal control environment and the external auditors on internal controls over financial reporting and key accounting and judgmental matters. The Committee reviewed the annual, interim and quarterly supplements on climate, purpose and ESG matters, as well as the annual Climate-related Disclosures Report. Particular scrutiny was given to the controls and basis of preparation for these releases. The Committee recognises such disclosures will continue to evolve over time. The impact of climate-related issues on financial statements more broadly was also considered by the Committee during the year. As the economic impacts of the COVID-19 pandemic and measures taken by the Government in response persisted throughout 2021, the Committee dedicated much time to the consideration of accounting judgments. In particular the Committee considered how the judgments were applied to determining post-model adjustments, as well as the actual and forecast impact on credit losses. The performance of internal models used by management for these purposes continued to improve following enhancements implemented in 2020. Benchmarking data provided by the PRA and the external auditor has again offered helpful context to the Committee given the continued uncertain conditions. The Committee oversight of the performance of the Internal Audit function and ensuring its independence is a key responsibility of the Committee. In February 2021 a new Chief Audit Executive joined NatWest Group and I have supported him in delivering enhancements to the operation and focus of the Internal Audit function. I have continued to be NatWest Group’s whistleblowing champion, and the Committee maintains responsibility for oversight of the independence, autonomy and effectiveness of NatWest group’s whistleblowing policies and procedures. In 2021 NatWest Group has continued to offer an effective whistleblowing service to colleagues. I welcomed the opportunity to respond to the consultation launched by the Department for Business, Energy and Industrial Strategy (BEIS) into audit and corporate governance. Stakeholders were invited to share their views on a range of proposals relating to the UK’s corporate governance framework for major companies and the way they are audited. I shared my views as Chairman of the GAC on the most pertinent proposals, which were submitted alongside a detailed NatWest Group-wide response. I would like to extend my thanks to my fellow Committee members and attendees for their contributions to the work of the GAC during 2021. Patrick Flynn Chairman of the Group Audit Committee 17 February 2022 Letter from Patrick Flynn Chairman of the Group Audit Committee 116 NatWest Group 2021 Annual Report and Accounts Meetings and visits Five scheduled meetings of the Committee were held in 2021, four of which took place immediately prior to the release of the financial results each quarter. During the year all members attended the meetings, all of which were held virtually. All meetings were also attended, in an observational capacity, by the two non-executive directors of NatWest Holdings who are members of that entity’s Audit Committee. In conjunction with the Group and NWH Board Risk Committee (BRC) and the NWH Audit Committee, the GAC undertook its annual programme of visits to control functions. Constructive and insightful discussions were held with members of management from the Risk, Internal Audit and Finance teams. Performance evaluations In 2021 the annual review of the effectiveness of the Board and its senior Committees, including the GAC, was conducted externally by Independent Board Evaluation. It was determined that the GAC had continued to operate effectively during 2021, Financial and non-financial reporting The GAC considered a number of accounting judgments and reporting issues in the preparation of NatWest Group’s financial results throughout 2021. The Committee reviewed the quarterly, interim and full year results announcements, the annual reporting suite of documents and other principal financial and non-financial releases for recommendation to the NatWest Group plc Board for approval. This included the disclosures required by the TCFD and the quarterly Climate, Purpose and ESG measures supplements. Consideration was given to the controls surrounding the preparation of these releases. Matter Role of Committee and context of discussion How the Committee addressed the matter Expected credit losses To review and challenge management’s judgements in relation to credit impairments and the underlying assumptions, methodologies and models applied, and any post-model adjustments required. To also consider the impact of macro-economic risks on the credit environment. The GAC focused on the key assumptions, methodologies and post-model adjustments applied to provisions under IFRS 9. The continued economic uncertainty during 2021 and the dislocation between the economics and the credit impacts observed, led management to adopt a measured approach to the release of IFRS 9 provisions in the year. In evaluating management’s proposal to release £1.3 billion, the Committee considered the previously implemented enhancements to the internal models and the improvements in the economic environment during 2021. Industry benchmarking data, particularly in the first half of the year, was also helpful to the Committee and informed its considerations. The Committee recognises that post-model adjustments should be limited to considerations beyond model capability and so sought from management confirmation of the criteria which would need to be satisfied to enable their release. The Committee will continue to scrutinise the application of post-model adjustments in 2022. Treatment of goodwill To consider the treatment of goodwill throughout the year and ensure the carrying value was appropriate and suitable disclosures were made. Management did not identify any reason to undertake an out of cycle reassessment of goodwill during 2021. Following discussion and challenge, the Committee was satisfied that goodwill remained recoverable throughout the year, and that appropriate disclosures were included in the quarterly and interim financial releases. The Committee considered and supported management’s proposed write down of £85 million of goodwill in RBS (and at higher levels) on the basis of materiality at the end of the year. Valuation methodologies To consider valuation methodologies, assumptions and judgments made by management. The GAC considered valuation methodologies and assumptions for financial instruments carried at fair value and scrutinised judgments made by management. meeting its statutory duties. The outcomes of the evaluation were considered by the Committee and subsequently reported to the Board. The Committee will support management’s consideration of the recommendation to review the leadership structure of the Finance function, and this was discussed with the Group CFO in the context of talent development and longer term planning for the function. The Committee also welcomed the recommendation to improve the diversity of the Committee membership, and this will be reviewed by the Nominations and Governance Committee as part of its ongoing business. The depth of financial expertise of the Committee was also recognised via the evaluation. The Committee is satisfied it fulfilled its terms of reference in 2021. The Committee continued to monitor the performance of the external auditor and the Internal Audit function in 2021. Formal assessments were undertaken at the end of the year via an internal process and the Committee reviewed summaries of the feedback provided by relevant stakeholders. Progress made to address the recommendations of the previous year’s evaluations was welcomed. 117 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Report of the Group Audit Committee continued Matter Role of Committee and context of discussion How the Committee addressed the matter Provisions and disclosures To consider the level of provisions for regulatory, litigation and conduct issues throughout the year. The Committee reviewed the levels of provisions during the year for regulatory, litigation and conduct matters, and was satisfied these were appropriate. The timing of certain litigation provisions was discussed with management and the external auditor, and the Committee concluded that it was only appropriate to record a provision once there was reliable estimate as to the quantum. The Committee welcomed the conclusion of a number of historic conduct and litigation matters during the year. Viability statement and the going concern basis of accounting To review NatWest Group’s going concern and viability statements. The GAC considered evidence of NatWest Group’s capital, liquidity and funding position and considered the process to support the assessment of principal risks. The GAC reviewed the company’s prospects in light of its current position, the identified principal and emerging risks (including climate risk) and the ongoing economic uncertainty resulting from the pandemic. FRC guidance and reviews of peer disclosures were considered as part of the preparation of the viability statement for NatWest Group. The Committee recommended both the going concern assessment and viability statement to the Board. (Refer to the Report of the directors for further information.) Fair, balanced and understandable To oversee the review process which supports the Committee and Board in concluding that the disclosures in the Annual Report and Accounts and other elements of the year-end reporting suite of documents, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the company’s position and performance, business model and strategy. The Committee oversaw the review process for the year-end disclosures which included: central coordination and oversight of the Annual Report and Accounts and other disclosures led by the Finance function; review of the documents by the Executive Disclosure Committee prior to consideration by the GAC; and a management certification process of the year-end reporting suite. The Committee considered whether the annual, interim and quarterly disclosures met the UK Corporate Governance Code requirements to be ‘fair, balanced and understandable’. It concluded each time that the releases satisfied the necessary criteria. The external auditor also considered the fair, balanced and understandable statement as part of the year-end processes and supported NatWest Group’s position. Non-financial reporting To review the principal non-financial disclosures made by NatWest Group and to ensure appropriate controls are in place to support the preparation of the information. These disclosures include the annual Climate-related Disclosures Report and the Climate, Purpose and ESG measures supplement published each quarter. As NatWest Group’s non-financial reporting has continued to evolve in 2021, the Committee has remained focused on ensuring robust and appropriate controls supported the preparation of the disclosures, which aligned with the existing measures in place in relation to financial disclosures. The Committee discussed the merits of publishing this information separately or as part of the interim and full-year results announcements, and concluded that releasing separate documents would be most useful for external stakeholders accessing the information. Industry best-practice and the output of peer reviews were considered to ensure NatWest Group is disclosing an appropriate and useful level of information, and this will continue to be reviewed going forward. The Committee considered the outcome of the reviews of the documents by management via the Executive Disclosure Committee and its sub- committee which focuses specifically on ESG disclosures. The Committee welcomed the extension of the risk and control assessments and the addition assurance work being undertaken by the external auditor. The Committee was satisfied that appropriate steps had been taken by management to limit the legal liability arising from the disclosure of such non-financial information. It received advice from NatWest Group Reputational Risk Committee as to the risk of reputational impacts in the event of a misstatement or future change in methodology which could give rise to suggestions of ‘greenwashing’. 118 NatWest Group 2021 Annual Report and Accounts Systems of internal control Systems of internal control relating to financial management, reporting and accounting issues is a key area of focus for the Committee. In 2021 it received reports throughout the year on the topic and evaluated the effectiveness of NatWest Group’s internal control systems, including any significant failings or weaknesses. Matter Role of Committee and context of discussion How the Committee addressed the matter Sarbanes-Oxley Act of 2002 To consider NatWest Group’s compliance with the requirements of section 404 of the Sarbanes-Oxley Act of 2002. The Committee received interim updates on the status of the bank’s internal controls over financial reporting throughout 2021 enabling it to monitor progress and support management’s conclusion at the year-end that there were no Material Weaknesses for NatWest Group. Two Significant Deficiencies were addressed by management during the year. The Committee monitored progress and supported management’s approach which allowed the matters to be downgraded prior to the end of the year. The Committee also reviewed the process undertaken to support the Group CEO and Group CFO in providing the certifications required under sections 302, 404 and 906 of the Sarbanes-Oxley Act of 2002. Regulatory and financial returns To review the controls and procedures established by management of NatWest Group for compliance with regulatory and financial reporting requirements. In December 2019 the PRA announced an industry-wide review of regulatory returns via means of a skilled persons report. In 2020, the Committee approved the appointment of EY as the skilled person to undertake the review for NatWest Group, given the external auditor’s extensive knowledge of our internal systems and processes. The Committee received regular updates on the review and while the skilled person raised a number of findings, there were none which indicated material errors with the regulatory returns. The Committee encouraged management to work collaboratively across the bank to ensure the necessary regulatory deadlines were met while ensuring business as usual work continued to be delivered. Three industry-wide themes were identified by the skilled person reviews: governance and ownership; controls; and data and investment. The Committee reviewed the formal remediation plans submitted to the PRA in response to the industry-wide findings and those specific to NatWest Group. It received assurances from management that appropriate resource was available to execute the plans and that the timescales were manageable. On this basis it approved the plans. The ongoing work to further strengthen the controls surrounding the preparation of regulatory returns has also been closely monitored and supported by the Committee throughout 2021; this will continue in 2022. Control Environment Certification To consider the control environment ratings of the businesses, functions and material subsidiaries and management’s actions to ensure that the control environment is maintained or strengthened. Management provided bi-annual reports on the Control Environment Certification, which were supplemented by the views of the second and third lines of defence. Changes in ratings during the year by certain businesses and functions were noted and supported by the Committee. Return to appetite plans have been developed by management for all major areas which was welcomed by the Committee. The most significant plans are regularly reviewed and challenged by the relevant Board Committee. 119 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Matter Role of Committee and context of discussion How the Committee addressed the matter Notifiable event process To monitor control breaches captured by the internal notifiable event process. The Committee received bi-annual updates on the volumes and nature of the most significant control breaches escalated via the internal notifiable event process and any common themes. Process-related issues accounted for the majority of the most significant events in 2021, and the Committee noted the high level of manual elements to processes across the bank. It requested management report on how greater automation could be implemented to NatWest Group’s key processes and systems. The work launched by the Chief Transformation Officer in this respect in relation to Customer Journeys was welcomed and will be monitored going forward. Where process issues had not been the cause of control breaches the Committee encouraged management to ensure the root causes of these issues are remediated. The outcome of an internal review of the process to ensure it was operating as expected was also presented to the Committee. All Board directors were alerted to the most significant breaches throughout the year. Whistleblowing To monitor the effectiveness of the bank’s whistleblowing policies and procedures. The Committee chairman is also the whistleblowers’ champion for NatWest Group. The GAC monitored the effectiveness of the bank’s whistleblowing process and received updates on the volume of whistleblowing reports and any common themes. The results of the annual Our View survey indicated that colleagues’ awareness of how to raise concerns was high and that the majority of respondents reported they felt safe to do so and that concerns raised would be handled appropriately. The Committee considered the output of Internal Audit’s annual review of the whistleblowing process, and welcomed the largely positive results. The GAC Chairman acts as NatWest Group’s Whistleblowers’ Champion, in line with PRA and FCA regulations, and meets regularly with the whistleblowing team. Whistleblowing is also discussed regularly with the chairs of the principal subsidiary audit committees to ensure a common and coordinated approach across the bank, and the Board is updated on these and the GAC’s discussions as appropriate. Legal and regulatory reports To note material legal investigations (current and emerging) and any impacts on financial reporting; and to monitor the bank’s relationship with relevant regulatory bodies including the FCA and PRA. Quarterly reports were presented to the Committee setting out updates on new and existing major investigations and litigation cases. The Committee considered provision levels and the impact on each quarterly financial results disclosure and was satisfied in both respects. The Committee also received updates on ongoing regulatory investigations, current and future areas of regulatory focus and the nature of the relationships with the primary regulators. Other standards of control In addition, the Committee receives regular updates on matters pertinent to NatWest Group’s standards of internal control. The Committee received an update on the bank’s tax position and discussed matters including tax disclosures and provisions, NatWest Group’s tax compliance status, the relationship with HMRC, the UK bank levy and emerging and forthcoming tax issues (including the likely post- COVID-19 tax environment and the impact on the OECD Pillar 2 rules on NatWest Group). The GAC reviewed the disclosure on internal control matters in conjunction with the related guidance from the Financial Reporting Council. Report of the Group Audit Committee continued 120 NatWest Group 2021 Annual Report and Accounts Internal Audit The GAC is responsible for overseeing the Internal Audit function, monitoring its effectiveness and independence. Matter Role of Committee and context of discussion How the Committee addressed the matter Quarterly opinions To consider periodic opinion reports prepared by Internal Audit on the overall effectiveness of the governance, risk management and internal control framework, current issues and the adequacy of remediation activity. Quarterly opinion reports were provided to the Committee by Internal Audit, setting out its view of the overall effectiveness of NatWest Group’s governance, risk management and internal control framework, current issues and the adequacy of remediation activity. Internal Audit also outlined material and emerging concerns identified through their audit work. Over the course of the year Internal Audit reported a gradual improvement in the bank’s control environment as the wider economic recovery from the COVID-19 pandemic continued. The Committee welcomed Internal Audit’s views on major programmes being undertaken by the bank such as the remediation of financial crime matters, the implementation of the Enterprise Wide Risk Management Framework and delivery of the One Bank transformation programme. The importance of increasing automation across the bank’s processes was also evident in Internal Audit’s reports, and this was explored further by the Committee, as noted above. Annual plan and budget To approve Internal Audit’s annual plan and budget prior to the start of each year as well as any significant changes required during the year. The Committee considered and approved Internal Audit’s 2021 plan and budget at the end of 2020. Following the appointment of a new Chief Audit Executive (CAE) certain refinements to the focus of the plan were made and these were discussed with the Committee throughout 2021. The Committee encouraged the function to increase its focus on validating the closure of prior findings by management. The Committee approved an increase to Internal Audit’s budget for 2021 to support recruitment to ensure there were appropriate resources available to deliver the plan. In December 2021, the Committee approved Internal Audit’s 2022 plan and budget. Internal Audit Charter and independence To approve the Internal Audit Charter each year and reviews the independence of the CAE and function as a whole. The GAC reviewed and approved the Internal Audit Charter which was consistent with prior years. The Committee noted the Independence Statement and confirmed the independence of Internal Audit. In line with the revised industry guidance issued in September 2017 and in order to maintain the independence and perceived independence of both the role of CAE and the wider Internal Audit function, a new CAE was appointed in 2020 and joined NatWest Group in February 2021. Performance/ evaluation To monitor and review, at least annually, the effectiveness of Internal Audit. In line with prior practice and industry guidance, the CAE continued to report to the GAC Chairman in 2021, with a secondary reporting line to the Group CEO for administrative purposes. The GAC assessed the annual performance (including risk performance) of the function and CAE. The 2021 evaluation of the Internal Audit function was carried out internally. Key stakeholders across the bank, including the GAC members, attendees and the external auditors provided feedback, identifying areas of particular strength and those for enhancement. The overall findings were positive, and the Internal Audit function was found to be operating effectively with continued improvement in most areas being noted. Certain areas for continued development were identified, including: the greater use of integrated audits, increased use of digital tools, and building bench- strength. Progress will be overseen by the GAC in 2022. Visit To undertake an annual deep dive session with members of the Internal Audit leadership team. In conjunction with the BRC, the GAC participated in a successful deep dive session with members of the Internal Audit team in 2021. A variety of issues impacting the Internal Audit function were discussed, including succession planning and bench-strength of the function and its recent work to fully implement integrated audits and extend its use of data analytics. The Committee was very encouraged by the innovative approach being taken in these areas and the clear benefits to both the function and the wider business. 121 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Report of the Group Audit Committee continued External audit The GAC has responsibility for monitoring the independence and objectivity of the external auditor, the effectiveness of the audit process and for reviewing the bank’s financial relationship with the external auditor and fixing its remuneration. Ernst & Young LLP (EY) has been NatWest Group’s external auditor since 2016, following a tender process carried out in 2014. Matter Role of Committee and context of discussion How the Committee addressed the matter External audit reports To review reports prepared by the external auditor in relation to NatWest Group’s financial results and control environment. The Committee received quarterly reports on the audit-related work and conclusions of the external auditor. The reports included EY’s view of the judgments made by management, compliance with international financial reporting standards and the external auditor’s observations and assessment of effectiveness of internal controls over financial reporting. The GAC also received helpful benchmarking information from EY during the course of the year and in particular relating to the accounting treatment of the impacts of the COVID-19 pandemic. The Committee received all communications from EY required by UK auditing standards, SEC and NYSE rules, including 2021 audit quality and transparency reports. Audit plan and fees To consider the scope and planning of the external auditor in relation to the audit of NatWest Group. It is also authorised by the shareholders to fix the remuneration of the external auditor. The GAC reviewed EY’s 2021 plan. It welcomed the external auditor’s intention to make greater use of digital tools in its work. In line with the authority granted to the Committee by shareholders at the 2021 Annual General Meeting (AGM) to fix the remuneration of the external auditor, the GAC approved the audit fees for the year including the fee for the 2021 interim results. The Committee received confirmation from the external auditor that the fees were appropriate to enable delivery of the required procedures to a high quality. Annual evaluation To review and monitor the external auditor’s independence and objectivity and the effectiveness of the audit process, taking into consideration all relevant professional and regulatory requirements. In 2021 an internal evaluation was carried out on behalf of the Committee to assess the independence and objectivity of the external auditor and the effectiveness of the audit process. The GAC members, attendees, finance directors of customer businesses and functions, and key members of the Finance team were consulted as part of the evaluation. The process assessed the external auditor’s independence, engagement, provision of robust challenge, bench-strength and reporting. The evaluation concluded that the external auditor was operating effectively and with objectivity. Respondents reported improvements in relation to the quality of engagement and challenge in 2021, as well as enhancements in certain aspects of the audit team’s bench-strength. Some suggested areas for consideration to further strengthen effectiveness included: refining written reports provided to senior Committees, exploring opportunities to leverage the work undertaken by other teams within EY and Internal Audit, and to continue to share its valuable insights on the emerging area of reporting on climate metrics. Following the evaluation, the GAC recommended that the Board seek the reappointment of EY as external auditor at the next AGM. The Committee noted the positive results of the audit quality reviews of EY’s 2020 audit by the FRC and PCAOB during 2021. Audit partner To oversee the lead audit partner and resolution of any points of disagreement with management. In February 2021 Micha Missakian succeeded Jonathan Bourne as EY’s lead audit partner for NatWest Group, following the conclusion of Mr Bourne’s five year term in role. Mr Missakian attended all meetings of the Committee in 2021. The Committee members met in private session with Mr Missakian twice during the year to ensure the external auditor had an opportunity to raise any points of disagreement with management. No such points were raised by the external auditor in 2021. 122 NatWest Group 2021 Annual Report and Accounts Matter Role of Committee and context of discussion How the Committee addressed the matter Additional reports prepared by the external auditor To review reports prepared by the external auditor in relation to NatWest Group. During 2021 various additional reports prepared by the external auditor were considered by the Committee. These included the results of the external auditor’s assurance procedures on compliance with the FCA’s Client Asset Rules for NatWest Group’s regulated legal entities for the year ended 31 December 2021. The Committee also received the outcome of EY’s written auditor report to the PRA under supervisory statement SS1/16 for the year ended 31 December 2021, noting that the matters identified were already being addressed by management. The Committee Chairman also contributed to a review of the process and its efficacy by the PRA. Non-audit services To review and approve, at least annually, NatWest Group’s policy in relation to the engagement of the external auditors to perform audit and non-audit services (the policy). All audit and non-audit services are approved by, or on behalf of, the Committee to safeguard the external auditor’s independence and objectivity. The GAC reviewed and approved NatWest Group’s non-audit services policy in 2021. Under the policy, audit-related services and permitted non-audit service engagements may be approved by the Group CFO up to certain financial thresholds. Engagements in excess of these limits require the approval of the GAC chairman. Where the fee for a non-audit service engagement is expected to exceed £100,000, a competitive tender process must be held; where the fee is anticipated to be £250,000 or more approval of all GAC members is required. The policy permits the external auditor to undertake engagements which are required by law or regulation or which relate to the provision of comfort letters in respect of debt issuances by the NatWest Group, provided prior approvals are in place in accordance with the policy. The policy also allows NatWest Group to receive services from EY which result from a customer’s banking relationship, provided prior approvals are in place in accordance with the policy. All such approvals are subsequently reported to the GAC. During 2021 the Committee approved, on an ad hoc basis, three significant non-audit engagements (where the fees exceeded £100,000) to be undertaken by the external auditor. These related to: assurance over selected ESG metrics; the audit of client money and assets (CASS); and the audit of LIBOR submissions. The latter two engagements are annual audits required under UK regulations and in prior years had been approved as part of the consideration of the total audit fees. Given the external auditor’s knowledge of the emerging area of climate-related disclosures and the alignment to other year-end reporting the Committee determined that EY were best placed to undertake this work. The audit to non-audit fee ratio for 2021 was 18%. Further details of the non-audit services policy can be found at natwestgroup.com. Information on fees paid in respect of audit and non-audit services carried out by the external auditor can be found in Note 6 to the consolidated accounts. 123 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Corporate governance continued Dear Shareholder I am pleased to present my second report as Chairman of the Board Risk Committee (the Committee or BRC). This report describes how the BRC has fulfilled its role overseeing and advising the Board in relation to current and potential future risk exposures and risk profile; and in overseeing the effectiveness of risk management frameworks. In carrying out this important role, the Committee helps to ensure that NatWest Group is purpose-led in its decision-making, building long-term value in the business. More detail on the remit of the Committee can also be found in its terms of reference which are reviewed annually and available at natwestgroup.com. During 2021 the committee ensured its time was prioritised to focus on oversight of NatWest Group’s principal and emerging risks, including improvements to the management of financial crime risk, model risk improvements, and the risk impacts of developments in the external environment as a result of COVID-19. It has also maintained oversight of the continued enhancement of the enterprise-wide risk management framework and the development of regular risk reporting to drive more insightful reporting to the Board. It is expected that these will continue to be areas of focus in 2022 as NatWest Group drives towards return to appetite in a number of areas and further impact of COVID-19 is experienced. Further information on key topics considered during the year and areas of focus and challenge by the Committee is provided on the following pages. I would like to thank my fellow Committee members for their continued commitment, support and challenge throughout the year. Morten Friis Chairman of the Group Board Risk Committee 17 February 2022 Report of the Group Board Risk Committee Membership BRC comprises four independent non-executive directors. The details of the members and their skills and experience are set out on pages 98 to 101. Patrick Flynn is chairman of the Group Audit Committee of which Robert Gillespie and I are also members. Robert is also chairman of the Group Performance and Remuneration Committee (RemCo) and Lena Wilson sits on this Committee. This common membership across Committees helps to ensure effective governance across the committees. Regular attendees at BRC meetings include: the Group Chairman, Group Chief Executive Officer, Group Chief Financial Officer, Group Chief Risk Officer, Group Chief Legal Officer and General Counsel, Group Chief Audit Executive and the external auditor. External advice is sought by the Committee where appropriate. Two non-executive directors of NWH Ltd (the ring-fenced bank) attended Committee meetings as observers in their capacity as members of NWH Ltd’s BRC. Meetings of the Group and NWH Ltd’s BRCs share much of a common agenda and are generally run in parallel. Meetings and visits There were eight scheduled meetings of the Committee held in 2021 and one ad hoc meeting of members only was required to discuss executive remuneration matters. The majority of meetings were held virtually during the year due to the pandemic but there was one in person meeting arranged in the second half of the year when circumstances allowed. Details of meeting attendance can be found on page 103. Outside of formal meetings, the Committee also held an additional meeting on financial crime and met with the Risk Leadership Team to help build relationships and provide the team with greater insights on the Committee’s perspectives. Members of the Group and NWH Ltd’s BRCs also undertook a programme of visits to the Risk, Internal Audit and Finance functions, in conjunction with members of the Group and NWH Ltd’s Audit Committees. Letter from Morten Friis Chairman of the Group Board Risk Committee “BRC has focused on oversight of NatWest Group’s principal risks, including financial crime risk management and model risk management, whilst also overseeing improvements in the quality of underlying risk management frameworks and reporting.” 124 NatWest Group 2021 Annual Report and Accounts Performance evaluation Throughout the year the Committee acted in accordance with its terms of reference. The annual review of the effectiveness of the Board and its Committees, including BRC, facilitated by Independent Board Evaluation, a specialist board evaluation consultancy. Overall, the review concluded that the Committee operated effectively and had evolved in a positive way. Some areas for potential enhancement were also identified which included streamlining reporting and driving action to address major issues of reputational significant to NatWest Group. These will be areas of focus for 2022. Key matters considered by the Committee in 2021 Matter Context of discussion How the Committee addressed the matter Financial crime Oversight of the management and return to appetite of financial crime risk, which continues to be a top risk for NatWest Group. Given the critical importance of the management of financial crime, the Committee held an additional focus session in January 2021 to discuss the detailed return to appetite plans and proposed management information requirements to ensure the Committee was provided with appropriate reporting to track progress throughout the year. The Committee received quarterly updates from all three lines of defence which included updates on progress on return to appetite plans, transformation, emerging risks and issues, and the Skilled Person’s report findings. In addition, the Committee considered the Money Laundering Reporting Officer’s (MLRO’s) report, from the newly appointed MLRO, and considered the enterprise- wide financial crime risk assessment. The CRO reported on the financial crime risk profile and progress on remediation as part of the risk management report at each meeting. Throughout the year, the Committee challenged management on return to appetite slippage, adequacy of resource and external support, and the pace of transformation and remediation to drive improvements in financial crime to ensure we can protect our customers. Model risk BRC maintained close oversight of management activity to return to appetite for model risk. The Committee evaluated the appropriateness of the model risk management framework, including required model changes, regulatory approval thereof, and the return to appetite plan. The Committee requested a number of additional spotlight sessions in March, July, September and October 2021 to maintain close oversight of progress. In intervening months, updates were given via the risk management report. The Committee requested additional metrics to differentiate between models where remediation and validation had been completed but regulatory approval had not been obtained from those models where management action was still underway and there was particular focus on progress of IFRS9 and Internal Ratings Based (IRB) models. The Committee held management to account in relation to return to appetite plans and sought clarity on accountabilities. Specific consideration of the impact of model weaknesses was considered as part of separate discussions regarding capital distributions, ICAAPs and stress testing updates. 125 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Matter Context of discussion How the Committee addressed the matter Enterprise Wide Risk Management Framework (EWRMF) enhancement (including risk appetite) BRC monitored the effectiveness of the risk management framework including further significant enhancements to the risk governance arrangements of NatWest Group. The EWRMF is NatWest Group’s primary risk management and risk governance document providing a framework to deliver strategy in a safe and sustainable way. A number of key enhancements to the EWRMF were considered by BRC and recommended to Board during 2021, including: the elevation of the EWRMF to a Board-approved framework; the assimilation of and enhancement to the pre-existing Board-approved Risk Appetite Framework within the EWRMF; transitioning all principal risk appetite measures to Board approved measures; and requiring all principal risk policies to be approved by the Committee. Further details of these changes can be found in the Risk management section of the report on page 188. These enhancements better align NatWest Group with peers and regulatory expectations. The Committee considers the implementation of the EWRMF to be of significant importance to NatWest Group’s robust risk management and requested regular updates on the progress of the implementation of the EWRMF via the risk management report. The Committee oversaw the refresh of both qualitative risk appetite statements and the quantitative risk appetite measures in line with the enhanced EWRMF and monitored the risk profile of NatWest Group relative to risk appetite via the risk management report. The risk appetite refresh included the introduction of climate risk as a principal risk with associated risk appetite statement and measures aligned to external climate commitments and NatWest Group’s strategic ambition, acknowledging that management of this long-term risk will continue to evolve. A more strategic approach to reputational risk appetite was introduced and the Committee challenged management to ensure conduct risk appetite is a key focus of the Board, as well as more generally ensuring risk appetite triggers and limits are appropriately set. Changes to the manner in which earnings stability risk appetite is managed and monitored and the framework to manage capital targets were reviewed by the Committee and recommended for Board approval. The Committee also challenged management to develop a more quantitative approach to risk appetite for all non-financial risks, including conduct, compliance and operational risk and these were introduced as part of the risk appetite refresh in December 2021. The Committee oversaw the enhancement of the approach to ensure alignment between risk appetite measures. All of these changes were subject to detailed review and challenge by the Committee. The Committee received specific spotlights in respect of all principal risks during the year. Report of the Group Board Risk Committee continued 126 NatWest Group 2021 Annual Report and Accounts Matter Context of discussion How the Committee addressed the matter Risk profile and reporting Time was spent at every BRC meeting reviewing NatWest Group’s current and future risk profile relative to risk appetite, with a particular focus on COVID-19 impacts, and scrutinising management’s actions to monitor and control exposures. Risk management reports – The Committee considered detailed analysis on NatWest Group’s risk profile, including the UK and global economic outlook, top and emerging risks and threats, and NatWest Group’s performance against risk appetite at each of its meetings via risk management reports. During 2021, the format and content of the report evolved, including integration with the Nerve Centre management information tool which provided additional optional detail to directors. The Committee sought a number of changes to the report to drive more insightful reporting, including more detail on actions being taken to mitigate top risks, implementation of EWRMF, credit risk and the Commercial Real Estate portfolio and this work will continue into 2022. The ongoing impact of COVID-19 on the economy, our customers and our colleagues was a key element of discussions throughout the year, particularly the manner in which the better than expected recovery was managed from a risk perspective. Other key areas of focus included financial crime and model remediation; the control environment and issues related thereto; regulatory compliance and conduct issues; embedding climate risk; operational and change risk; and management of the correlation of top risks. Reports on legal and regulatory developments and litigation risks were considered quarterly. The CRO also reported on key matters discussed at the Executive Risk Committee. Updates from Subsidiary Risk Committees – Quarterly reports were received from the Chairmen of the management risk committees of the franchises and the board-level risk committees of material regulated subsidiaries providing an overview of issues being overseen and a channel for escalation of issues. The Chairmen of the Board Risk Committees of material regulated subsidiaries were invited to join meetings throughout the year, providing updates on key areas of focus. Capital, funding and liquidity risk BRC completed a detailed review of capital, funding and liquidity requirements and also reviewed the capital distribution proposals. ICAAPs, ILAAPs and budget stress tests – The BRC considered the budget and budget stress test as well as the ILAAP and ICAAP for NatWest Group and recommended them to the Board for approval. It challenged management to ensure that prior regulatory feedback had been addressed and that Risk and Internal Audit improvement recommendations would be incorporated in 2022 submissions. The Committee reviewed and recommended to the Board the scenarios to be used during 2022 for the Budget, IFRS 9, Earnings Stability, the ICAAP and the ILAAP and noted that management would continue to use this suite of scenarios throughout 2022, in response to prior feedback from the Committee. Capital distributions – The Committee provided detailed review of proposals to increase capital distributions to shareholders, prior to approval by the Board, including creation of an on-market buyback plan, following the improved projected capital position of NatWest Group in comparison to the initial view of impacts from COVID-19. The Committee challenged management on the CET1% target, the manner in which capital would be deployed over the plan, and how excess capital would be managed. 127 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Matter Context of discussion How the Committee addressed the matter Stress testing BRC reviewed in detail the stress testing activity undertaken by management to identify and monitor risks and threats and in relation to the SST and CBES, challenging and scrutinising the outputs. Stress testing capabilities – The Committee also received an update on improvements in the stress testing capabilities and realignment of stress testing activity and accountabilities within NatWest Group. This included the development of enhanced scenario analysis capabilities to support the calibration of risk appetite measures, earnings stability risk profile and dynamic capital planning targets. Bank of England stress tests – The BRC performed a detailed review of the 2021 Bank of England Solvency Stress Test (SST) and the Biennial Exploratory Stress Test, examining the impact on NatWest Group of potential climate change scenarios (CBES) and recommended the results of both stress tests to the Board. The Committee approved the scenarios for these stress tests, under delegated authority from the Board, including scenario expansion, and considered significant judgments, the impact of model weaknesses, the results and proposed management actions. The Committee acknowledged the limitations of the CBES in its preliminary year and that NatWest Group will continue to develop its modelling and data capabilities. To ensure directors had sufficient understanding of the CBES activity in its introductory year, the Committee received a series of supporting training video materials to help contextualise the process and results. Recovery plans and the resolvability self-assessment BRC monitors and challenges the development of plans which would allow NatWest Group to be dealt with effectively in the event of financial failure. Recovery Plan – BRC performed the detailed review of the NatWest Group Recovery Plan prior to approval by the Board. The Committee sought confirmation from management that NatWest Group had adequate capacity and capabilities in a recovery scenario and requested that the dynamic nature of capital planning targets and their impact on CET1 recovery level thresholds be clarified. Resolvability self-assessment – The Committee reviewed management’s approach to its first Resolvability self-assessment and reviewed and recommended the results of the self-assessment to the Board for approval. The Committee discussed the risks to resolvability and sought comfort on observations from Risk and Internal Audit regarding the limited restructuring options. In advance of approval, the Board undertook a training session on directors’ duties in Resolution. Control environment BRC continued to monitor the effectiveness of internal controls required to manage risk. Control Environment Certification and oversight – The Committee was provided with updates regarding the control environment ratings of NatWest Group, franchises, functions, services, and legal entities. Particular areas of focus were NatWest Markets and RBSI and the Committee sought comfort from management on the key activities to improve ratings, including financial crime, model risk and surveillance systems. The Committee received regular updates on trends in the NatWest Group Notifiable Event Process notifications and management focus on the culture of escalating issues timeously. The Committee reviewed and supported management’s report on the effectiveness of internal controls required to manage risk. Risk culture – To support the Board in its role, BRC received updates on progress to align NatWest Group’s culture to its purpose and strategy, which includes refreshing the approach to risk culture under the banner ‘Intelligent Risk Taking’ as a fundamental pillar within the One Bank culture. This places emphasis on risk appetite alignment with strategic goals, analytically supported decisions and behaviours such as openness, challenge and raising issues early. The Committee encouraged management to consider tolerance for failure and clarity on expectations as the cultural behaviours were refined. It also sought clarity on how the updated articulation of risk culture would align with other existing employee tools and it was confirmed this has been considered. Report of the Group Board Risk Committee continued 128 NatWest Group 2021 Annual Report and Accounts Matter Context of discussion How the Committee addressed the matter Financial and strategic risks Regular monitoring of key risks is a pivotal part of BRC’s role both via routine risk reporting and via regular focused reports. Credit and market risk – In addition to reporting on credit and market risk within the risk management report, BRC received separate updates in respect of the retail and wholesale credit risk portfolios, the single name concertation framework, commercial real estate exposures, credit decisions made by the Executive Credit Group and traded and non-traded market risk. These updates provided insight into the sources of the risk, including asset quality, risk management approach and risk appetite, controls and testing and monitoring activity undertaken. The Committee also received specific spotlights on Commercial Banking credit risk and stewardship and preparation for expected increased levels of problem debt due to COVID-19 and plans established to manage this increase. Financial risk from climate change – BRC received quarterly updates on management plans to address the financial and non-financial risks arising from climate change, including the inclusion of climate related risks within the existing EWRMF and the development of new risk appetite measures to assist monitoring of NatWest Group’s risk profile. The Committee also received assurance from management in relation to the NatWest Group Climate Change Programme closure activity as NatWest Group transitions to the integration of climate-related matters into business-as-usual activity. 129 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Matter Context of discussion How the Committee addressed the matter Non-financial risks BRC continued its oversight of NatWest Group’s non- financial risks, including major change programmes and strategic transformation initiatives. Transformation/major change programmes – BRC considered progress on the delivery of NatWest Group’s transformation and change programme and its position relative to risk appetite, including oversight of red rated programmes and consideration of a new reporting style. It received updates on key regulatory programmes, including LIBOR transition, IRB models transformation, and GDPR readiness. BRC requested greater visibility of how interdependencies between programmes were managed, monitored how strategic risks were being managed and challenged management on slippage of Objectives and Key Results, adequacy of capabilities and budget prioritisation. The Committee also challenged the proposed risk appetite measure which was subsequently changed. Conduct risk and regulatory compliance risk – In addition to the review of changes to risk appetite measures, the Committee received regular updates on the conduct and regulatory compliance risk profile, the elements driving the elevated conduct and compliance risk profile, both, internally and externally, and actions being taken to return to appetite. A spotlight on conduct and regulatory compliance highlighted the steps being taken to embed regulatory compliance within the risk operating model across NatWest Group. The Committee supported the Board in overseeing management’s progress in embedding compliance with the UK ring-fencing rules in support of the submission of its regulatory attestation. Operational risk, resilience, and cyber security – BRC received regular updates on NatWest Group’s operational risk profile and risk appetite, with a particular focus on the impact of COVID-19 on operational resilience, outsourcing and information and cyber security. The Committee considered the bank’s preparation for compliance with the new Operational Resilience Regulatory Policy and recommended a new list of Important Business Services and associated impact tolerances to the Board for approval. In addition, separate updates on information security were reviewed and the BRC dedicated time to the consideration of cyber risk, the external threat landscape, and the action being taken by management in response. The Committee received confirmation that there was sufficient investment in this area and there would continue to be focus on change capacity and effective prioritisation. The Committee received a third-party management dashboard to facilitate oversight of the identification and management of third-party related risks. The Committee sought additional clarity on the process for re-tender and management of cloud service providers. Data management and BCBS239 – BRC received reports on the data management risk profile, including the risk implications of proposed data strategy changes, required to support NatWest Group’s refreshed purpose- led strategy. The Committee also received regular updates on compliance with BCBS239, challenging management on its approach to assessment of NatWest Group’s compliance status. Changes to the Risk Data Aggregation & Reporting Framework were reviewed and approved by the Committee under Board delegated authority. Report of the Group Board Risk Committee continued 130 NatWest Group 2021 Annual Report and Accounts Matter Context of discussion How the Committee addressed the matter Accountability and remuneration BRC continued to provide oversight over the risk dimension of performance and remuneration arrangements, working closely with RemCo. Accountability – The Committee regularly considered developments in significant material events and investigations. This included resultant accountability review recommendations, ensuring appropriateness of the recommendations from a risk perspective. Remuneration – The risk and control goals and associated long term incentive performance measures of the NatWest Group Executive Committee (ExCo) were reviewed, with additional focus on underlying objectives for the Group Chief Risk Officer. In addition, the Committee reviewed the risk management performance and long term incentive performance conditions, pre-grant and pre-vest assessments for ExCo, ensuring fair reflection of risk management performance in award and vesting outcomes. More generally, the Committee considered and recommended to RemCo adjustments to NatWest Group’s bonus calculation, to reflect NatWest Group’s risk management performance. Remuneration policy – Proposals for the 2022 Executive Director Remuneration Policy were considered by the Committee and recommended to RemCo from a risk management perspective. The Committee also reviewed relevant changes to the Material Risk Taker identification process. Further detail on how risk is considered in remuneration decisions can be found in the Report of the RemCo on page 136. 131 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Corporate governance continued Report of the Group Sustainable Banking Committee Dear Shareholder, I am pleased to present my fourth report as Chairman of the Group Sustainable Banking Committee (the Committee or SBC). The journey towards being purpose-led As the Group continues its journey towards being purpose-led, the Committee has played an important oversight role. On behalf of the Board, we have focused our efforts on NatWest Group’s progress against our purposeful commitments and ambitions. In response to feedback arising from the 2021 performance evaluation, it was agreed that the Committee should enhance its focus on customer service and experience. This is now reflected in our terms of reference and refreshed sustainable banking pillars – Climate; Customers; Enterprise; People & Culture; and Conduct & Ethics. 2021 Highlights We held several spotlight sessions throughout the year, covering our five SBC pillar topics. Committee members challenged the actions taken by management to run the bank as a sustainable business and sought the views of internal and external stakeholders wherever possible. Meeting time is prioritised towards meaningful debate and discussion. Below are the key discussion points and outcomes for 2021. Climate At its annual climate spotlight session, the Committee discussed external developments relating to climate and their potential impact on NatWest Group, including key messages emerging from an NGO roundtable and an update on COP26 preparations. The Committee also considered a detailed update on progress against NatWest Group’s climate-related goals and targets. A franchise-led session on climate-related returns and opportunities included deep dives on clean buildings and voluntary carbon markets. Updates were also considered on climate measurement and reporting; managing the financial and non-financial risks arising from climate change; how “The Committee has continued to oversee the embedding of purpose across NatWest Group, with enhanced focus on customer service and experience.” NatWest Group was reducing its own carbon footprint; and investor insights. Later in the year, the Committee also received a deep dive session on NatWest Group’s first carbon budget in the context of our carbon emission reduction commitments. A key outcome was to challenge management on climate transition activity, specifically to maintain a opportunistic perspective and to consider the sustainable business model and performance impacts of exiting climate sectors as part of climate budgeting activity. Discussion and questions focused on accelerating the transition to net zero for customers in their daily lives and for businesses, including creating new products, services, and sustainable funding and financing. The Committee was impressed by the excellent levels of collaboration demonstrated across NatWest Group and noted the benefits of effective partnerships with third parties on climate-related initiatives. There was debate on how NatWest Group maintains a leadership position while promoting industry-wide progress, and on fostering meaningful partnerships. A key management action was to report back on which ESG surveys and NGO reports were most valued by NatWest Group’s influential investors, to direct appropriate resources. The discussion continued to build Board level knowledge on the financial risks from climate change. The discussion should influence future proposition and strategy design, particularly around how NatWest Group helps customers to transition, the approach to investor relations and future climate budgeting. Customers (including enterprise) The Committee received an update on customer service and experience, focused on three key customer segments: Under 30s, Affluent, and Small and Medium-sized Enterprises (SMEs). Franchise CEOs and their teams presented on the range of measures which had been introduced to support customers and communities because of the pandemic. Discussion and questions focused on the impact of the pandemic on customers’ needs for products and services. Areas of debate included the steps being taken within each segment to enhance customer service and experience, as well as peer comparisons and broader industry trends. An external speaker connected to a youth charity joined to help us understand how young people had been hardest hit by the economic crisis arising from the pandemic. A key outcome was a greater understanding of how youth opinions and expectations of banks had evolved as a result of the pandemic, allowing both management and the Board directors present to better consider the opportunities and needs relating to this important customer segment during future strategy design. People & Culture Reflecting an enhanced level of focus on culture at Board level, the Committee’s People & Culture meeting concentrated on the cultural change involved in building a purpose-led bank. The meeting began with a ‘Living our purpose’ spotlight session covering some of the diversity, equity and inclusion Letter from Mike Rogers Chairman of the Group Sustainable Banking Committee 132 NatWest Group 2021 Annual Report and Accounts initiatives which focused on community learning and social mobility. We were joined by two guest speakers – one of NatWest Group’s apprentices who joined the bank from school, and charity partner of CareerSense (NatWest Group’s employability programme which aims to support 13 to 24 year olds to have the skills, knowledge and experience to take control of their future) – who helped us understand how these programmes are changing the lives of young people. The Committee also discussed the results of the latest Our View survey where employees respond to questions covering wellbeing, purpose, building capability and leadership. Linked to this was an update from Internal Audit on their Behavioural Risk reviews, where team sub-cultures are assessed using behavioural science for indicators of potential future conduct issues. Key areas of discussion and challenge were the need to coordinate and potentially simplify the range of diversity, equity and inclusion policies and practices, culture measurement reporting improvements and assurance of management action to address behavioural sub-culture findings. A key outcome and example of constructive, Board level challenge was the request for a further deep dive on the branch culture findings, where the Committee felt more detail and understanding was needed about behaviours, products and practices involved, and the improvements planned for. Conduct & Ethics Following discussion at the People & Culture session, the Committee received a deep dive presentation on branch culture which focused on safe sales practices, the ongoing branch transformation activity and culture improvement plans which focus on customer feedback rather than product targets. The report and presentation were well received and demonstrated a robust management response to the issues raised. Spotlight sessions on customer trust, fraud and human rights were also presented, followed by a group discussion with external insights from a guest speaker who challenged NatWest Group’s approach and shared practical suggestions based on experience of leading on human rights activity for a global consumer goods company. Discussion and challenge focused on the social dimension of the ESG agenda; an area in which interest and expectations are increasing. The Committee listened to customer calls about romance and cryptocurrency scams which prompted discussion about some of the conduct and ethical dilemmas NatWest Group and the wider industry are facing around customer behaviour and responsibility. A specific conduct-related action was for management to provide data on colleague abuse and related support, given the worrying trend seen in service industries generally. Supporting long-term value creation Given its purpose responsibilities, the Committee continues to receive a purpose dashboard providing a useful snapshot of NatWest Group’s progress against key purpose targets and metrics. The Committee also considered and provided advice to the Group Performance and Remuneration Committee on customer, strategy, people and culture targets and performance, advocating for sustainable targets with the incentive framework. Committee members enjoyed meeting potential executive-level successors in July 2021, when we explored with top talent how NatWest Group can continue to support, build relationships, and grow within the communities NatWest Group serves. Membership, meetings and escalation There were no changes to the Committee’s membership during 2021. Membership of the SBC continues to comprise three non-executive directors as members, with two non- executive directors from NatWest Group’s ring-fenced bank board observing, along with management attendees. More details of membership and attendance for the SBC can be found in the Corporate governance report. The Committee’s operating rhythm, including the number of scheduled meetings held in the year and escalation mechanisms, has not changed since last year’s report. Two ad hoc meetings were scheduled to accommodate executive remuneration policy matters. Authority is delegated to the SBC by the Board and a regular report of the Committee’s activities is provided to the Board. The Committee’s terms of reference are available at natwestgroup.com and these are reviewed annually and approved by the Board. Performance evaluation The annual review of the effectiveness of the Board and its senior Committees was conducted externally in 2021. The report on the SBC was a positive one. I was pleased to read that the agendas feel well-purposed and my fellow directors enjoy the range of presentations and insights as much as I do. We discussed recommendations relating to driving harder to action and effecting change in the areas within our remit, noting the successes and limitations of our current meeting structure and schedule. We agreed to maintain a keener eye on management actions going forward which should support enhanced management accountability. I would also like to continue to see customer experience and service remain at the heart of each of our sessions. Areas of focus for 2022 will follow this year’s structure with the same dedicated meeting themes. The structure will retain some flexibility to allow us to respond to any emerging issues within the Committee’s remit should something significant arise. Challenging views and a diverse range of insights will continue to be sought to support the 2022 meetings. The Committee operated within its Terms of Reference during the year. Conclusion As I envisaged in last year’s report, the Committee has continued to oversee Purpose progress across the Group during what has been a critical time of embedding, with enhanced focus on customer service and experience. We have continued to benefit from a broad range of internal and external stakeholder perspectives, and our discussions have been all the richer for it. I would like to take this opportunity to thank everyone who has contributed to the Committee’s activities during 2021, including my fellow directors, attendees, and presenters, for their commitment and dedication. Mike Rogers Chairman of the Group Sustainable Banking Committee 17 February 2022 133 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Corporate governance continued Report of the Technology and Innovation Committee Dear Shareholder, I am delighted to present my second report as Chairman of the Technology and Innovation Committee (the Committee or TIC). Role and responsibilities TIC is responsible for supporting the Board by overseeing, monitoring, and challenging the actions being taken by management in relation to technology and innovation. In doing so, the Committee also gives due consideration to NatWest Group’s purpose. Authority is delegated to TIC by the Board and a regular report of the Committee’s activities is provided to the Board. The terms of reference are available at natwestgroup.com. These are reviewed annually and approved by the Board. Principal activity during 2021 During 2021, the Committee has played an important role in helping to support and challenge management plans to use technology and innovation as part of its journey to become a relationship bank for a digital world. TIC focused on the principal themes of digitising the core, future ready, innovation, partnerships and ventures, and emerging threats and opportunities. As agreed, as part of the 2020 Committee evaluation, it deliberately focused on a smaller number of deep dives into specific aspects of each theme, including competitor position and link to purpose. Key highlights included: Digitising the core The Committee received a number of spotlight sessions on the development of existing technology, architecture, and processes to enhance customer experience and maintain the health and resilience of IT systems. The Committee considered management programmes designed to automate pioneer customer journeys, including Account Opening and Pay a Bill or Person, which impact 70 to 80% of customer interactions and the majority of the customer base. The Committee considered how the activity would improve customer experience, reduce cost, and utilise One Bank capabilities to drive a consistent approach. Committee discussions focused on digitising the front to back architecture; the use of digital journeys in branch and telephony channels; the benefits from immediate decisioning; and from simplifying the product offering and supporting processes and technology. “The Committee has played an important role in helping to support and challenge management plans to use technology and innovation as part of its journey to become a relationship bank for a digital world.” The Committee also discussed how predictive analytics, including machine learning, was being used within the Retail and Private Banking businesses, primarily to assist with identification of potential customer needs and plans to extend the use of such techniques to the Commercial Banking business. TIC also considered how Open Finance was changing the sector and the changes required to core systems and architecture. The Committee noted the increased use of Application Programming Interfaces (APIs) to improve the NatWest Group’s internal architecture, maximise re-use of assets and to improve customer experience. In addition, the external consumption and monetisation of bank produced APIs in conjunction with partners was also considered. The Committee discussed potential opportunities presented by the development of FreeAgent (integrated lending for NatWest Group customers based on cashflow forecast), Payit (Open Banking payments offering), and data sharing to support new SME customers onboarding. The Committee received an update regarding changes in the use of technology by the Risk function. TIC discussed technology and data transformation underway, including the use of robotic process automation and workflow tools; movement of risk engines to a cloud-based solution; data transformation; and use of ‘Software as A Service’ applications for solutions. The Committee discussed and challenged how proposed changes to the logical data architecture could improve regulatory reporting and noted that approach reduced complexity via data consolidation and assigning end to end ownership for such data. The update on the use of technology and innovation as part of NatWest Group’s security and cyber defences, included the evolution of the threats faced by NatWest Group; the strength of NatWest Group’s defences against such attacks to date; and the continuous innovation approach being implemented. Mr James Lyne, Head of Research and Development at the SANS Institute and member of NatWest Group’s Technology Advisory Board provided an external perspective on how NatWest Group compared to competitors and challenges being faced by the industry. Future ready The Committee considered a number of actions being taken within the organisation to transform data and technology capabilities and deploy forward-looking technology. Letter from Yasmin Jetha Chairman of the Technology and Innovation Committee 134 NatWest Group 2021 Annual Report and Accounts TIC received an update on how new technology was empowering colleagues to adapt to a digital future by providing modern software, such as Workday, which had seen high adoption rates. Implementation of Ask Archie, NatWest Group’s chatbot, and accelerated adoption of tools such as Microsoft Office 365 and Zoom as a result of COVID-19 were also considered. The Committee discussed and challenged the mindset and behaviour changes needed to embrace adoption, the technology challenges posed by legacy technology platforms, and contention between tools which were managed via One Bank design oversight. The Committee discussed the manner in which potential acquisitions would be considered from a technology and innovation perspective. Discussion focussed on external threats, lessons learned from prior acquisitions and potential targets. Innovation & partnerships and ventures Being powered by innovations and partnerships is a key part of NatWest Group’s strategy. TIC considered an update on the framework and approach to partnership working from a technology and innovation perspective. This was supported by certain deep dives on existing strategic relationships. TIC also discussed the potential income threat from payments disruption and potential opportunities to address this threat. The Committee received updates regarding key Venture’s initiatives, including Tyl and Rapidcash. In relation to Tyl, the Committee noted that it extended beyond helping businesses to receive payments by helping customers to run and grow their business as well as giving back to the community. The Committee discussed and challenged growth plans and how the business was proposed to be scaled following reduced growth, partly as a result of COVID-19. The competitive environment, emergence of non-traditional payment providers, and the potential to make greater use of merchant acquiring data to help customers and drive further development was also considered. Regarding Rapidcash, TIC noted the transition of the business into Commercial Banking as a market leading product with the potential to disrupt the asset finance market by resolving issues such as long onboarding times, links to customers’ accounting software packages to provide ‘always on’ lending and use of an invisible trust account to resolve customer pain points. Emerging threats and opportunities TIC considered the potential threats and opportunities presented by big technology companies, including innovation from China-based technology companies. The Committee noted the collaborative approach taken by management to deepen relationships beyond supplier relationships into partnership working to solve customer needs. The Committee discussed the evolution of digital currencies, exploration of central bank digital currencies and growth of tokenised assets and the potential threats and opportunities presented. It was agreed that this would continue to be monitored. Membership and meetings The Committee is comprised of three non-executive director members, Frank Dangeard, Patrick Flynn, and me. More details of membership and attendance at meetings can be found on page 103 of the Corporate governance report. The Committee is supported by management and the Group CEO, Group CFO, Chief Administration Officer, Chief Risk Officer, Director of Innovation, Director of Strategy & Corporate Development and Chief Technology Officer are all standing attendees. External insights were also provided through the updates provided by management. The Committee held four scheduled meetings during 2021. Performance evaluation The annual review of the effectiveness of the Board and its Committees, including TIC, was facilitated by Independent Board Evaluation, a specialist board evaluation consultancy. Throughout the year the Committee acted in accordance with its terms of reference and, overall, the review concluded that the Committee operated effectively, and had responded to prior feedback regarding focus on a smaller number of spotlight items. The review suggested that, given the importance of technology and innovation, the Committee could arrange its work in a way that would be more accessible to all Board members. As a result, it was agreed that appropriate agenda topics would be opened to all Board Directors in future and that consideration would be given to reducing the number of Committee meetings held taking into account the sessions opened up to the full Board in future years. The outcomes of the evaluation have been reported to the Board and the Committee will track progress during 2022. Conclusion I am delighted to chair this Committee as it continues to support the Board in an area core to NatWest Group’s purpose to champion potential, helping people, families, and businesses to thrive. Together with my fellow directors, we will retain our focus on monitoring the future technology and innovation landscape and its impact on NatWest Group in order to ensure continued resilience and help NatWest Group become a relationship bank in a digital world. The Committee will continue to shape opportunities arising from management’s response to both threats and opportunities that align with NatWest Group’s purpose. I want to take the opportunity to thank the Committee members and attendees for their continued commitment during 2021. Yasmin Jetha Chairman of the Technology and Innovation Committee 17 February 2022 135 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Directors’ remuneration report Directors’ remuneration report Dear Shareholder, On behalf of the Board I am pleased to set out the Directors’ remuneration report for 2021. There continues to be heightened public interest in pay, as the wider economy and society attempts to recover from the impact of the COVID-19 pandemic. Economic conditions have improved, which has led to an increasingly competitive external market for key talent and skills. Many companies are having to manage higher than usual attrition rates. Furthermore, the level of inflation in the UK economy has increased significantly, as have forecasts of its level in the coming year, which has given rise to heightened expectations of general salary increases. For many individuals, the experience of working from home has led to significant changes in how working environments are now perceived. As a result, we have had many important matters to consider during the year. As part of this report, we have set out proposals for a new Directors’ Remuneration Policy (the Policy). Subject to approval from shareholders, this will apply from the 2022 Annual General Meeting (AGM), with the first awards being granted under the new Policy in March 2023. This letter explains why we are seeking approval for this new policy which is significantly different from the existing policy which has been in force since 2017. The report also details the remuneration decisions we made under the existing Policy for 2021. Summary of the year NatWest Group has delivered a strong operating performance in 2021, returning to profitability with an attributable profit of £2,950 million. NatWest Group’s share price also saw a sharp recovery throughout the year, increasing around 35% and outperforming our UK peers. Our capital distribution plan has helped return £3.8 billion to shareholders through buybacks, both directed and on-market, and dividends. Our strong capital position and continued capital generation mean that NatWest Group is well placed to invest for growth, to provide the support our customers need as the economy recovers and to drive sustainable returns to shareholders. We have also been acutely aware in our deliberations that during 2021 the Financial Conduct Authority (FCA) imposed a fine of £265 million on NatWest Bank Plc for breaches of the Money Laundering Regulations 2007 over five years ago. My report explains how we have taken this matter into account in our pay decisions. Wider workforce remuneration The Committee has a very keen interest in wider workforce remuneration. Our colleagues enable us to achieve our purpose of helping people, families and businesses to thrive. It is therefore vital they are paid fairly and in ways that support our values and culture. I met with the Colleague Advisory Panel (CAP) during the year and we had a good discussion on our approach to executive and wider workforce remuneration. We know how important it is to have fair and transparent pay structures for all. One of the suggestions from the CAP was to explore how our Fair Pay Charter could receive a higher profile within the bank which the Committee is taking forward. I also explained certain challenges we have been facing with the current Policy for executive directors, as described later in my letter. Further details regarding my engagement with the CAP is set out on page 154. Over the year we have seen demand rise rapidly for certain skill sets. This has put pressure on retaining talent within NatWest Group. With the decisions we make as a Committee, we seek to recognise these demands while meeting our commitment to pay colleagues fairly, in line with our Fair Pay Charter. I am pleased that the lowest level of pay for UK-based colleagues at NatWest Group has exceeded the Living Wage foundation benchmarks in the UK for several years. We take a similar approach across our major hubs outside the UK. The fixed pay investment we have made over the last few years has typically been higher than the rate of inflation for that period. This investment has been targeted primarily towards our most junior and lowest paid colleagues, areas where specialist skills are required leading to high attrition rates and those lowest in their salary ranges. I know from speaking to colleagues that they are concerned by the economic conditions especially in our main hub in the UK. Our 2022 pay discussions with our recognised trade unions are still ongoing, but we believe the proposed salary increases, which would provide an expected 3.6% on average across the wider global workforce from April 2022, demonstrate a materially improved pay position with fair outcomes for our colleagues. For the most junior colleagues in the UK, the minimum proposed salary increase would be £600 and the majority of them would be in line to receive at least 4%. Contents 136 Chairman’s introduction 140 Remuneration at a glance 143 The Directors’ Remuneration Policy and wider workforce remuneration 158 The Annual remuneration report 175 Other remuneration disclosures Letter from Robert Gillespie, Chairman of the Group Performance and Remuneration Committee 136 NatWest Group 2021 Annual Report and Accounts We have agreed a bonus pool of £298 million in respect of 2021 for those colleagues who are eligible to receive a bonus award. This is 44% higher than the 2020 bonus pool, which was significantly reduced to reflect the impact of COVID-19. It is also 3% lower than the 2019 bonus pool, which was agreed prior to COVID-19. We have followed a consistent process for determining the bonus pool since 2014. When determining the pool, we considered a balanced scorecard of strategically important measures, including financial performance, customer outcomes, colleague experience and risk performance. In 2021, we included a new measure of progress against our climate ambitions. A material downward adjustment was applied to the 2021 bonus pool to reflect the fine imposed on NatWest Bank Plc for breaches of the Money Laundering Regulations 2007 and ongoing financial crime remediation considerations. This adjustment was apportioned across all business areas to reflect the impact on the bank’s financial performance and to reinforce to colleagues the need to ensure the effective management of financial crime. Whilst progress has been made in recent years on NatWest Group’s management of financial crime, an all-colleague financial crime performance goal has been introduced in 2022 so that it continues to receive the appropriate focus. We have also initiated an accountability review into the events that led to the breaches of the Money Laundering Regulations 2007. The possible need for individual pay adjustments to prior year awards, using the malus and clawback provisions in the NatWest Group remuneration construct, will be considered as part of the accountability process. Revised remuneration policy for executive directors The current Policy was introduced in 2017 and renewed in 2020. The Committee believes it has worked well in supporting our culture of prudent risk taking, by introducing a significantly restrained variable pay position for executive directors in return for more consistent pay outcomes during a time of significant transition for the organisation. The Committee has been mindful that the current Policy is not aligned to standard market practice and that some of its unique features have been subject to challenge. Over the last year, we have listened carefully to shareholders and other stakeholders. We have also been mindful that the bank is nearing the end of its long process of normalisation and the Government continues to sell its shareholding which will result in a normalised shareholder base. Finally, we have found the operation of the pre-vest test more difficult than expected. We have concluded in the light of all these factors that substantial change to our existing Policy is required and that now is the appropriate time for NatWest Group to transition to a more market-standard remuneration model rather than waiting until the next triennial vote on the Policy in 2023. Under regulatory requirements, which have been in force for a number of years, regulated banks may only offer variable pay equal to 100% of fixed pay, unless shareholder approval is obtained to increase the ratio to 200% of fixed pay. NatWest Group did not seek shareholder approval and has operated on a 1:1 structure. The Board is not seeking to change this position as it believes the current construct supports our belief in prudent risk taking and the maintenance of restrained compensation levels. We do, however, believe that executives should be incentivised using a structure that balances both short-term and longer-term performance, while maintaining our focus on prudent risk management. We are, therefore, proposing that our current long-term incentive (LTI) construct is replaced by a more widely accepted and competitive construct based around annual bonus plus Restricted Share Plan (RSP) awards. In total, the changes set out in this report would result in expected total compensation increasing by 19% for the CEO and by 13% for the CFO, once the transition period is complete. This would bring both executive directors closer to, but still below, the average expected total compensation paid by the other major UK banks. We recognise that the move to a more normal construct which involves an increase to total compensation represents a material change and intend to make the transition to the new Policy over two years. The phasing will mean that no more than half of the increase will apply in year one. The Committee is highly aware that any increase in compensation will be closely scrutinised by shareholders. It is, therefore, important for us to be clear on why we believe the combination of annual bonus plus RSP represents the best cultural and strategic fit for our organisation and why the proposed opportunities under each element are appropriate. By introducing a market-aligned annual bonus mechanism we will increase the performance alignment within the package to annual performance based on formulaic and weighted measures and targets. This will provide greater transparency on performance outcomes and a more direct link between pay and the delivery of our strategic targets. The market-aligned RSP will also ensure that we continue to retain a level of balance within the package between annual performance and longer-term alignment with the shareholder experience. Delivering a remuneration package which is sufficiently competitive both in structure and quantum to attract and retain our senior team has been a significant consideration in determining the proposed new arrangements. You can find detailed information about the new Policy on pages 140 to 152 below. The Committee has consulted widely with shareholders and the final form of the proposals being put forward for shareholder approval reflects much of the feedback we have received. In my discussions with some of our major shareholders, it has become clear that the current management team is highly regarded and that it would be imprudent to ignore this when setting an appropriate pay scale. Further details of the consultation findings are set out in this report. The Board believes that these proposals are in the company’s best interests as they move our remuneration policy into line with market norms and provide a more competitive package to our executive directors, which is a very important factor in attracting and retaining highly talented colleagues. The Board, therefore, recommends that shareholders vote in favour of the new Policy. 137 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements 2019 LTI award vesting outcome Following an assessment of her performance in 2018, Ms Rose received an LTI award over 2019, while CEO of Commercial & Private Banking. Ms Murray was on a different remuneration construct for the 2018 performance year and did not receive an LTI award in 2019. The Committee carried out a pre-vest assessment at the end of 2021 for awards granted in 2019 which vest in 2022. This involved considering whether anything had come to light since grant that would change our original view of performance of the beneficiaries of the award during the 2018 financial year. We used a structured set of questions and evidence factors to guide discussions. From the analysis, we agreed that customer and risk were areas that merited further consideration. Supported by external opinion, we concluded that although customer performance had declined in one business area, it was not due to factors within management’s reasonable control. Therefore, no adjustment was made relating to customer. On risk performance, the pre-vest test confirmed there had been no material deterioration in risk culture or profile over the relevant period. However, management performance relating to financial crime remediation over the 2018 performance year was considered to be an area that merited further investigation using the Risk & Control underpin. The Group Board Risk Committee (BRC) concluded that, while management had taken significant action to drive delivery of the financial crime remediation programme, there had not been a full appreciation of scale, complexity and interdependencies of the programme at the time of the 2019 LTI grant, resulting in delays to the proposed return to appetite. The BRC recommended that an adjustment be considered and as a result we applied a pre-vest reduction of 5% of Ms Rose’s original maximum 2019 LTI award resulting in a reduction of 32,234 shares vesting. A pre-vest reduction of 5% of the original maximum was also made to the 2019 LTI award held by the former CEO, Ross McEwan. The total adjustments made to their respective maximum 2019 LTI award levels, when combined with adjustments made pre-grant, amounted to 17% for Ms Rose and 11% for Mr McEwan. You can find full details of the pre-vest assessment for both Ms Rose and Mr McEwan on page 159 to 160. 2019 LTI award to Alison Rose Maximum Granted Shares to vest Shares 644,672 568,829 536,595 Value £1.7m £1.5m £1.197m The £1.197 million value reflects an aggregate reduction of 17% of the maximum LTI award level for Ms Rose across pre-grant and pre-vest stages. It also reflects the fall in the share price over the performance period. Directors’ remuneration report continued Executive director pay for 2021 and salaries for 2022 Alison Rose At the time of the last Policy renewal in 2020, we committed to considering salary increases for Ms Rose during the life of the Policy. No increases have been made since her appointment in 2019. In December 2021, we noted the proposed average salary increase for the wider global workforce and agreed that a reduced rate of increase would be appropriate for the executive directors. As a result, Ms Rose’s salary will increase by 2% under the existing Policy from 1 April 2022. In considering performance against the LTI targets for 2021, we agreed that Ms Rose’s performance has been highly impressive. Finance and climate performance was strong with targets achieved and despite a marginal ‘miss’ on the ‘building capability’ target, our people scores were good. Targets for supporting enterprise were also met and customer performance had improved in most areas. In terms of risk performance, while there had been some progress, it was noted that there was more work to do on the control environment. External assessments of Ms Rose’s performance were also very favourable, especially in relation to leadership on COVID-19 schemes and COP26. Board members welcomed Ms Rose’s frankness and transparency during the year. Our overall assessment of Ms Rose’s performance for 2021 led the Committee to agree that an LTI award of £1,598,000 would be an appropriate outcome, which represents 145% of salary and 83% of the maximum LTI award. In order to ensure parity of treatment with the wider workforce, the LTI outcome reflected an adjustment to mirror the downward adjustment to the 2021 bonus pool for the fine imposed on NatWest Bank Plc for breaches of the Money Laundering Regulations 2007 and ongoing financial crime remediation considerations. Ms Rose’s LTI award will be granted in March 2022. Katie Murray Ms Murray’s salary has remained unchanged since her appointment to the Board in January 2019 and the Committee agreed that an increase of 2% would be appropriate. The increase will take effect from 1 April 2022. In considering an LTI award for 2021, we agreed that Ms Murray had also performed well during the year. Along with the achievements noted against LTI targets for Ms Rose, Ms Murray had successfully delivered the quarterly results, with proactive investor engagement and made good progress on refreshing the annual reporting process. Cost reduction targets were also met for Finance and NatWest Group. Our overall assessment of performance for 2021 led the Committee to agree that an LTI award of £1,057,500 would be an appropriate outcome, which represents 141% of salary and 71% of the maximum LTI award. In line with the approach taken for Ms Rose, the LTI outcome reflected an adjustment to mirror the downward adjustment to the 2021 bonus pool for the fine imposed on NatWest Bank Plc for breaches of the Money Laundering Regulations 2007 and ongoing financial crime remediation. Ms Murray’s LTI award will be granted in March 2022. 138 NatWest Group 2021 Annual Report and Accounts While the performance cycle has completed, the shares from this award will vest in tranches up to 2026. Malus and clawback provisions help ensure that recipients maintain a long-term focus in their decision-making and aligns with regulatory expectations. Approach to windfall gains In my report last year, I highlighted that windfall gains had become a focal point for shareholders due to share price volatility as a result of the pandemic. When the LTI grants were made in 2021, the share price had risen over the prior year resulting in fewer shares being granted to satisfy a given quantum of award. We, therefore, did not consider there were any obvious potential windfall gains implications for award levels that should be addressed at the time of grant. We continue to believe that vesting, rather than at grant, is the best time to consider any adjustments for windfall gains. To guide our judgment, we continue to operate a framework designed to assess whether windfall gains have arisen over the period from grant to vest and the factors to be considered in making any adjustments. Gender and ethnicity pay reporting The Committee considers gender and ethnicity pay gap metrics to be another important indicator and full details can be found in the Strategic report and at natwestgroup.com. This is the fourth year that we have published ethnicity pay gap information on a voluntary basis. We are confident that colleagues are paid fairly and policies and processes are kept under review to make sure this continues to be the case. Climate in remuneration From 2020, we have included a climate goal and related measures in our executive director performance goals. Climate will continue to be an integral part of the annual bonus scorecard to be introduced under the new Policy proposals. As mentioned above, the bonus pool agreed for the wider workforce was also determined for 2021 having regard to performance against strategically important measures, including our climate ambition. This ensures that the work of colleagues in supporting the transition to a low carbon economy is being reflected in pay decisions. Looking ahead The Committee understands the expectations of shareholders, colleagues and wider society relating to the oversight of remuneration continue to evolve. It is also very aware that the bank’s commitment to purpose, to equality of opportunity and to fighting climate change must be fully reflected in compensation outcomes for its employees in general and its leaders in particular. I have referred to all these matters throughout this letter and the Committee will continue to focus on these and other emerging issues in the coming year. The Committee is focused on ensuring the smooth transition to the new Policy, assuming it is approved by shareholders at the 2022 AGM. Set out later in this document is the annual bonus scorecard expected to be used in respect of 2022. We would expect the bonus scorecard to continue to evolve to ensure that it is incentivising progress against NatWest Group’s purpose-led targets and wider societal needs. We have committed to publish our climate transition plan which will support alignment with the Paris Agreement. Future climate targets will in turn evidence progress towards longer- term climate objectives. We will also continue to engage with colleagues to explain the alignment of our approaches to executive and wider workforce remuneration and to listen to their feedback. This is my last report as the Chairman of the Committee as I will have completed nine years as a director of NatWest Group later this year. It has been a great privilege to perform the role of Chairman of the Committee for the last five years. I believe it is imperative for NatWest Group to be able to motivate and retain colleagues of great ability at every level in the firm and therefore to be able to evidence the link between its remuneration policies, culture and purpose. I strongly believe that the proposed changes to the Policy are an important step in the evolution of NatWest Group to being a purpose led organisation and hope shareholders will vote for its approval at the forthcoming AGM. Robert Gillespie Chairman of the Group Performance and Remuneration Committee 17 February 2022 139 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Delivering a restrained but fair level of pay for executive directors Remuneration at a glance Nat W est Group CEO tar get variable pay % of salary (£000 t otal compensation (T C) target) 8% increase in compensation 9% increase in compensation 50% 150% 85% 125% 200% (TC: £4,626) 125% 43% 168% (TC: £4,262) 140% 140% (TC: £3,953) Current Policy Year 1 proposed Year 2 onwards Target variable pay (% of salary) Bonus RSP Major UK banks average LTI Major UK bank aver age 226% (TC:£5,347) Nat W est Group CEO maximum v ariable pay % of salary (£000 t otal compensation (T C) maximum) 9% increase in compensation Major UK bank aver age 433% (TC:£7,849) 9% increase in compensation Bonus RSP Major UK banks average LTI 100% 150% 85% 125% 250% (TC: £5,187) 125% 85% 144% 210% (TC: £4,739) 175% 175% (TC: £4,346) Current Policy Year 1 proposed Year 2 onwards Max variable pay (% of salary) How does the new Policy ensure continued shareholder alignment? With the adoption of the RSP, we will replace our current leaver terms with market aligned best practice leaver terms, with pro-rating reintroduced in good-leaver scenarios for RSP awards. Shareholding requirements will be increased from 400% to 500% of salary for the CEO and from 250% to 300% of salary for the CFO and the fixed share allowance release period will be extended from three to five years. As is the case under the current Policy, around 67% of expected remuneration would continue to be delivered under the new Policy in shares, which will be subject to deferral and retention requirements. Along with the proposed increase in shareholding requirements, this will continue to ensure close symmetry between executives, shareholders and the financial health of the business. Delivering a restrained but competitive level of pay for executive directors which is aligned with our cultural values What is driving the move to a new Policy? Under the current Policy we deliver variable pay through a single long-term incentive arrangement, which operates in a different way to those more commonly seen in the market, particularly in the case of the main UK banks. The LTI-only construct operates within a 1:1 variable to fixed pay ratio with executive directors receiving a significantly restrained but more predicable level of pay, thereby encouraging safe and secure growth within appetite. However, it has become apparent through our stakeholder engagement process that certain shareholders continue to have reservations with regard to the current Policy and its unique features, in particular, the lack of formulaic, weighted performance measures, and the removal of pro-rating. The Committee has given considerable thought to how it should address such feedback and, conscious that we are continuing on a trajectory towards private ownership, believe now would be an appropriate time to introduce a more market-aligned annual bonus and RSP construct for executive directors. Why are we increasing total compensation? The Committee has also been mindful that while we have successfully recruited highly talented executive directors under the current Policy, our compensation levels are falling too far behind our nearest competitors. The Board is very pleased with the performance of the executive directors since appointment. We believe that continuing an approach that is materially behind our peers is imprudent and that a move towards a more flexible remuneration structure, which delivers more competitive levels of pay, is justified and in the best interests of the business. The new Policy will result in an increase to total compensation for executive directors, with maximum variable pay set at 100% of base salary for annual bonus and 150% of base salary for RSP awards. While this enables us to deliver more competitive levels of pay, maximum compensation levels for the CEO would still be the lowest compared with other major UK banks and significantly lower than peers who continue to operate traditional long-term incentive plan (LTIP) constructs, demonstrating continued restraint on executive pay. The increase in variable pay levels should also be viewed in the context of us making further changes to the Policy which will introduce less favourable leaver treatment, increased shareholding requirements and longer holding periods for the fixed share allowance. We recognise moving to a more normal construct represents a material change and intend to make the transition in two phases. For the first year, maximum awards will be limited to 85% of base salary for annual bonus and 125% of salary for the RSP. The charts opposite illustrate the transition for the CEO from our current Policy and also show that compensation levels will move closer to, but still below, the average maximum and target compensation levels at the other major UK banks. The CFO will also be below the average maximum and target compensation levels at the other major UK banks. 140 NatWest Group 2021 Annual Report and Accounts One of the principal areas of focus during meetings was the transition to the new Policy including the new variable pay structure with annual bonus and RSP awards. The Committee Chairman explained that NatWest Group remained committed to prudent yet competitive compensation levels that would assess long-term performance and ensure alignment with shareholder interests. Discussions also highlighted that under the new Policy shareholders would expect continued adherence to best practice and transparent remuneration disclosures. The Committee acknowledged the need to ensure the ongoing alignment of all aspects of the new Policy with market best practice. A summary of the new Policy and how it compares to the current Policy can be found on the next page, followed by the main Policy tables which set out further details. In addition to the above discussions, we also held three virtual shareholder events with retail shareholders in 2021 to ensure we heard from the wider shareholder base on matters of importance. The event held in November 2021 focused on climate and one of our shareholders asked how we link executive pay to ESG measures including climate. Yasmin Jetha, one of our directors who was present at the event, confirmed that climate measures had been introduced for executive directors in 2020 which assessed performance with reference to progress towards climate positive operations, the funding and financing of climate and sustainable finance, and the setting of sector specific targets for emissions reduction. Ms Jetha’s response also noted that executive director performance had, for several years, also been assessed with reference to social and governance measures, with diversity and inclusion targets having been in place since 2017. Further shareholder events are planned for 2022. Shareholders play a vital role in helping us develop remuneration practices that meet the needs of all our stakeholders and we are grateful for their involvement in the process. It is also now more important than ever that we listen to our colleagues and use the insight we gain to attract, engage and retain the talent we need for the future. In November 2021, the Committee Chairman met with our Colleague Advisory Panel to discuss executive and wider workforce pay. The outcome of such discussion is summarised in more detail in the ‘colleague listening strategy’ section later in this report. Nat W est Group CEO v ariable pay % of salary (£000 t otal compensation maximum) 50% reduction in L TIP opportunity Further discount acknowledging res trained pay position and rebalancing tow ards long term Y ear 1 implementation limited to a lower award Bonus RSP LTIP 100% 150% 85% 125% 250% (£5,187) 210% (£4,739) 192% 144% 336% (£6,839) 192% 288% 480% (£8,597) Average for other major UK banks with LTIPs Illustrative 50% reduction Proposed Policy Year 1 implementation Max variable pay (% of salary) With bonus expected to vest at 50% of maximum opportunity, the combination of the RSP and bonus means that we are still guiding towards an expected vesting level of 80% for variable remuneration outcomes. This is aligned with the position under our current LTI-only construct which is expected to vest at 80% of maximum opportunity. However, in the case of the new Policy, the expected vesting level of 80% depends on executive directors achieving on-target performance across the annual bonus scorecard. How does the RSP operate in practice and does it satisfy shareholder guidelines? The Committee will be required to assess the performance of executives under the RSP construct, both at the pre-grant and pre-vest stage. The pre-grant test will measure whether executives have achieved satisfactory performance over the performance period prior to grant, using the existing performance management processes that apply to all colleagues across the bank. RSP awards will also be subject to an underpin assessment at pre-vest stage. The underpin assessment is designed to ensure that sustainable performance has been achieved over the course of the vesting period. While RSP awards are expected to be granted and vest at 100% of maximum opportunity, the combination of the RSP pre-grant and pre-vest tests enable the Committee to make downward adjustments, potentially to zero, in order to guard against payments for failure. We know that shareholder guidelines normally expect an appropriate discount, of at least 50%, to be applied when introducing RSP awards compared to a traditional LTIP with performance conditions. As our current Policy differs in a number of ways to traditional practice and has already delivered a more restrained pay position, with significantly reduced maximum total compensation levels, it would not be appropriate to apply the 50% discount to our current LTI construct. Recognising that the principle of a 50% discount to an LTIP equivalent construct remains important to stakeholders, the Committee is satisfied that the proposed move to the RSP is aligned with the spirit of the guidelines as it delivers more than a 50% reduction when the RSP construct is compared with more traditional LTIP constructs envisaged by the guidance. This is illustrated further in the chart opposite. Engagement with stakeholders on remuneration Every year we undertake an engagement programme with major shareholders and other stakeholders before the Committee makes final decisions on pay awards. In late 2021 and early 2022, we met with several institutional shareholders, UK Government Investments, proxy advisors and the UK regulators to discuss our approach to remuneration for the 2021 performance year and our proposed policy amendments for executive directors. 141 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Remuneration at a glance continued Comparing the new Policy with the current Policy The main features of the Policy as applied in 2021 is summarised in the table below. The table also includes details of how the Policy is intended to apply in 2022 if approved by shareholders at the 2022 AGM. Timing Key elements Current Policy Proposed Policy Paid over performance year Fixed pay Salary Any increase will not normally be greater than the average salary increase for NatWest Group employees over the period of the Policy. Other than in exceptional circumstances, the salary of an executive director will not increase by more than 15% over the course of this Policy. Implementation in 2021: CEO: £1,100,000 CFO: £750,000 Implementation in 2022: 2% increase under existing Policy from 1 April CEO: £1,122,000 CFO: £765,000 Pension Pension contribution, aligned to the wider workforce, at 10% of base salary. Benefits £26,250 standard benefit funding Other benefits can be paid within the terms of the Policy. Fixed Share Allowance 100% of base salary Shares released over three years. 100% of base salary Shares released over five years. Paid in the year after the performance year, share element subject to 12-month retention period. Annual bonus Maximum benefit Not part of Policy for 2021 Maximum award: 100% of base salary Phased maximum: 85% of base salary for first awards in 2023 for performance year (PY)2022 Operation Awarded upfront with a 50/50 split of cash and shares. Metrics Annual bonus assessed based on a weighted scorecard of strategic measures, as set out below. A risk modifier will also apply, enabling risk performance to be assessed and awards reduced, potentially to zero. Metrics Weighting RoTE 30% Income growth 10% Cost reduction 10% Capital 10% Climate 10% Customer 10% Purpose, Culture and People 10% Enterprise and Capability 5% Personal 5% Paid over years three to seven after grant with a 12-month retention period after each vesting. Long-term incentives LTI award RSP award Maximum benefit CEO: 175% of base salary CFO: 200% of base salary Final award in 2022 for PY2021. Maximum award: 150% of base salary Phased maximum: 125% of base salary for first awards in 2023 for PY2022. Operation Delivered in shares, vesting in equal tranches over years three to seven with a 12-month retention period following each vesting. Metrics Performance assessed over year before grant with further tests before vesting. Balanced scorecard in line with our strategic aims, performance assessed in the round. RSP awards subject to satisfactory performance before grant and an underpin assessment after three years to check performance has been sustainable. Ongoing Share ownership Shareholding requirements CEO: 400% of salary CFO: 250% of salary CEO: 500% of salary CFO: 300% of salary Post- employment requirements Equal to the lower of the shareholding requirement immediately prior to departure or the actual shareholding on departure, to be held for a period of two years post departure. Ongoing Malus and clawback Operation Any variable pay awarded is subject to malus prior to vesting and clawback for seven years from grant, extended to ten years in certain circumstances. See page 157 for further details. 142 NatWest Group 2021 Annual Report and Accounts Subject to approval from shareholders, the new Policy set out below will be effective from the date of the 2022 AGM. It will apply for a period of three years, until the 2025 AGM, unless a revised Policy is approved by shareholders before then. Fixed pay for executive directors Purpose and link to strategy Operation Maximum potential value Base salary Providing fair levels of base salary and other elements of pay supports the recruitment and retention of high-calibre executives to develop and deliver strategic priorities. Base salary set at a competitive level which means there is less reliance on variable pay. This helps to discourage excessive risk-taking. Base salary is paid monthly in cash and reviewed annually. Rates are determined based on the individual’s role, skills and experience and are benchmarked against market practice. We use a peer group, which includes comparable roles in other financial services groups of a similar size, to determine the appropriate level of base salary. We amend this peer group from time to time to ensure it remains relevant. Salaries will be increased by 2% from 1 April 2022. 1 January 2022 1 April 2022 CEO £1,100,000 £1,122,000 CFO £750,000 £765,000 Any future salary increases will take in-role performance into account and will be considered against peer companies. Any increase will not normally be greater than the average salary increase for NatWest Group employees over the period of the Policy. Other than in exceptional circumstances, an executive director’s salary will not increase by more than 15% over the course of this Policy. See the recruitment policy section for new directors. Fixed share allowance Additional fixed pay that reflects the skills and experience required and the complexities and responsibilities of the role. It further supports the delivery of a balanced remuneration policy offering a suitable mix of fixed and variable pay. This is a fixed allowance paid entirely in shares. Individuals receive shares that vest immediately subject to any deductions required for tax purposes. A retention period will also apply. Shares will be released annually on a pro-rata basis over five years from the date of award (1) . As shares are held beneficially, the directors will be entitled to any dividends paid on those shares. The fixed share allowance will broadly be paid in arrears, in four instalments per year or at any other frequency that the Committee deems appropriate. The fixed share allowance is not pensionable and no performance conditions apply. An award of shares with an annual value of up to 100% of base salary at the time of award, or such higher amount as represents this value rounded up to the nearest whole share. (1) If regulatory requirements emerge that prohibit allowances from being delivered in shares, or deem that such allowances will not qualify as fixed remuneration, then NatWest Group reserves the right to provide the value of the allowance in cash in order to ensure compliance with such requirements. The Directors’ Remuneration Policy (the Policy) 143 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements The Directors’ Remuneration Policy continued Purpose and link to strategy Operation Maximum potential value Benefits Providing a range of flexible and market competitive benefits that colleagues value and that help them carry out their duties effectively. Executive directors can select from a range of standard benefits including a company car, private medical cover, life assurance and critical illness insurance. Executive directors are also entitled to travel assistance connected with company business including the use of a car and driver. NatWest Group will meet the cost of any tax due on the benefit. On rare occasions when executive directors are accompanied by their spouse or partner to business events, NatWest Group may also meet the costs and any associated tax liability. Executive directors are also entitled to holiday and sick pay. NatWest Group may offer further benefits including, but not limited to, relocation assistance in line with market practice. We may also put in place certain security arrangements for executive directors when that is deemed appropriate and meet the cost of any tax due on these benefits. A set level of funding for standard benefits (currently £26,250 and subject to periodic review). We disclose the total value of benefits provided each year in the Annual Report on remuneration. The maximum potential value of benefits will depend on the type of benefit and cost of providing it, which will vary according to market rates. Any non-standard benefits are subject to approval from the Board. Pension Encouraging planning for retirement and long-term savings. This involves the provision of a monthly pension allowance paid in cash and based on a percentage of salary. Recipients have the opportunity to use the cash to participate in a defined contribution pension scheme. – CEO – 10% of base salary – CFO – 10% of base salary In compliance with the UK Corporate Governance Code (the Code), the pension allowance rates for executive directors are aligned with the rate for the wider workforce (currently 10% of base salary) (1) . This rate may be increased or reduced to remain aligned with the wider NatWest Group. (1) 10% of base salary is in line with the rate applicable to the vast majority of the workforce. Over 99.64% of employees in the UK receive this rate. 144 NatWest Group 2021 Annual Report and Accounts Variable pay for executive directors Purpose and link to strategy Operation Maximum potential value Performance assessment Annual bonus To support a culture where individuals are rewarded for the delivery of superior performance, taking into account NatWest Group’s strategic objectives and purpose. Performance will be assessed based on a range of financial and non-financial measures that encourage long-term value creation for shareholders. Part of the annual bonus award is paid in shares with a holding period. Awards are also subject to malus and clawback adjustments to support long-term decision-making. Annual bonus awards will operate as follows: – performance will be assessed against a balanced scorecard of measures to determine the amount of any award for a particular year; – awards will be paid 50% in shares and 50% in cash; – awards will be paid in combination with RSP awards to meet or exceed the deferral period for variable pay in order to comply with regulatory requirements; – a post-vesting retention period will apply to the amount delivered in shares in line with regulations (currently 12 months); and – malus provisions apply prior to vesting and clawback applies for seven (and potentially up to ten) years from the date of award. Awards will be subject to any other terms as regulators require from time to time. We may calculate the number of shares awarded using a share price that is discounted to reflect the absence of the right to receive dividends or equivalents during the vesting period. If regulations permit the use of dividend equivalents in future, awards may be eligible to receive dividend equivalents instead. The discounted share price will be calculated with reference to estimated dividend yields based on market consensus and the length of the vesting period. An independent adviser will then review it. For the avoidance of doubt, there is no intention to reflect special dividends in the calculation. We will grant annual bonus awards on a discretionary basis. They will be delivered through one of NatWest Group’s shareholder-approved employee share plans. The maximum value of annual bonus awards will be set at 100% of base salary for executive directors (or an amount which represents such value rounded up to the nearest whole share). The value of awards can also reflect a discount for long-term deferral, in line with the Prudential Regulation Authority (PRA) Rulebook and European Banking Authority (EBA) guidelines. The level of the award to be paid can vary between 10% for threshold performance and 100% for maximum performance. Target performance will pay out at 50% of maximum opportunity. Threshold and maximum targets will be disclosed at the end of the performance period in the 2022 Directors’ Remuneration Report, alongside the actual level of performance achieved. The Committee will set and assess performance against the scorecard with weightings that apply to each category. The measures and targets we use will reflect NatWest Group’s strategic priorities for the year and align with our purpose. Financial measures will account for between 50% and 60% of the annual bonus opportunity. A range of non-financial measures will be included in a strategic category accounting for at least 30% of the overall scorecard. Personal measures may also be used up to a maximum of 10% of the overall scorecard. A risk modifier will also apply, enabling risk performance to be assessed and awards reduced, potentially to zero. The Committee has discretion to vary the performance measures and weightings in appropriate circumstances. However, financial measures will always account for at least 50%. The Committee also has discretion to determine the appropriate bonus outcome when the assessment of performance against the formulaic measures and targets would drive an unrepresentative outcome or when it is necessary to consider strategic, economic, or societal impacts that were not or could not have been accounted for at the point of agreeing the bonus scorecard. We will set out further details on the performance measures and weightings and a detailed assessment of performance against targets in the relevant year’s Annual Report on remuneration. You can find the proposed performance measures and weightings for the 2022 financial year on page 166. 145 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Variable pay for executive directors continued Purpose and link to strategy Operation Maximum potential value Performance assessment RSP awards To support sustainable performance over a multi-year period. We will deliver awards entirely in shares with payments deferred over many years. This creates simple and effective alignment with the returns that shareholders receive over the long term. Awards are subject to malus and clawback adjustments to discourage excessive risk-taking and other inappropriate behaviours. RSP awards will operate as follows: – an award will be granted in shares provided satisfactory performance has been achieved in the prior year; – performance will be assessed using our established performance management processes that apply to all colleagues across the bank; – after three years, performance against pre-determined underpin criteria will be used to ensure there is no payment for failure; – subject to the underpin assessment, awards will vest in combination with annual bonus awards to meet or exceed the deferral period for variable pay under regulatory requirements (currently between years three to seven after grant); – a post-vesting retention period will apply to the shares in line with regulations (currently 12 months); and – malus provisions can be applied prior to vesting and clawback applies for seven (and potentially up to ten) years from the date of award. Awards will be subject to any other terms regulators require from time to time. We may calculate the number of shares awarded using a share price that is discounted to reflect the absence of the right to receive dividends or equivalents during the vesting period. If regulations permit the use of dividend equivalents in future, awards may be eligible to receive dividend equivalents instead. The discounted share price will be calculated with reference to estimated dividend yields based on market consensus and the length of the vesting period. An independent adviser will then review it. For the avoidance of doubt, there is no intention to reflect special dividends in the calculation. We will grant RSP awards on a discretionary basis. They will be delivered through one of NatWest Group’s shareholder-approved employee share plans. The maximum value of RSP awards will be set at 150% of base salary for executive directors (or an amount which represents such value rounded up to the nearest whole share). The value of awards can also reflect a discount for long-term deferral, in line with the PRA Rulebook and EBA guidelines. Depending on the Committee’s assessment of the RSP underpin criteria, the vesting level of the award can vary between 0% and 100% of the original number of shares granted. The expected vesting level of the RSP award is 100% of maximum opportunity. Executive directors will be granted an RSP award provided performance over the prior year is considered by the Committee to be satisfactory, when assessed using our established performance management processes. Before vesting takes place, the Committee will review the outcomes of the business against underpin criteria determined by the Committee. In the first year of operation, the underpin criteria will consider whether a sustainable level of performance over the period has been achieved with reference to: 1. the level of capital held relative to the maximum distributable amount; 2. total distributions paid relative to our distribution policy; and 3. any material deterioration in the risk or regulatory compliance profile or control environment of NatWest Group, or a serious conduct or reputational event. Following the underpin assessment, RSP awards may vest in full, in part or lapse in their entirety. The Committee will also retain the right to consider other factors and apply discretion before deciding on the final vesting outcome. This will aim to mitigate any potential unintended consequences that might arise and ensure that the outcome is fair. You can find more information on the RSP in the implementation of Policy for 2022 on page 167. The Committee is committed to transparency and will explain its reasons for applying discretion or for not doing so. We also reserve the right to change the underpin criteria when granting new RSP awards over the Policy period. The Directors’ Remuneration Policy continued 146 NatWest Group 2021 Annual Report and Accounts Other elements of the Policy for executive directors Purpose and link to strategy Operation Maximum potential value Shareholding requirements Executive directors must build and continue to hold a significant shareholding both during and after employment. This helps to further align their interests with returns to shareholders over the long term. Shares held outright, including those acquired under the fixed share allowance, qualify towards the shareholding requirement. Unvested shares from annual bonus and RSP awards count on a net-of-tax basis towards the shareholding requirement once performance conditions have been assessed. When any applicable retention periods have passed, executive directors can dispose of up to 25% of the net-of-tax shares received until the shareholding requirement is met. Any shares purchased voluntarily will count towards the requirement but are excluded from the restriction on sale. On leaving, executive directors are required to hold shares of a value equal to the lower of their shareholding requirement immediately prior to departure or the actual shareholding on departure, for a period of two years. The requirement includes vested and unvested shares that have been assessed for performance but shares purchased voluntarily are excluded from the post-employment shareholding requirement. A fixed number of shares for the post-employment requirement will be determined at the date of departure. Procedures are in place to help enforce the shareholding requirements, both during and after employment. Executive directors are required to agree to be bound by the terms of the requirements and to use prescribed nominee accounts to hold shares subject to restrictions. CEO – 500% of salary. CFO – 300% of salary. Requirements may be reviewed in future but are not expected to be reduced. Employee share plans Providing an opportunity for executive directors to purchase shares in the company voluntarily. The plans provide an opportunity for executive directors to contribute from salary and acquire shares under one or more of NatWest Group’s all-employee share plans in operation from time to time. In the UK, this currently includes: – the Sharesave plan where monthly savings over a fixed period may be used to purchase shares at an agreed option price; and – the Buy As You Earn plan where shares can be purchased from pre-tax salary. Executive directors may participate on the same basis as other eligible employees. All-employee share plans are not subject to performance conditions. The statutory limits that are imposed by HMRC in the UK or the limits under the relevant share plan rules. Legacy arrangements To ensure NatWest Group can continue to honour payments due to executive directors. In approving this Policy, authority is given to honour any previous commitments or arrangements entered into with current or former directors. This includes any share awards granted under the 2014 Employee Share Plan. For the avoidance of doubt, all outstanding LTI awards granted under previous policies will continue to vest in line with the terms agreed at the time of grant. LTI awards are subject to performance assessments prior to grant and again before vesting. Awards are deferred over three to seven years and a 12-month retention period applies after each vesting. Authority is also given to honour arrangements agreed with an employee prior to appointment as an executive director that may have different terms or performance conditions. In line with existing commitments and arrangements. 147 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements The Directors’ Remuneration Policy continued Remuneration for the Chairman and non-executive directors Purpose and link to strategy Operation Potential value Fees Competitive fixed remuneration that reflects the skills, experience and time commitment required for the role. Fees are set at an appropriate level to attract individuals with the attributes needed to oversee the Board’s strategy. Fees are paid monthly in cash. The Board retains discretion to pay fees in cash, shares or a combination of the two. The level of remuneration reflects the responsibility and time commitment required, and the level of fees paid to directors of comparable major UK companies. We review fees regularly, and the Board may choose to apply an increase within the limits of the Policy on an annual or less frequent basis. The Chairman receives an all-inclusive fee. Non-executive directors receive a basic Board fee with additional payments when serving as a member or Chairman of a Board Committee or performing an additional role such as the Senior Independent Director. Non-executive directors may also receive fees as directors of subsidiary companies. Additional fees may be paid for new Board Committees provided these are not greater than fees payable for the existing Board Committees as detailed in the Annual remuneration report. No variable pay is provided, enabling the Chairman and non-executive directors to maintain appropriate independence, focus on long-term decision-making and constructively challenge performance of the executive directors. The rates for the year ahead are set out in the Annual Report on remuneration. Any increases to fees will not normally be greater than the average inflation rate or salary increases for the wider workforce over the period of the new Policy. However, we take into account that any change in responsibilities, role or time commitment may merit a larger increase. Other than in exceptional circumstances, fees will not increase by more than 15% over the course of this Policy. Benefits Providing a level of benefits in line with market practice. The Chairman and non-executive directors are also entitled to travel assistance connected with company business, including the use of a car and driver where deemed appropriate. Where this is a taxable benefit for the recipient, NatWest Group will meet the cost of any tax due on the benefit. On rare occasions when directors are accompanied by their spouse or partner to business events, NatWest Group may also meet the costs and any associated tax liability. We may also offer other benefits in line with market practice. In line with evolving working practices and our efforts to discourage unnecessary travel and costs, the Board has moved to a hybrid model where meetings take place both ‘in person’ and remotely. In light of the change, NatWest Group will consider providing assistance and meeting reasonable costs on a case-by-case basis to support the Chairman and non-executive directors in the effective undertaking of their roles from another location. If additional tax liabilities arise from this practice, NatWest Group will also meet these costs when deemed appropriate. The Chairman is entitled to private medical cover and life insurance cover provided the Board considers the costs to be reasonable. Reasonable expenses incurred in connection with the performance of duties will also be reimbursed. The value of the private medical and life insurance cover provided to the Chairman as well as other benefits provided under the new Policy will be in line with market rates and disclosed in the Annual remuneration report. 148 NatWest Group 2021 Annual Report and Accounts Other policy elements for directors Provisions Operation Recruitment policy Our Boardroom Inclusion Policy is in place to ensure that NatWest Group can attract, motivate and retain the best talent and avoid limiting potential caused by bias, prejudice or discrimination. When recruiting new directors, our Policy aims to be competitive and to structure pay in line with the framework applicable to current directors (as stated in the tables above), while recognising that some adjustment to quantum may be necessary to secure the preferred candidate. The pension allowance for new executive directors will be in line with that of the wider UK workforce. We can continue to honour existing commitments in the event of an internal promotion. A buy-out policy exists to replace awards forfeited or payments foregone, which is in line with regulatory requirements. The Committee will minimise buy-outs wherever possible and ensure they are no more generous than, and on substantially similar terms to, the original awards or payments they are replacing. No sign-on awards will be offered on joining. Any awards granted following recruitment may be made under such NatWest Group employee share plans as are in place from time to time or otherwise in accordance with the relevant provisions in the Listing Rules. We will disclose full details in the next remuneration report. The maximum level of variable pay which may be granted to new executive directors will be guided by, but not limited to, arrangements for existing executive directors. In any event this will not exceed the limit of one times the level of fixed pay. The maximum level excludes any buy-out arrangements. Notice and termination provisions Executive directors As set out in our executive directors’ service contracts, NatWest Group or the executive director is required to give 12 months’ notice to the other party to terminate the employment. The Committee will ensure that any proposals relating to termination payments are fair and reasonable and recognise that failure is not rewarded. There are no pre-determined provisions for compensation on termination, other than when we determine that a redundancy payment is properly due under our redundancy policy in place from time to time. There is discretion for NatWest Group to make a payment in lieu of notice (based on salary only) which is released in monthly instalments. The executive director must take all reasonable steps to find alternative work and any remaining instalments will be reduced as appropriate to offset income from any such work. Chairman and non-executive directors Instead of service contracts, the Chairman and the non-executive directors have letters of appointment that reflect their responsibilities and time commitments. There are no notice periods and we will pay no compensation in the event of termination, other than standard payments for the period served up to the termination date. Under the Board Appointment Policy, non-executive directors are appointed for an initial term of three years, subject to annual re-election by shareholders. At the end of this initial term, a further three-year term may be agreed. Non-executive directors may be invited to serve beyond six years, up to a maximum tenure of nine years. The Chairman is not subject to the Board Appointment Policy but is subject to the Code’s requirements relating to the maximum tenure period for chairs. All directors stand for annual election or re-election by shareholders at the NatWest Group’s AGM. Effective dates of appointment for directors: Howard Davies – 14 July 2015 Alison Rose – 1 November 2019 Katie Murray – 1 January 2019 Frank Dangeard – 16 May 2016 Patrick Flynn – 1 June 2018 Morten Friis – 10 April 2014 Robert Gillespie – 2 December 2013 Yasmin Jetha – 21 June 2017 (1) Mike Rogers – 26 January 2016 Mark Seligman – 1 April 2017 Lena Wilson – 1 January 2018 (1) Yasmin Jetha’s first appointment to the Board. In preparation for the ring-fencing regime, Ms Jetha stepped down from the Board in 2018 to serve solely as a director of some of our subsidiary companies before re-joining the Board on 1 April 2020. 149 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Provisions Operation Treatment of outstanding share plan awards on termination On termination, we will treat awards in accordance with the relevant plan rules or other terms on which they were granted. Individuals will only qualify for good leaver treatment if they leave due to ill-health, injury, disability, death, retirement (as agreed with NatWest Group), redundancy, the employing company ceasing to be a member of NatWest Group, transfer of the employing business, or any other reason if, and to the extent, the Committee decides in any case. Malus and clawback provisions will continue to apply to all leavers, and could be used to adjust awards if subsequent issues relating to executive directors’ performance come to light. In the event of a change of control, outstanding awards will be treated in line with the provisions of the relevant plan rules, as approved by shareholders. Fixed share allowances Shares will continue to be released over the applicable retention period helping to ensure that former executive directors maintain an appropriate interest in shares. In all leaver circumstances, executive directors will continue to be eligible to receive a pro-rated fixed share allowance to reflect the period up to the termination date. LTI awards (under the existing Policy) LTI awards normally lapse on leaving unless the termination is for one of the specified good leaver reasons. LTI awards held by good leavers will normally vest on the original vesting dates, subject to the performance conditions being met and the rules of the relevant plan. No pro-rating applies after grant for LTI awards granted from 2018 onwards. The existing Policy allows good leaver retirement to be granted provided the individual is not leaving to work in a capacity considered to be competing directly and materially with NatWest Group. The new Policy introduces a more typical and less favourable definition of retirement that will not allow good leaver retirement treatment where individuals take up a commensurate role elsewhere or a role with a company providing banking services. The new Policy will also address the concerns from some shareholders by introducing pro-rating for RSP awards in good leaver circumstances. Annual bonus awards (for performance year 2022 and later years) Any deferred bonus awards that are unvested will normally lapse on leaving unless good leaver circumstances apply, in which case the awards will normally continue to vest on the original vesting dates. Provided that individuals leave in good-leaver circumstances, they will be eligible to be considered for an annual bonus award for their final year of employment. RSP awards (for performance year 2022 and later years) RSP awards that are unvested will normally lapse on leaving unless specified good-leaver circumstances apply. For good leavers, awards are pro-rated for time served during the three-year performance period and will normally continue to vest on the original vesting dates. Individuals will not be eligible to be considered for an RSP award for the final year of employment. Contractual provisions Contracts include standard clauses covering remuneration arrangements and discretionary incentive plans (as set out in this report). The contracts also reference: reimbursement of reasonable out-of- pocket expenses; annual leave; redundancy terms and sickness absence; the performance review process; directors’ and officers’ insurance; the disciplinary procedure; and terms for dismissal in the event of personal underperformance or breaches of NatWest Group’s policies. The Committee retains the discretion to make payments (including but not limited to professional and outplacement fees) to: facilitate smooth handovers; mitigate against legal claims; and/or procure reasonable assistance with investigations or claims, subject to any payments being made pursuant to a settlement or release agreement. The Directors’ Remuneration Policy continued 150 NatWest Group 2021 Annual Report and Accounts Summary of proposed changes for executive directors Under the new Policy, LTI awards will be replaced with annual bonuses and RSP awards. This will provide a more market-aligned and competitive remuneration package for executive directors, while incentivising growth and the delivery of our purpose-led strategy. It will also align more closely to shareholder expectations, with pro-rating applying to RSP awards in good leaver circumstances and annual bonus outcomes being determined with reference to weighted performance measures and robust strategic targets. RSP awards will contribute to nearly 67% of expected pay being delivered in shares, further supporting the delivery of sustainable long-term performance. The fixed share allowance retention period will also be extended from three to five years, further aligning remuneration to the long term. The pay levels under the Policy were decided after considering relevant market positioning for similar roles at comparable financial services companies. They remain relatively modest compared to other major UK bank peers. We selected performance measures for annual bonus and RSP awards to reflect a cross section of our main strategic deliverables. There will be greater transparency on the link between performance and pay outcomes through weighted annual bonus measures with non-financial targets being set to reflect our purpose-led strategy. Other changes under the new Policy for executive directors Performance conditions Leaver terms Shareholding requirement While LTI awards under the existing Policy are based on assessing performance in the round, we will base bonus awards under the new Policy on a weighted scorecard of annual measures and targets aligned with our strategic priorities. Financial measures will account for at least 50% of the bonus scorecard supported by strategic and personal measures. RSP awards will be based on a simpler pre-grant test than the existing Policy with an underpin assessment at the end of three years to ensure there are no payments for failure. As is currently the case, any outstanding awards will be forfeited on leaving unless the individual leaves for a specified good leaver reason. Under the existing Policy no pro-rating applies to LTI awards after grant in agreed good leaver circumstances. RSP awards under the new Policy will be subject to pro-rating in good leaver circumstances. In addition, we will adopt a more typical definition of ‘retirement’, that is more in line with shareholder expectations and does not allow good leaver status where individuals take up a commensurate role elsewhere or a role with a company providing banking services. Shareholding requirements will increase from 400% of salary to 500% of salary for the CEO and from 250% of salary to 300% of salary for the CFO. This increase recognises that shareholders expect executive directors to have significant shareholdings where RSP constructs are being introduced. The change moves NatWest Group towards the highest levels of market practice on shareholder requirements and reinforces the long-term alignment of executive remuneration with shareholders. Changes to the policy for the Chairman and non-executive directors We reviewed the remuneration policy for the Chairman and the non-executive directors during 2021, following which only one change will be made. To recognise working practices have changed, and also to discourage unnecessary travel, the Board has moved to a hybrid model whereby meetings take place both in person and remotely. The change under the Policy will allow the Chairman and non-executive directors to receive assistance when they are attending Board meetings from another location, including meeting any costs that are considered reasonable and appropriate. Arrangements will be considered on a case-by-case basis. The Committee retains discretion to make minor amendments to the Directors’ Remuneration Policy that reflect changing legal or regulatory requirements or guidelines. We will not make any material changes to the advantage of directors without first reverting to shareholders for approval. 151 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements The Directors’ Remuneration Policy continued (1) The charts above are for illustration only, with minimum representing fixed remuneration (base salary, fixed share allowance, pension and standard benefit funding). (2) The charts reflect remuneration receivable in the first year of the new Policy which, as noted earlier in this report, is being introduced on a phased basis. The maximum annual bonus award will be limited to 85% of base salary in year one rising to 100% of base salary in year two. The maximum RSP award will be limited to 125% of base salary in year one rising to 150% of base salary in year two. (3) The expected value assumes annual bonus payments will be made at 50% of maximum opportunity and RSP awards will vest at 100% of maximum. (4) Maximum 1 in the charts assumes both annual bonus and RSP awards are paid and vest in full, at 100% of maximum. Maximum 2 extends this to show the impact of a 50% increase in the share price for RSP awards over the period from grant to vest. The benefits figure includes standard benefit funding as outlined in the Policy but excludes any potential other benefits under the Policy such as travel assistance in connection with company business. We will disclose the value of any taxable business expenses in the total remuneration table each year. Chief Ex ecutive Ofﬁcer (£000’ s) Chief Financial Ofﬁc er (£000’ s) Base salary Fixed share allowance Pension & beneﬁts Annual bonus RSP award (vesting value) 47% 47% 2,382 6% 26% 26% 11% 34% 4,262 3% 24% 24% 20% 29% 4,739 3% 21% 21% 17% 39% 5,440 2% 120% Minimum Expected Maximum 1 Maximum 2 Fixed pay only Bonus and RSP at constant share price RSP at 50% share price increase 47% 47% 1,633 6% 26% 26% 11% 33% 2,914 4% 24% 24% 20% 29% 3,239 3% 21% 21% 17% 38% 3,717 3% Minimum Expected Maximum 1 Maximum 2 Fixed pay only Bonus and RSP at constant share price RSP at 50% share price increase Illustration of annual remuneration for executive directors under the new policy 152 NatWest Group 2021 Annual Report and Accounts Directors’ remuneration report Aligning executive pay with ESG performance and our purpose-led strategy In addition to considering financial measures, the process to determine variable pay for executive directors under the new Policy will continue to reflect progress against our Environmental, Social and Governance (ESG) priorities. The combined bonus scorecard for 2022 and the assessment of satisfactory performance under the RSP will align with the five principles of a purpose-led business, as set out in the Blueprint for Better Business (BfBB) framework. The five principles form part of our purpose framework and you can find more details of this on page 13 of the Strategic report. Five principles of a purpose-led business A guardian for future generations Honest and fair with customers and suppliers A good citizen A responsible and responsive employer Has a purpose which delivers long-term sustainable performance Variable pay for 2022 Tackling climate change is core to our purpose. Several climate measures are included in the bonus scorecard for executive directors. The climate category accounts for 10% of annual bonus awards for 2022. This includes three measures as follows: 1. Carbon emissions from own operations 2. Funding and financing committed to climate and sustainable finance 3. Develop climate transition plan for publication with 2022 annual results. Putting customers at the heart of what we do will help people, families and businesses to thrive. We target customer satisfaction and the likelihood that customers will recommend our brands in annual bonus decisions. A weighted Net Promoter Score (NPS) will account for 10% of the annual bonus awards for 2022. RSP awards will also be assessed to ensure that performance has been sustainable before the vesting takes place. We can only deliver on our purpose-led strategy by continuing and deepening our relationships with all our stakeholders. There are targets to encourage and grow businesses and to increase financial capability. The Committee has discretion when making decisions to ensure outcomes are fair and appropriate. Variable pay can also be recovered from individuals if we believe the payments are no longer justified. We are committed to creating a diverse workforce with an equitable and inclusive culture. This will also help us in serving our diverse range of customers and communities in the ways they need. There are targets to increase the percentage of females and Black, Asian and Minority Ethnic colleagues in the top layers of the organisation. Together the Purpose, Culture and People targets account for 10% of annual bonus awards for 2022. A very high proportion of pay is delivered in shares over many years. This encourages executive directors to think and act in the best long-term interests of all our stakeholders. 10% of the 2022 annual bonus award will be based on maintaining efficient and safe levels of capital. If risk performance is not at the required level, annual bonus awards can be adjusted. RSP awards also take financial and risk considerations into account prior to vesting. ESG alignment E S G 153 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Our ‘Colleague Listening Strategy’ It is more important than ever that we listen to colleagues and use the insight we gain to attract, engage and retain the talent we need for the future. This helps us improve by assessing colleague (1) sentiment and our progress in creating a great place to work. Regular engagement Colleague Advisory Panel (CAP) – Twice a year, a colleague opinion survey (Our View) allows people to have a say on what it feels like to work at NatWest Group. – Just over 46,700 (81%) of our colleagues participated in the latest survey and there is regular engagement throughout the year. – Question and answer sessions take place with senior executives throughout the year. – Feedback from colleagues forms part of the People and Culture measures that impact executive pay. – Engagement on remuneration also takes place with representatives from Unite in Great Britain and Offshore and the Financial Services Union in Northern Ireland and the Republic of Ireland. The CAP was established in 2018 to help us promote colleague voice in the boardroom. The CAP is chaired by Lena Wilson, one of our non-executive directors, and allows colleagues to engage directly with senior management and the Board on topics that are important to them. It includes colleagues who volunteered to be involved, representatives from trade union bodies and works councils, the colleague-led networks and junior management teams. After each meeting, the Board receives a summary and a follow-up call is then held with the CAP so that CAP members can hear how their views were shared and what happened as a result. The CAP continues to be highly regarded by those who attend and has proven to be an effective way of establishing two-way dialogue between colleagues and Board members. In November 2021, the Committee Chairman met with the CAP to discuss executive and wider workforce remuneration. There was a focus on fairness, simplicity, transparency and inclusion which runs through all colleague remuneration. Members were appreciative of the presentation, saying it was a very clear explanation of NatWest Group’s approach to remuneration. They were keen to see how our Fair Pay Charter could receive a higher profile and also discussed NatWest Group’s approach to salary increases and the impact of the rising cost of living. The Committee Chairman explained that the combination of inflation and higher living costs was something employers had not faced for some time. The COVID-19 pandemic had also had a significant impact across society. Economic factors alongside the external pay market and longer-term business affordability would all need to be taken in to account when deciding our investment in fixed pay. Climate was the overall theme of the November meeting and the Committee Chairman referred to this in his presentation. He highlighted that executive directors had specific performance goals and measures linked to climate cost, our climate footprint and colleague feedback, all of which was considered when deciding their pay awards. New ways of working were also discussed, and the Group Chief People and Transformation Officer highlighted that focus groups were being run to understand the cost impact of working from home. A number of actions were agreed at the meeting for further consideration and the Chair of the CAP provided the Board with an update on the feedback received from colleagues. (1) Colleagues means all employees and, in some instances, other members of the wider workforce (including contractors and agency workers). 154 NatWest Group 2021 Annual Report and Accounts Our View survey The Our View colleague opinion survey compares responses from colleagues at NatWest Group against those from other companies, known as the Global Financial Services Norm (GFSN). In general, the scores from the Reward category in Our View have declined over the last year although they remain above the GFSN in all but one category. The reduction in scores was anticipated as the impact of the global pandemic on our financial performance meant investment in fixed pay was constrained last year and our bonus pool was reduced. Some colleagues also felt they had limited opportunity over the last year to use some of the benefits they had purchased under our benefit scheme. 2021 favourable score Versus 2020 Versus GFSN Total Reward (1) 76 -4 +4 Colleagues who think they are paid fairly for the work they do 67 -6 +4 Understand how their pay is determined 87 -2 +13 Understand how their bonus is determined 72 -5 -5 Believe NatWest Group’s benefit programme fits their needs 80 -1 +5 Manager regularly gives them recognition for work well done 87 no change +5 (1) NatWest Group Our View scores for 2021 exclude Ulster Bank RoI. Pay gaps and pay ratio disclosures Pay equality, including neutrality in respect of protected characteristics, is a core feature of our approach, to support equal pay for equal work. You can find the latest gender and ethnicity pay gap reporting for NatWest Group together with the steps being taken to address the position in the ‘Our Colleagues’ section of the Strategic Report and at natwestgroup.com. You can also see the CEO-to-employee pay ratios and further information on remuneration for the wider workforce later in this report. Further information on our wider workforce approach. Fair reward is one of the key things we are committed to in order to provide a great place to work for everyone. Our Fair Pay Charter is one of the ways we do this and you can find further information on our approach in our ESG Supplement. The ‘Our Colleagues’ section of the Strategic Report also sets out how we helping colleagues to thrive and realise their potential, how we support their wellbeing and how we create a diverse, equitable and inclusive culture. How we align wider workforce and executive pay Consistent with our approach to executive pay, our remuneration policy for all colleagues aims to be simple, transparent and to promote the long-term success of NatWest Group. It encourages a culture where individuals are rewarded for sustained performance in line with risk appetite and for demonstrating the right behaviours. These principles apply to everyone with adjustments made where necessary to comply with local requirements. As set out on the previous page, the Committee Chairman met with colleagues through the CAP in November 2021 to discuss how we take a consistent approach to workforce remuneration. He also highlighted some of the challenges being faced with the existing Policy for executive directors. The proposed introduction of annual bonus for executive directors under the new Policy will create closer alignment with the remuneration construct for the wider workforce. A significant proportion of our colleagues are eligible to receive annual bonus awards, subject to performance. 155 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements All colleagues Certain colleagues depending on location, grade or job Senior executives only Base salary and pension funding Benefits and share plans Role-based allowances Annual bonus RSP awards A competitive level of salary paid in cash and reviewed annually. Set to reflect the talents, skills and competencies that the individual brings to the business. Additional funding is provided which colleagues can use to save in a company pension scheme. Colleagues in the UK receive pension funding at 10% of base salary. The same rate applies to executive directors. Rates in other locations reflect market practice in those locations. Some colleagues receive funding which they can use towards the cost of benefits or take as cash. Benefits offered include private medical cover, dental cover, personal accident insurance, life assurance and critical illness insurance. Individuals in some jurisdictions can also join share plans, providing an efficient way to buy NatWest Group plc shares and align their interests with our shareholders. Role-based allowances reflect the skills and experience required for certain jobs. These are part of fixed remuneration for regulatory purposes. They are delivered in cash and/or shares depending on the level of the allowance and the seniority of the recipient. Shares are released in instalments over a minimum three-year period with a five-year period applying to executive directors. This is a way of rewarding individuals for superior performance. The annual bonus pool is based on a balanced scorecard of measures across our core strategic areas and our purpose. Allocation from the pool depends on the performance of the business area and the individual. Awards are made in cash and/or shares with larger amounts paid out over several years. These encourage a sustainable long-term performance. Awards are delivered entirely in shares to provide direct alignment with our shareholders. We carry out performance checks prior to grant and again after three years to ensure satisfactory and sustained performance has been achieved. Awards are paid out in equal amounts across years three to seven following grant, followed by a 12-month retention period. RSP participants are also subject to shareholding requirements. Fixed pay Variable pay To drive consistency, we have agreed a set of NatWest Group-wide Remuneration Policy Principles which are designed to: 1. support a performance culture – we recognise colleagues’ skills and experience, the responsibilities of their job and their geographic location. Ultimately, we ‘pay for performance’, underpinned by a robust performance management process; 2. be market facing – we benchmark ourselves against a core peer group and ensure our pay is fair, competitive and affordable; and 3. ensure compliance and governance – our reward design must be within policy, meet the expectations and requirements of our regulators and be appropriately aligned with the expectations of our shareholders and customers. – A simple and transparent pay policy supports colleagues in doing the right thing. – Our more junior colleagues are typically paid through fixed pay only, which was increased when variable pay was removed. – This provides them with greater security and allows them to fully focus on the needs of the customer. Pay for executive directors is aligned with the wider workforce, with two main differences: i. the use of RSP awards; and ii. a requirement to maintain a holding of shares in NatWest Group, both during and after employment. These differences are deliberate and recognise that it is in the best interests of our stakeholders for executive directors to have a significant proportion of their remuneration paid in shares and subject to long-term holding requirements. Base Salary Pension & Benefit Funding + Role-based Allowances Annual Bonus RSP Awards The Directors’ remuneration report continued + Benefit funding applies to certain jobs Provided to some Material Risk Takers (MRTs) only Mainly manager grade and above (including executive directors under the new Policy). Executive directors and potentially some of the CEO’s direct reports. 156 NatWest Group 2021 Annual Report and Accounts Our approach to the UK Corporate Governance Code (the ‘Code’) This table supplements other information in this report by demonstrating some of the ways in which we meet the requirements and spirit of the Code. We continue to monitor and reflect on best practice when developing our remuneration practices. By introducing weighted annual bonus measures, rather than assessing performance in the round, the new Policy for executive directors creates a more direct link between the delivery of our strategy and pay and performance outcomes. We consider both the outcomes and how they have been achieved to encourage and reward behaviours in line with our values. Malus and clawback provisions together with long holding periods reinforce the need for recipients to act in the best interests of our stakeholders. Provision Our approach Review workforce remuneration and alignment with culture – Every year we consider how pay has been distributed across NatWest Group, analysing performance ratings by grade and diversity categories. Checks are in place to ensure decisions are made fairly. – Over the last year, we also offered colleagues the opportunity to join Sharesave in the UK, Poland and India. This simple savings plan encourages colleagues to think about their financial wellbeing and provides an option to buy shares and align their interests with our shareholders. – We also review the annual spend on fixed pay (approximately two-thirds of the workforce receive fixed pay only). We have targeted recent increases towards our most junior and lowest-paid colleagues, areas where specialist skills are required leading to high attrition rates and those lowest in their salary range. – The Committee also approves, and reviews the implementation of, the Group-wide remuneration policy principles, and approves the bonus pool for bonus-eligible colleagues across the wider workforce. – Targets exist to help build colleagues’ capability, strengthen our culture and build a diverse workforce within an inclusive environment. These form part of the performance measures that are aligned with our strategy and affect the pay of executive directors and bonus-eligible colleagues. – An accountability review process allows us to respond where new information would change our variable pay decisions. The Committee works closely with other Board Committees to consider how to reflect progress on culture in remuneration. – The governance of culture is clearly laid out with specific Senior Management Function roles having defined accountabilities, which are taken into account in determining pay decisions for such roles. When determining the executive director remuneration policy, we consider factors including clarity, simplicity, risk, predictability, proportionality and alignment to culture – Most of the remuneration for executive directors is share-based and subject to deferral and retention requirements, creating significant alignment with our shareholders. – There is clarity for executives on how performance will be assessed and the behaviours expected of them. We provide detailed disclosure on decisions made to give our shareholders transparency. – We take risk into account at various stages of the performance assessment process, with underpins and malus and clawback provisions providing us with further tools to adjust awards, if necessary. – We have set out scenarios of the possible rewards to executive directors under the new Policy on page 152 along with the impact of a 50% share price appreciation over the performance period for RSP awards. – Variable pay cannot be awarded above the level of fixed pay. We believe that this is a restrained and proportionate approach to executive remuneration. RSP awards will be subject to a satisfactory and sustainable level of performance having been achieved, having regard to our purpose-led strategic goals. RSP awards will also be deferred over many years to encourage long-term thinking. Discretion – We can apply discretion under our share plan rules where appropriate. The Committee has in the past applied downwards discretion in determining variable pay outcomes and did so again this year in respect of the 2019 LTI awards due to vest in March 2022. – The Committee can also determine whether an individual would qualify as a good leaver on departure and, subject to meeting any regulatory requirements, decide that awards held by good leavers should vest earlier than the normal vesting date. – Discretion is only used to ensure a fair outcome. We will disclose any use of discretion. – Further discretions include the ability to: treat variable pay awards in a range of ways in the event of a change of control, but only within the terms of the share plan rules approved by shareholders; change any performance measures, targets, and adjust awards if major events occur. Scope to adjust variable pay through malus and clawback – Malus allows us to reduce the amount of any unvested variable pay awards, potentially to zero, prior to payment. Clawback allows the recovery of variable pay awards that have already vested. – The circumstances in which NatWest Group may apply malus or clawback include: – conduct which results in significant financial losses for NatWest Group; – an individual failing to meet appropriate standards of fitness and propriety; – an individual’s misbehaviour or material error; – NatWest Group or the individual’s business unit suffering a material failure of risk management; and – for malus and in-year bonus reduction only, circumstances where there has been a material downturn in financial performance. – This list is not exhaustive and further circumstances may be considered where appropriate. 157 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Annual remuneration report Annual r emuneration report Single total figure of remuneration for executive directors for 2021 (audited) Alison Rose Katie Murray 2021 £000 2020 £000 2021 £000 2020 £000 Base salary 1,100 1,100 750 750 Fixed share allowance (1) 1,100 674 750 750 Benefits (2) 81 81 30 47 Pension (3) 110 110 75 75 Total fixed remuneration 2,391 1,965 1,605 1,622 Annual bonus n/a n/a n/a n/a Long-term incentive award (4) 1,197 650 – – Total variable remuneration 1,197 650 – – Total remuneration 3,588 2,615 1,605 1,622 (1) The fixed share allowance is based on 100% of salary and, as part of fixed remuneration, is not subject to any performance conditions. In April 2020, Ms Rose announced she would forgo 25% of her fixed pay for the rest of the year. A reduction of £426,078 was applied to her fixed share allowance and NatWest Group made a comparable donation to the NET Coronavirus Appeal. (2) Includes standard benefit funding at £26,250 per annum. In addition, Ms Rose received travel assistance in connection with company business (£25,314) and assistance with home security (£29,703). Ms Murray also received travel assistance (£990) and home security arrangements (£2,519) for 2021. (3) The executive directors receive a monthly cash allowance and can choose to participate in the company’s defined contribution pension arrangements. (4) The 2021 value for Ms Rose relates to an LTI award granted in 2019, prior to becoming an executive director. The Committee assessed performance prior to vesting as set out below and on the next page. No discretion was exercised as a result of the share price changing over the performance period. Ms Murray was not eligible for an LTI award in 2019. Vesting of 2019 LTI award (audited) The table summarises the number of shares due to vest to Ms Rose following the pre-grant and pre-vest performance assessments and the estimated vesting value for the 2019 LTI award, shown in the single total figure of remuneration above. No dividend equivalents were paid prior to vesting. Alison Rose 2019 LTI award Maximum shares at grant Reduction at pre-grant test Shares granted Further reduction at pre–vest test as a percentage of original maximum Shares to vest 644,672 c.11.76% 568,829 5% 536,595 Maximum value at grant Reduction in value from pre-grant test Value of Shares granted Reduction in value at pre-vest test Reduction due to fall in share price Vesting value (1) £1,700,000 £200,000 £1,500,000 £85,000 £218,000 £1,197,000 (1) Share price at grant was £2.637 and the vesting value was based on share price of £2.23, the average over the three-month period from October to December 2021. 158 NatWest Group 2021 Annual Report and Accounts 2019 LTI award – Pre-vest performance assessment framework LTI awards were made in early 2019 following an assessment of performance over the 2018 financial year. Before vesting, the Committee carries out a further review to consider whether anything has come to light which might call the original award into question. Internal control functions and PwC, as independent advisers, the Group Board Risk Committee (BRC) and the Group Sustainable Banking Committee (SBC) support the Committee in this assessment, with the outcome set out below. Looking back to performance for 2018 and ‘knowing what we know now’, has NatWest Group 1. Remained safe and secure, taking into account financial results and the capital position? Has NatWest Group breached a minimum capital ratio over the period? NO NatWest Group has remained well capitalised since 2018. YES Has there been a material fall in the NatWest Group share price over the period? NO The share price has risen by 4% since the end of 2018. Has Net Promoter Score (NPS) fallen across the business? NO for six segments. YES for one of the five targeted customer brands. Have there been indicators of a material deterioration in the risk culture or profile, taking into account annual assessments by the Risk function and the BRC? NO No material deterioration in risk culture or profile since 2018. Has the Financial Services Culture Board (FSCB) (1) survey position fallen materially? NO Scores improved consistently since 2018. Have colleague engagement scores fallen materially? NO Engagement Index has increased since 2018. NO 2. Been a good bank for customers taking into account customer and advocacy performance? 3. Operated in an environment in which risk is seen as part of the way we work and think? 4. Operated in a way that reflects its stated values? Core questions Where the answer is ‘Yes’, three further questions are considered: 1. Is the underperformance due to factors within management’s reasonable control in the circumstances? 2. Can the underperformance be linked back to the performance year to which the award relates, rather than to performance developments since? 3. Is it appropriate to reflect the underperformance in the current pre-vest test (i.e. if the underperformance has not been adequately reflected in other ways such as subsequent pre-grant tests for awards granted in the interim)? If the answer to each of these questions is “Yes”, the Committee may decide that a further adjustment prior to vesting is appropriate, and it has the discretion to decide the amount. Further analysis The areas of customer and risk were investigated with a specific focus on Financial Crime (FC) remediation. – Supported by external opinion, we concluded that while NPS had declined within Ulster Bank ROI over the period, it was not considered to be due to factors which related to the 2018 award year or were within management’s reasonable control. – Although on risk there had been no material deterioration in risk culture or profile over the period, it was felt appropriate that the management performance relating to FC remediation should be assessed using the Risk & Control underpin. (1) FSCB was formerly the Banking Standards Board. NatWest Group will cease to take part in the FSCB survey from 2022. Going forwards the LTI pre vest test culture assessment will be assessed using Our View; NatWest Group’s internal colleague opinion survey. Achievement of ‘threshold level of sustainable performance’ has been evidenced. No adjustment proposed, subject to the underpins below. Evidenced by Analysis Potential underperformance? 159 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements BRC assessment and recommendation to invoke the Risk & Control underpin Following a detailed investigation by management, the BRC concluded that, while management had taken significant action to drive delivery of the FC remediation programme, there had not been a full appreciation of the scale, complexity and interdependencies of the programme at the time of the 2019 LTI grant which had resulted in technology and programme delays. This had led to target dates being pushed out for critical deliverables to return within risk appetite, with such delays not being fully reflected at grant or in subsequent grants. Following the steps above, the BRC recommended that the Committee consider applying the Risk & Control underpin for the 2019 LTI awards. Assessment by the Committee and final outcome (audited) After considering the Risk & Control underpin and the organisational significance of the FC remediation programme alongside the Group’s other priorities and performance in 2018, the Committee agreed that the awards of three individuals holding 2019 LTI awards would be adjusted. Ross McEwan was viewed as having supervisory responsibility for the delivery of the FC remediation programme and Alison Rose was considered to have had joint primary responsibility for the delivery of the programme, during 2018. The third individual, who is not currently an executive director and has not held such a role in the past, was also considered to have joint primary responsibility for the programme in 2018. The Committee considered at length the differing level of involvement of and responsibilities held by the three individuals, to ensure that fair and proportionate adjustments were made. Mr McEwan received an LTI award of 625,712 shares out of a maximum of 663,633 shares in 2019 after the application of the pre-grant performance assessment. Under the pre-vest assessment above, a further reduction of 5% of the maximum award was applied using the Risk & Control underpin, resulting in a balance of 592,530 shares. Ms Rose received a 2019 LTI award of 568,829 shares following the pre-grant test, representing a 11.76% reduction from the maximum possible award. The Committee and the Board agreed that a further reduction of 5% of Ms Rose’s 2019 LTI maximum award level would be appropriate using the Risk & Control underpin, resulting in a balance of 536,595 shares. Applying a consistent reduction for Mr McEwan and Ms Rose was considered to be appropriate as whilst Mr McEwan was not primarily responsible for the delivery of the programme, he continued to play a significant role as Group CEO and was expected to provide clear line manager direction and oversight given the importance of the FC remediation programme. These pre-vest reductions to the 2019 LTI awards of Mr McEwan and Ms Rose resulted in a total reduction, based on their respective maximum 2019 LTI awards, of 11% for Mr McEwan and 17% for Ms Rose. Further details on Mr McEwan’s arrangements can be found in the payments to past directors’ section. Scheme interests – LTI awards granted during 2021 (audited) Grant date Face value Award price Shares awarded (1) Vesting levels Performance requirements Alison Rose – – – – Between 0% – 100% with no set minimum vesting The award was subject to a pre-grant assessment of performance over 2020. A further assessment will take place following the end of the 2023 financial year to check that nothing has come to light that would change the original decision. This assessment will operate in a similar way to the framework for the 2019 LTI award pre-vest assessment, as set out above. Katie Murray 8 March 2021 £682,000 £1.6746 407,262 (1) An indicative PY 2020 award of £899k was approved in principle for Ms Rose. However, as Ms Rose confirmed in April 2020 that she did not wish to be considered for a 2021 LTI award, due to the impact of COVID-19, she declined this award. The conditional share award granted to Ms Murray equates to c.91% of base salary. The number of shares was calculated taking into account performance and the maximum potential award for Ms Murray. The award price was based on the average share price over five business days prior to grant. Subject to the pre-vest assessment, these awards will vest in equal amounts between years 2024 and 2028. Service conditions and malus provisions apply up until vest, and clawback provisions apply for a period of at least seven years from the date of grant. Pre-grant assessment of performance in 2021 (for LTI awards to be granted in 2022) For each of the core performance areas, the Committee considers whether the executive directors have achieved what would reasonably have been expected of them over the performance year prior to grant. We use a robust process to review performance against pre-set goals relevant to NatWest Group’s strategic aims for that year, but apply our judgment without a formulaic range for vesting or mechanistic weightings. Risk & Control and Stakeholder Perception underpins also apply, under which we can consider if there are any other factors that would lead to a downwards adjustment. The CFO’s performance was assessed in line with the framework set out below and also with reference to the performance of the Finance function. A further performance assessment will take place in early 2025 before any vesting takes place. This will operate in a similar way to the pre-vest framework in place for the 2019 LTI awards, as described in detail on page 159. It will consider whether anything has come to light that would indicate the assessment below did not represent a correct view of performance at that time. Annual remuneration report continued Risk & Control and Stakeholder Perception underpins We use the underpins to give us scope to consider significant risk, stakeholder or reputational matters not already captured in the performance assessment, taking into account advice from the BRC and the SBC. We can use the underpins to consider events arising during the period between grant and the end of year three. Having reviewed the facts relating to management performance with regard to FC remediation, and recognising its significance, BRC agreed it would be appropriate for the Committee to consider an adjustment to 2019 LTI vest levels. 160 NatWest Group 2021 Annual Report and Accounts Core strategic areas Measures and targets to assess pre-grant performance Performance against targets for 2021 Ratings Scorecard Financial & Business Delivery Purpose alignment Has a purpose which delivers long-term sustainable performance Run a safe and secure bank Achieve cost reduction target by reducing other expenses, excluding operating lease depreciation, by around 4% in comparison to 2020. Priority Achieve CET1 ratio targets for NatWest Group of 15.3% and NWH Group of 14.5%, with appropriate repatriation of capital to NatWest Group. Priority Above market rate net lending growth across the retail and commercial businesses, excluding UK Government financial support schemes. Increase focus on climate lending. Priority Achieve RoTE target of 0.8% for NatWest Group. Progress towards execution of the NatWest Markets strategic review by achieving the majority of the remaining RWA reduction towards our medium-term target of £20 billion by the end of 2021. Priority NatWest Group cost savings were £256 million or 4.0% meaning the target has been met. NatWest Group CET1 was 18.2% at year end and exceeded the target. In the year, NatWest Group made significant shareholder distributions. NWH Group CET1 was 15.9% with appropriate capital repatriation to NatWest Group, which also exceeded the target. Across the UK and RBSI retail and commercial businesses, and excluding UK Government support schemes, net lending increased by 2.6%. Mortgage growth exceeded the market, however commercial lending was behind market as we have sought to reduce certain exposures, through targeted sector reductions and capital actions, whilst continuing to focus on supporting customers through sustainable lending. Significant outperformance on RoTE which was 9.4% for the year, benefiting from a significant impairment release. NatWest Markets did not achieve its 2021 RWA reduction target. Partially met Scorecard Risk & Control Purpose alignment Has a purpose which delivers long-term sustainable performance Maintain a robust control environment NatWest Group and NWH Group to achieve a control environment rating of ‘2’, with evidence to support progress against regulatory responsibilities and priorities. Compliance with minimum controls under ring-fencing rules. Priority The control environment rating across NatWest Group and NWH Group remained a ‘3’, meaning the target was not met. NatWest Group is materially compliant with ring-fencing requirements. Internal arrangements including frameworks, processes and controls have been developed to facilitate demonstration of compliance with the ring-fencing regime Not met Material progress towards our desired risk culture NatWest Group and NWH Group to each achieve a ‘2’ systematic risk culture rating as a minimum, with key Enterprise Wide Risk Management Framework (EWRMF) milestones delivered and decisions made through application of a ‘purpose’ lens. Priority NWH Group risk culture has improved to systematic. However at NatWest Group level, risk culture is still assessed as being proactive and as such the target has not been met. Group key risk policies and key components of the non-financial risk framework were delivered for implementation on 1 January 2022 meaning the EWRMF element of the risk culture measure was achieved in line with target. Partially met Scorecard Customer & Stakeholder Purpose alignment Honest and fair with customers and suppliers A good citizen Meaningful increase in customer advocacy Achievement of targets across the top four customer journeys prioritised for 2021. Aiming for Net Promoter Score (NPS) improvement of: – Six points for NatWest Account Opening or be fourth or better; – Two points for NatWest Commercial Lending; – Two points for NatWest Day-to-Day Business Servicing. Maintain NPS for NatWest Mortgages or be second or better. As at Q3 2021, customer NPS performance was positive with targets met for two out of four customer NPS journeys. NatWest Account Opening NPS exceeded target by six points, up 12 points year on year and ranking third. NatWest Lending NPS missed target by one point. NatWest Day-to-Day Business Servicing has exceeded its target by five points. NatWest Mortgages NPS missed its target as a result of dropping one point and dropping one place to third. Partially met 161 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Core strategic areas Measures and targets to assess pre-grant performance Performance against targets for 2021 Ratings Increase the likelihood that customers will recommend our brands Achievement of NPS targets for our core customer facing businesses. Priority Aiming for NPS improvement of: – One point for NatWest Retail Main Bank or be fifth or better; – Four points for NatWest Business Banking and be third or better; and – Five points for Mid-Markets NPS or be first by five points. As at Q3 2021, customer NPS performance has been positive with targets met or exceeded for two out of the three core customer facing businesses. NatWest Retail main bank NPS exceeded its target by five points, up six points year on year. NatWest is now ranked third compared to equal seventh a year ago. NatWest Business Banking NPS missed its target by two points and continues to be ranked third. After a strong start to the year, NPS flattened following NatWest Group asking customers to pay back their loans (in line with approach advised by the Government), which contributed to a change in sentiment. NatWest Business Mid-Markets NPS increased by four points but met target by regaining first position and its lead over the next best competitor. Partially met Improve the financial capability of our customers, colleagues and communities Aiming to help an additional 500,000 customers to start saving at least £100. Priority NatWest Group to reach 3.2 million individuals through agreed financial capability interactions. We have supported an additional 471,000 customers to start saving at least £100. We have reached 6.1 million individuals through financial capability interactions. Partially met Remove barriers to UK enterprise growth Support removal of barriers to UK enterprise growth through networking and funding interventions. Support 35,000 businesses through enterprise programmes with 200,000 customer interactions to help them start, run and grow a business. Priority Support to be distributed: – 75% to UK regions outside London and the South East; – 60% to females; – 20% to Black, Asian and Minority Ethnic individuals; and – 10% to people intending to create purpose-led businesses. NatWest Group supported c.54,500 businesses through enterprise programmes with c.200,000 (1) customer interactions focused on supporting businesses to start, run and grow. Support was distributed: – 79% to UK regions outside London and the South East; – 60% to females; – 26% to Black, Asian and Minority Ethnic individuals; and – 52% to people intending to create purpose-led businesses. Met A guardian for future generations To be a leading bank in helping to address the climate challenge Progress towards Climate Positive own operations by 2025. Reduce carbon emissions from our direct operational footprint by 25% of NatWest Group’s 2019 baseline position. Providing £8 billion of funding and financing for climate and sustainable finance in 2021. Complete footprint estimate of 2019 total financed emissions. Develop estimates aligned with the 2015 Paris Agreement for a further four sectors. Priority Progress has continued to be made against the carbon emissions target, with NatWest Group exceeding the target with a 46% reduction in emissions in 2021. Funding and financing for climate and sustainable finance totalled £17.5 billion, meaning the target has been exceeded. NatWest Group has completed its footprint estimate of 2019 total financed emissions. We developed 2019 financed emissions estimates for a further eight sectors, meaning the target has been exceeded. Exceeded (1) Represents approximate number of interactions delivered by enterprise programmes during 2021 which is based upon data provided by third parties delivering these interactions without further independent verification by NatWest Group. Annual remuneration report continued 162 NatWest Group 2021 Annual Report and Accounts Core strategic areas Measures and targets to assess pre-grant performance Performance against targets for 2021 Ratings Scorecard People & Culture Purpose alignment A responsible and responsive employer Build the capability of our colleagues to realise their potential. Achieving the capability targets as measured through the ‘Our View’ colleague survey, NatWest Group to be 15 points above and NWH Group to be 16 points above the Global Financial Services Norm. NatWest Group and NWH Group building capability scores both missed the target by one point. Not met Build up and strengthen a healthy culture. Achieving the culture targets as measured through the Our View colleague survey. NatWest Group to be seven points above and NWH Group to be eight points above the FSCB. Priority NatWest Group and NWH Group culture scores both exceeded the target by two points. Exceeded Embed our shared purpose across the business and brands Achieving the shared purpose target as measured through the ‘Our View’ colleague survey. NatWest Group and NWH Group to be six points above the FSCB. Priority NatWest Group and NWH Group shared purpose scores exceeded the target by three points and four points respectively. Exceeded A diverse workforce and inclusive environment To increase the percentage of females in the top three layers of NatWest Group from 39% to 40% on aggregate. To increase the percentage of Black, Asian and Minority Ethnic UK employees in the top four layers of NatWest Group from 10% to 11% on aggregate. Achieving the inclusion target as measured through the ‘Our View’ colleague survey. NatWest Group and NWH Group to be 13 points above the Global Financial Services Norm. The percentage of females in top three layers of NatWest Group, in aggregate, increased from 39% to 40% as at Q3 2021, meaning the target has been met. The percentage of Black, Asian and Minority Ethnic UK employees in the top four layers of NatWest Group, in aggregate, increased from 10% to 11% as at Q3 2021, meaning the target has been met. The NatWest Group and NWH Group inclusion index scores both exceeded target by one point. Met Outcome of the pre-grant assessment for LTI awards to be granted in 2022 (audited) In assessing performance against the above framework, the Committee also received advice from the BRC and the SBC in making its final assessment. As part of its ‘performance in the round’ judgment, the Committee noted that targets had been met or exceeded for five of the areas above, while five were partially met and two were missed, albeit narrowly in both cases. The highlighted priority measures were a key focus for the Committee as it applied its judgment to assess performance for the year. Alison Rose (audited) Turning to individual performance, Ms Rose was considered to have had a strong year. NatWest Group’s underlying financial performance was viewed as strong, which had resulted in significant shareholder distributions across 2021. Progress had been made against NatWest Group’s Enterprise and Climate goals and NatWest Group’s contribution to COP26 was considered to have been strong. People scores remained strong, despite a marginal ‘miss’ on building capability, and Customer scores were improved in most areas. NatWest Group continued to be behind target on its Risk performance, although progress had been made in some areas. Taking into account performance against the core goals as set out above, the Committee agreed an LTI award level of £1,598,000 would be appropriate, which represents 145% of salary and 83% of the maximum LTI award. In order to ensure parity of treatment with the wider workforce, the LTI outcome reflected an adjustment to mirror the downward adjustment to the 2021 bonus pool for the fine imposed by the FCA on NatWest Bank Plc for breaches of the Money Laundering Regulations 2007 and ongoing FC remediation considerations. 163 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Katie Murray (audited) Ms Murray’s performance was also considered to be strong in 2021, with highlights including her proactive engagement with investors, the refresh of NatWest Group’s Annual Report and Accounts process and reporting frameworks and on scenario modelling, with improvements having been delivered in forecasting capabilities. Ms Murray had shown excellent leadership on the cost and investment agenda and had made progress on the Finance transformation agenda. In light of performance achieved, the Committee agreed that an LTI award of £1,057,500 would be appropriate, which represents 141% of salary and 71% of the maximum award available. In line with the approach taken for Ms Rose, the LTI outcome reflected an adjustment to mirror the downward adjustment to the 2021 bonus pool for the fine imposed on NatWest Bank Plc for breaches of the Money Laundering Regulations 2007 and ongoing FC remediation considerations. Maximum award Reduction for pre- grant performance LTI award to be made in 2022 Award level agreed by Committee (% of maximum) Alison Rose £1,925,000 £327,000 £1,598,000 83% Katie Murray £1,500,000 £442,500 £1,057,500 71% Remuneration for the Chairman and non-executive directors A change was made to the level of fees for the Group Performance and Remuneration Committee, with the Committee Chairman receiving an increase from £60,000 to £68,000 per annum and members receiving an increase from £30,000 to £34,000 per an num with effect from 1 July 2021. Committee fees had not changed since 2014 and the review took place after considering the time commitment against the other NatWest Group Board Committees and market practice. The number of meetings remained consistently high and was not expected to change due to the heavily-regulated nature of remuneration at large banks. The annual engagement with our stakeholders on remuneration also required a significant amount of work, particularly for the Committee Chairman. After reflecting on current and expected future time commitment, it was agreed to bring the rates in line with those currently paid for the BRC and the Group Audit Committee. No directors are involved in decisions regarding their own remuneration. The temporary increase in the fees for the Chairman of the CAP, to reflect additional engagement with the workforce due to COVID-19, came to an end on 1 April 2021 with fees reverting from £30,000 to £15,000 per annum. For NatWest Group plc Board directors who also serve on the Boards and Committees of NatWest Holdings Limited, National Westminster Bank Plc, The Royal Bank of Scotland plc and Ulster Bank Limited, the fees below reflect membership of all five boards and their respective Board Committees. Directors may also receive fees for membership of other subsidiary company Boards and Committees, the value of which is included below. No variable pay is provided to the Chairman and non-executive directors. Total remuneration for the Chairman and non-executive directors in 2021 (audited) Fees Benefits (1) Total Chairman (composite fee) 2021 £000 2020 £000 2021 £000 2020 £000 2021 £000 2020 £000 Howard Davies 750 750 13 12 763 762 Non-executive directors Fees Benefits (2) Total Board £000 N&G £000 GAC £000 BRC £000 RemCo £000 SBC £000 TIC £000 SID £000 CAP £000 Other £000 2021 £000 2020 £000 2021 £000 2020 £000 2021 £000 2020 £000 Frank Dangeard (3) 262 262 260 1 1 263 261 Patrick Flynn 80 15 68 34 30 227 227 1 3 228 230 Morten Friis 80 15 34 68 197 168 22 7 219 175 Robert Gillespie 80 15 34 34 64 227 221 2 3 229 224 Yasmin Jetha 80 30 60 170 128 1 – 171 128 Mike Rogers 80 32 60 172 170 – 2 172 172 Mark Seligman 80 15 34 32 30 191 189 1 1 192 190 Lena Wilson 80 34 32 30 19 195 180 5 4 200 184 (1) The benefits column for Howard Davies, Chairman, includes private medical cover, life cover and expenses in connection with attendance at Board meetings. In April 2020, the Chairman announced he would donate 25% of his fees for the rest of 2020 to the NET Coronavirus Appeal. (2) Non-executive directors are reimbursed expenses incurred in connection with travel and attendance at Board meetings. (3) Under the ‘Other’ column, Frank Dangeard received a composite fee as Chairman of the NatWest Markets Plc (NWM Plc) Board. Key to table: N&G Group Nominations and Governance Committee SBC Group Sustainable Banking Committee GAC Group Audit Committee TIC Technology and Innovation Committee BRC Group Board Risk Committee SID Senior Independent Director RemCo Group Performance and Remuneration Committee CAP Colleague Advisory Panel Annual remuneration report continued 164 NatWest Group 2021 Annual Report and Accounts Payments for loss of office and payments to past directors (audited) There were no payments for loss of office made to directors in 2021. Ross McEwan stepped down from the Board as CEO in October 2019. Mr McEwan qualified for good leaver treatment meaning his outstanding LTI awards continue to vest on their scheduled vesting dates and pro-rating does not apply. All awards remain subject to a performance assessment prior to vesting and the potential application of malus and clawback provisions. As set out earlier in this report, Mr McEwan received an LTI award of 625,712 shares in 2019 which was reduced to 592,530 shares following the application of the pre-vest assessment and Risk and Control underpin. The remaining shares are due to vest between 2022 and 2026, subject to good leaver criteria continuing to be met. The value of the shares is £1,321,342 based on the average share price over October to December 2021. A further disclosure will be made in next year’s report following the pre-vest assessment of the final LTI award granted to Mr McEwan in 2020. In addition, Mr McEwan received assistance with his UK tax return for his final year of employment with NatWest Group and a payment was made in relation to taxes incurred as a result of a business trip to California while in employment, with payments totalling £10,700. There are no other payments to past directors to disclose for 2021. Implementation of remuneration policy in 2022 Pay arrangements Both executive directors will receive LTI awards in March 2022 in respect of the 2021 performance year. You can find details of these awards on page 164. Under the existing Policy, a salary increase of 2% has been agreed for executive directors from 1 April 2022, which is below the expected average salary increase for the wider global workforce of 3.6%. Subject to the new Policy being approved by shareholders at the 2022 AGM, the revised annual pay arrangements that will apply from the date of the AGM for the 2022 performance year are set out below. Salary (1 Jan 2022) Salary (1 April 2022) Standard benefits (1) Pension Fixed share allowance (2) Maximum bonus award for 2022 (3) Maximum RSP award for 2022 (4) Alison Rose £1,100,000 £1,122,000 £26,250 10% of salary 100% of salary 85% of salary 125% of salary Katie Murray £750,000 £765,000 £26,250 10% of salary 100% of salary 85% of salary 125% of salary (1) Amounts shown relates to standard benefit funding. Executive directors are also entitled to travel assistance and security arrangements in line with the policy. We will disclose the value of benefits received each year. (2) Fixed share allowance is payable broadly in arrears, currently in four instalments per year. The first payment for January to March 2022 will be made under the existing Policy, with the shares released in equal amounts over a three-year period. The remaining instalments for 2022 will be made under the new Policy, with shares released in equal amounts over a five-year period. (3) The maximum bonus award under the Policy is set at 100% of base salary, however, in the first year of implementation this will be limited to 85% of base salary as part of a phased increase. The calculation of award maximum is based on salary earned over the year. As the salary increase is effective from 1 April, three months of the year will be based on existing salary with nine months based on the post April salary. The annual bonus award is expected to vest at 50% where target performance is achieved across the scorecard. (4) The maximum RSP award under the Policy will be set at 150% of base salary, however, in the first year of implementation this will be limited to 125% of base salary as part of a phased increase. As per above, the calculation of maximum is based on salary earned over the year. The RSP award is normally expected to vest in full, subject to underpin criteria that will ensure there is no payment for failure. Annual bonus and RSP Subject to being approved by shareholders at the 2022 AGM, the Policy on pages 143 to 147 will apply to the executive directors from 2022. The Committee intends to implement the new Policy as follows. Annual bonus The 2022 bonus scorecard will be based on weighted performance measures and appropriately stretching targets across financial and non-financial areas that align with our purpose-led strategy. For 2022, these will be apportioned as follows: – Financial performance measures will represent 60% of the overall scorecard. Target ranges have been set in line with the budget. A qualitative overlay will be applied to consider actual performance and how the outcome has been achieved. Any M&A activity and performance versus the market will be considered in the final assessment; – Non-financial measures will be focused across Climate, Customer, Purpose, Culture and People, Enterprise and Capability. For 2022, these areas will represent an aggregate of 35% of the scorecard; – Personal measures will represent 5% of the overall scorecard and the performance of each executive director will be based on a discretionary assessment at year end; and – A downward Risk modifier will also apply, enabling risk performance to be assessed and awards reduced, potentially to zero, as required. This will be based on an assessment of: – Annual risk performance assessment of Franchises/Functions/Legal Entities; – Annual assessment of individual performance against executive director risk and control goals; and – Qualitative behavioural observations from the Group Chief Risk Officer. In the first year of implementation the annual bonus will be granted at a maximum value of 85% of base salary. 165 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Annual remuneration report continued Annual bonus performance assessment under the new Policy for 2022 Threshold and maximum targets will be disclosed retrospectively at the end of the performance period in the 2022 Directors’ Remuneration Report, alongside the actual level of performance achieved and associated narrative. No award will be made if threshold performance, as determined by the Committee, is not achieved. The level of the award to be paid will vary between 10% for threshold performance and 100% for maximum performance. Target performance will pay out at 50% of maximum opportunity. All assessments of performance are subject to the Committee’s judgment to determine the appropriate outcome. Discretion will only be used by the Committee when the application of the formulaic performance outcome drives an unrepresentative outcome or when it is necessary to take into account strategic, economic or societal impacts that were not or could not have been accounted for at the point of agreeing the bonus scorecard. Annual bonus performance measure and targets for 2022 Category Performance measures Target Weighting % Financial Go-forward group (1) ROTE. Targets set and the extent of their achievement will be disclosed in the 2022 Annual Report as the Committee considers them to be commercially sensitive at this point in time. 30% Financial (60%) Underlying income growth of the Go-forward group. Income excluding notable items to exceed £11.0 billion in the Go-forward group. 10% Go-forward group operating expenses, excluding litigation and conduct costs. Around 3% cost reduction. 10% Progress to medium-term capital target. CET1 ratio of around 14% post distributions. 10% Non-Financial Climate Progress towards halving emissions for own direct operations by 2025. Funding and financing committed to climate and sustainable finance. Develop climate transition plan for publication. Maintain 40% reduction in carbon emissions from our direct operational footprint against 2019 baseline. £17.5 billion of funding and financing for climate and sustainable finance in 2022. Development of NWG climate transition plan for publication with the 2022 annual results. 10% Strategic (35%) Customer Achieving Net Promoter Score (NPS) targets on an aggregated basis for NatWest Group. NPS improvement of: – One point for NatWest Retail Banking or be 2nd or better – Two points for NatWest Premier Banking – One point for Coutts – One point for NatWest Business Banking and be 3rd or better – Two points for RBSI Maintain NPS for NatWest Commercial & Corporate Banking and maintain 1st position. Achieve a Customer Touchpoint Rating of 70 for NatWest Markets (2) . 10% Purpose, Culture and People Progress against purpose targets. Progress against culture targets. Number of females in senior roles. Black, Asian and Minority Ethnic representation. Maintain current purpose score of 90. Maintain current culture score of 83. Progression towards the achievement of our externally published long-term target (2030) for gender of 50%. Increase percentage of females in top three layers of the organisation to 41%. Progression towards the achievement of our externally published medium-term target (2025) for ethnicity of 15%. Increase percentage of Black, Asian and Minority Ethnic colleagues in top four layers of the organisation to 12%. 10% 166 NatWest Group 2021 Annual Report and Accounts Enterprise & Capability Support a Springboard to Sustainable Recovery and prioritise support for harder to reach groups. Encourage youth participation in enterprise. Increase number of customers to save at least £100. Number of financial capability interactions which require active engagement, give knowledge or skills or change behaviour. Support 35,000 businesses through enterprise programmes with 250,000 customer interactions to start, run and grow a business. Support being distributed as follows: – 75% support to UK regions outside London & South East; – 60% support to females; – 20% support to Black, Asian and Minority Ethnic individuals; – 20% to people intending to create purpose-led businesses. 30,000 young adults engaged in enterprise and entrepreneurship activity. Help an additional 530,000 customers to start saving. Reach 4 million people through financial capability interactions. 5% Personal (5%) Discretionary assessment at year end for both executive directors. CEO performance is based on recommendation from Chairman taking into account additional individual performance factors. CFO performance is based on recommendation from CEO taking into account individual performance goals and the performance of the Finance function. 5% Risk (0-100%) Risk performance assessment based on Group, NatWest Holdings, Functional (CFO only) and individual risk performance. Discretionary downwards modifier. 0 -100% (1) Go-forward group excludes Ulster Bank RoI. (2) As NPS is not available for the NatWest Markets business, an internal Customer Touchpoint Rating is applied to assess NatWest Markets’ customer performance. RSP performance assessment under the new Policy for 2022 The new tests are simpler than those currently operated under the existing LTI-only construct. The RSP is bolstered by the annual bonus, which ensures that executive directors are also incentivised to deliver on the key strategic priorities of NatWest Group, with robust weighted performance measures as set out on the previous page. After the pre-grant test and underpin, the RSP would be expected to pay out at 100% in the vast majority of cases to deliver the expected value under the construct. In the first year of implementation, the RSP will be granted at a maximum value of 125% of base salary. This will rise to 150% of base salary in the second year of the new Policy. Pre-grant test The first RSP award will be granted in early 2023. Executive directors will be granted an RSP award provided the Committee considers performance over 2022 has been satisfactory, based on an assessment against our performance management framework. Pre-vest underpin RSP awards will not be subject to further performance conditions. However, before vesting, the Committee will review the outcomes of the business against the following underpin criteria. A sustainable level of performance over the period will be considered with reference to: 1. the level of capital held relative to the maximum distributable amount; 2. total distributions paid relative to our distribution policy; and 3. any material deterioration in the risk or regulatory compliance profile or control environment of NatWest Group, or a serious conduct or reputational event. The Committee will make an assessment at the end of the three-year performance period to determine whether sustainable performance has been achieved. The Committee will refer to the above underpin criteria in determining whether this has been the case. Following the Committee’s assessment, RSP awards may vest in full, in part or lapse in their entirety. The Committee will also retain the right to consider other factors and apply discretion before making a decision on the final vesting outcome. This will mitigate any potential unintended outcomes that might arise and ensure that there is a fair outcome. The Committee will explain its reasons for applying discretion in either direction, or for not doing so. The Committee reserves the right to change the underpin criteria when granting new RSP awards over the Policy period. 167 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Annual remuneration report continued Chairman and non-executive directors’ annual fees for 2022 Following a review of fees paid during 2021, the only change is to increase the fees for the Senior Independent Director role. The rate will increase from £30,000 per annum to £34,000 per annum. This is closer to the fees paid for the equivalent role at peer banks and also aligns with the rates currently being paid to members of the Group Board Risk Committee, the Group Audit Committee and the Group Performance and Remuneration Committee. The change will apply from 1 January 2022 and is within the limits allowed under the existing remuneration policy. Fees for NatWest Group plc Board (1) Rates from 1 January 2022 Chairman (composite fee) £750,000 Non-executive director basic fee £80,000 Senior Independent Director £34,000 Fees for NatWest Group plc Board Committees (1) Member Chairman Group Board Risk Committee £34,000 £68,000 Group Audit Committee £34,000 £68,000 Group Performance and Remuneration Committee £34,000 £68,000 Group Sustainable Banking Committee £30,000 £60,000 Technology and Innovation Committee £30,000 £60,000 Group Nominations and Governance Committee £15,000 – Other fees for NatWest Group plc Board directors Chairman of NatWest Markets Plc (composite fee to cover all boards and committees) £264,000 Chairman of the Colleague Advisory Panel £15,000 (1) No additional fees are payable where the director is also a member of the boards and respective board committees of NatWest Holdings Limited, National Westminster Bank Plc and The Royal Bank of Scotland plc. Where appropriate, directors receive additional fees for membership of other subsidiary company boards and committees including NatWest Markets Plc. We will disclose the value of fees received in this report each year. 125% of base salary 85% of base salary Annual bonus perf. assessment period RSP pre-grant perf. period Cash vesting Share vesting Grant Given 60% of variable is in the RSP, there would normally be no deferral requirements for the bonus 210% of base salary (maximum variable pay for 2022) Base salary Pension FSA RSP Post-vesting retention period Bonus T otal Y ear 2030 2031 2029 2027 2028 2026 2025 2024 2023 2022 100% 100% 10% 20% 20% 20% 20% 20% 20% 20% Underpin assessment 20% Share release 20% 20% Structure and timing o f p ayments under the ne w Policy f or 2022 168 NatWest Group 2021 Annual Report and Accounts Other external directorships The Board must approve any additional appointments undertaken by directors outside NatWest Group. Steps are in place to make sure that directors comply with regulatory limits on the number of directorships held. The Board also considers whether it is appropriate for executive directors to retain any remuneration from any new external roles, depending on the appointment. You can find details of current external appointments in the biographies section of the Corporate Governance report. Annual change in directors’ pay compared to average change in employee pay Remuneration for employees is based on salary, benefits and annual bonus. The CEO and CFO receive fixed share allowances and are eligible for LTI awards rather than an annual bonus. The Chairman and non-executive directors receive fees rather than salary and do not receive any variable pay. We regularly review membership of Board Committees and changes in membership will impact the level of fees paid to non-executive directors from one year to the next. The benefits figures for non-executive directors can also change significantly year on year depending on the amount of travel undertaken in connection with Board meetings. 2020 to 2021 2019 to 2020 Annual percentage change Salary Benefits (1) Annual Bonus Salary Benefits (1) Annual Bonus UK employees (2) 2.02% 4.68% 35.24% 2.86% 1.70% -32.4% Executive directors Alison Rose (3) 0% 0% n/a – – n/a Katie Murray 0% 0% n/a 0% 0% n/a Chairman and non-executive directors Fees Benefits Annual Bonus Fees Benefits Annual Bonus Howard Davies 0% 8% n/a 0% 9% n/a Frank Dangeard 1% 0% n/a 0% -75% n/a Patrick Flynn 0% -67% n/a 2% -70% n/a Morten Friis 17% 214% n/a 14% -80% n/a Robert Gillespie 3% -33% n/a -3% -84% n/a Yasmin Jetha (4) 33% 100% n/a – – n/a Mike Rogers 1% -100% n/a 0% -83% n/a Mark Seligman 1% 0% n/a -4% -88% n/a Lena Wilson 8% 25% n/a 16% -64% n/a (1) Standard benefit funding for executive directors has remained unchanged. The figures above excludes any other benefits to executive directors such as travel assistance in connection with company business, the value of which is disclosed each year in the total remuneration table. (2) NatWest Group plc is a holding company and is not an employing entity. Therefore the disclosure above is made on a voluntary basis to compare any change in directors’ pay with all employees based in the UK. The data above is based on full-year average salary costs of UK based employees of NatWest Group, excluding the CEO and the CFO. This is considered to be the most representative comparator group, as it covers the majority of employees and the CEO and CFO are based in the UK. (3) Alison Rose, CEO, was appointed on 1 November 2019 and therefore the annual change comparison to 2020 is not relevant. No change has been made to Ms Rose’s salary over the last two years. (4) Yasmin Jetha re-joined the Board on 1 April 2020, so there is no comparison for the 2019 to 2020 annual change. 169 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Annual remuneration report continued CEO to employee pay ratios The ratios compare the total pay of the CEO against the pay of three UK employees, whose earnings represent the lower, median and upper quartiles of the UK employee population. A significant proportion of the CEO’s pay is delivered in LTI awards. As these are linked to performance and share price movements, this part of the ratio can fluctuate significantly from one year to the next. None of the three employees identified this year received LTI awards. Information based on salary only is included as a further comparison. The pay ratios reflect the diverse range of roles and pay levels across NatWest Group as a large financial services company. The median employee for 2021 works in Services and the median pay ratio is consistent with the pay, reward and progression policies for UK employees taken as a whole. We are committed to paying each individual a fair rate for the role performed, using consistent reward policies and offering opportunities for progression. We set out further information on our fair pay approach earlier in this report and in the supporting ESG Supplement at natwestgroup.com. The change in the median pay ratio since 2018 is largely driven by the more volatile nature of pay for the CEO. In April 2020, the CEO decided to forgo 25% of her fixed pay for the rest of the year which also contributed to the ratio falling in 2020 before returning to more typical levels in 2021. Based on a comparison of salary only, the trend is more stable. Pay ratios Remuneration values (£000) Year Methodology P25 (LQ) P50 (Median) P75 (UQ) Calculation CEO Y25 (LQ) Y50 (Median) Y75 (UQ) 2018 A Total remuneration 143:1 97:1 56:1 Total remuneration 3,578 25 37 64 Salary only 44:1 30:1 19:1 Salary only 1,000 23 33 51 2019 A Total remuneration 175:1 118:1 69:1 Total remuneration 4,517 26 38 66 Salary only 44:1 30:1 19:1 Salary only 1,017 23 34 52 2020 A Total remuneration 99:1 66:1 39:1 Total remuneration 2,615 26 40 66 Salary only 46:1 31:1 20:1 Salary only 1,100 24 36 54 2021 A Total remuneration 130:1 87:1 51:1 Total remuneration 3,588 28 41 70 Salary only 44:1 29:1 20:1 Salary only 1,100 25 37 55 Supplementary information on the pay ratio table: (1) The data for 2021 is based on remuneration earned by Alison Rose, as set out in the single figure of remuneration table in this report. (2) The employees at the 25th, 50th and 75th percentiles (lower, median and upper quartiles) were determined as at 31 December of the relevant year, based on full-time equivalent remuneration for all UK employees. This includes fixed pay (salary, pension funding and where relevant benefit funding and other allowances) and also any variable pay (based on the amount to be paid). For employees who work part-time, fixed pay is grossed up to the full-time equivalent. (3) ‘Option A’ methodology was selected as this is considered the most statistically accurate method under the reporting regulations. UK employees receive a pension funding allowance set as a percentage of salary. Some employees, but not the CEO, continue to participate in the defined benefit pension scheme. Under this, it would be possible to recognise a higher value, which would in turn reduce the ratios. However, for simplicity and consistency with regulatory disclosures, we have included the pension funding allowance value in the calculation for all employees. (4) The data for the three employees identified has been considered and fairly reflects pay at the relevant quartiles among the UK employee population. Each of the three individuals was a full-time employee during the year and none received an exceptional award that would otherwise inflate their pay figure Summary of r emuneration le vels for emplo yees in 2021 49,171 employ ees earned total r emuneration up to £50,000 12,678 employ ees earned total r emuneration between £50,000 and £100,000 5,256 employ ees earned total r emuneration between £100,000 and £250,000 790 employ ees earned total r emuneration ov er £250,000 (1) For 2021, the disclosure of remuneration levels for employees includes anyone employed by NatWest Group during the year. This is a change of approach from previous years when we only included colleagues employed at year end. 170 NatWest Group 2021 Annual Report and Accounts Directors’ interests in NatWest Group plc shares (audited) Under the existing shareholding requirements, the CEO and CFO need to build up and maintain shares to the value of 400% of salary and 250% of salary respectively. The requirements apply both during employment and for two years after leaving, in line with best practice. Procedures are in place to enforce the shareholding requirements, and you can find further details on page 147. Subject to approval of the new Policy by shareholders at the 2022 AGM, the requirements will be increased to 500% of salary for the CEO and 300% of salary for the CFO. 0 100 200 300 400 500 600 700 Alison Rose Katie Murray 168% 316% £1.1m 49% 267% 501% 59% 442% Values as percentage of salary Shares held outright Shares awards still subject to performance Shares awards that count towards requirement Shareholding requirement Share interests held by directors Alison Rose Katie Murray Howard Davies Frank Dangeard Patrick Flynn Morten Friis (2) Robert Gillespie Yasmin Jetha Mike Rogers Mark Seligman (3) Lena Wilson Shares held (1) 2,155,298 886,232 100,000 5,000 20,000 20,000 25,000 30,000 20,000 30,000 20,000 Shareholding requirement 400% of salary 250% of salary – – – – – – – – – Position against requirement 501% of salary 316% of salary – – – – – – – – – (1) Shares owned beneficially as at 31 December 2021 or at the date of stepping down from the Board if earlier. Includes shares held by persons closely associated with the directors. As at 17 February 2022, there were no changes to the shares held as shown above. Share awards, as shown below, are also included for the purposes of the shareholding requirement once any performance assessment has been completed. All share awards are included net-of-taxes due to be paid on vesting. The position against the requirement was calculated as at 31 December 2021, at which point both executive directors exceeded the requirement based on the closing price of £2.257. (2) The share interest held is over 10,000 American Depositary Receipts representing 20,000 ordinary shares. (3) 10,000 shares are held in the name of M Seligman & Co Limited, of which Mr Seligman and Louise Seligman are shareholders. Share awards under share plans Year Awards held 1 Jan 2021 Awards granted Award price £ Awards vested Awards lapsed Awards forfeited Awards held 31 Dec 2021 Expected vesting dates Alison Rose LTI award 2016 100,780 2.26 100,780 0 LTI award 2017 223,677 2.41 55,919 167,758 (1) 07.03.22 – 07.03.24 LTI award 2018 488,906 2.66 92,140 28,206 368,560 (1) 07.03.22 – 07.03.25 LTI award 2019 568,829 2.64 568,829 (2) 07.03.22 – 07.03.26 LTI award 2020 881,679 1.70 881,679 (2) 07.03.23 – 07.03.27 2,263,871 248,839 28,206 1,986,826 Total LTI awards subject to service 536,318 (1) Total LTI awards subject to performance and service 1,450,508 (2) Katie Murray LTI award 2016 9,142 2.26 9,142 0 Deferred award 2017 34,171 2.41 17,087 17,084 (1) 07.03.22 LTI award 2017 62,382 2.41 31,191 31,191 (1) 07.03.22 Deferred award 2018 80,387 2.66 26,796 53,591 (1) 07.03.22 – 07.03.23 Deferred award 2019 226,388 2.64 17,443 208,945 (1) 07.03.22 – 07.03.26 LTI award 2020 646,565 1.70 646,565 (2) 07.03.23 – 07.03.27 Sharesave 2020 3,200 1.12 3,200 (3) 18.12.23 LTI award 2021 407,262 1.67 407,262 (2) 07.03.24 – 07.03.28 1,062,235 407,262 101,659 1,367,838 Total LTI and deferred awards subject to service 310,811 (1) Total LTI awards subject to performance and service 1,053,827 (2) Total Sharesave options 3,200 (3) (1) Performance assessment has taken place and awards remain subject to deferral and employment conditions before vesting. These awards count on a net of tax basis towards meeting the shareholding requirement. (2) Awards are subject to the LTI pre-vest performance assessment along with deferral and employment conditions before vesting. See earlier in this report for the pre-vest assessment of the 2019 LTI award. The first vesting of this award is due to take place in March 2022, which will be reflected in next year’s table together with the shares lapsed for performance. (3) Sharesave options enable colleagues to save from their salary with an option to buy shares at the end of the savings period. The award price is the price at which shares can be bought. Sharesave options are normally exercisable for a period of six months from the maturity date at an option price that is discounted by up to 20% of the market value around the time of the award. 171 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Annual remuneration report continued CEO pay over the same period 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Total remuneration (£000s) (1) AR 1,401 2,615 3,588 RM 393 1,878 3,492 3,702 3,487 3,578 4,066 SH 1,646 1,235 Annual bonus against maximum opportunity SH 0% 0% n/a n/a n/a n/a n/a n/a n/a n/a LTI vesting rates against maximum opportunity (2) AR 60% 82% 83% RM 73% 62% 56% 89% 41% 78% SH 0% 0% (1) CEOs are Alison Rose (AR), Ross McEwan (RM) and Stephen Hester (SH) with figures based on the single figure of remuneration for the relevant year. (2) Maximum opportunity is set according to the approved policy and, for LTI awards granted in 2015 and onwards, the regulatory cap. Relative importance of spend on pay 2021 £m 2020 £m Change Remuneration paid to all employees (1,2) 3,156 3,324 -5.05% Distributions to holders of ordinary shares (3) 693 – n/a Distributions to holders of preference shares and paid-in equity 318 381 -16.5% (1) Remuneration paid to all employees represents total staff expenses as per Note 3 to the consolidated financial statements, exclusive of social security and other staff costs. (2) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8 to the consolidated financial statements. (3) Dividends proposed for payment during 2020 were withdrawn in line with regulatory requirements. The Board has confirmed its intention to pay a dividend of 7.5p per ordinary share in respect of financial year 2021, subject to approval by shareholders at the Annual General Meeting on 28 April 2022. Total Shareholder Return (TSR) performance The graph compares the TSR performance of NatWest Group with companies comprising the FTSE 100 Index over the last 10 years. We have selected this index because it represents a cross-section of leading UK companies. We have added the TSR for FTSE UK banks for the same period as a further comparison. Source: Datastream 250 200 150 100 50 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 FTSE 100 FTSE UK Banks NatWest Group Shareholder dilution and share sourcing NatWest Group can use new issue, market-purchase or treasury shares to deliver shares that are required for employee share plans. Best practice dilution limits are monitored and govern the number of shares that may be issued to satisfy share plan awards. 172 NatWest Group 2021 Annual Report and Accounts Statement of shareholder voting The tables below set out the latest resolutions to approve the Directors’ Remuneration Policy and the Annual remuneration report. Directors’ Remuneration Policy – 2020 Annual remuneration report – 2021 Vote Number of shares Percentage Vote Number of shares Percentage For 39,142,662,676 90.14% For 40,070,096,464 99.89% Against 4,281,775,516 9.86% Against 42,368,132 0.11% Withheld 12,426,752 – Withheld 1,371,168,504 – The Group Performance and Remuneration Committee Membership All members of the Committee are independent non-executive directors. In order to be considered for the role of Committee Chairman, an individual must first have served on a remuneration committee for at least 12 months. During 2021, Robert Gillespie was the Committee Chairman. Frank Dangeard, Mike Rogers, Mark Seligman and Lena Wilson were members. The Committee held eight scheduled meetings in 2021 and a further three ad hoc meetings. You can find further details on members and attendance in the Corporate Governance report on page 103. Role of the Committee The Committee is responsible for: – approving the remuneration policy for all colleagues and reviewing the effectiveness of its implementation; – reviewing performance and making recommendations to the Board on arrangements for executive directors; – approving remuneration for a defined ‘in-scope’ population comprising members and attendees of the Senior Executive Committees and direct reports of the CEO, control function heads and the Company Secretary. The Committee also approves arrangements where individuals earn total compensation above £1 million; and – setting the remuneration framework and principles for colleagues identified as Material Risk Takers (MRTs). The terms of reference (ToR) of the Committee are reviewed annually and available on natwestgroup.com Main activities One of the main activities of the Committee was to reflect on stakeholder feedback on the new Policy for executive directors, and developing revised proposals as set out in this report. Wider workforce Executive remuneration Governance and regulatory – Approving and overseeing the NatWest Group-wide Remuneration Policy. – Considering how pay has been allocated across the workforce, including analysis by colleague level, geography and diversity. – Reviewing fixed pay proposals. – Approving Sharesave offers to colleagues. – Reviewing performance over the year and approving bonus pools for the business areas. – Reviewing gender and ethnicity pay gap reporting. – Reviewing performance assessments and remuneration arrangements for the Committee’s ‘in scope’ population. – Setting performance objectives for Senior Executives for the year ahead. – Approving vesting and grant levels for LTI awards. – Approving remuneration for senior hires and arrangements for any leavers. – Engaging with stakeholders on our remuneration proposals. – Reviewing and approving the Directors’ Remuneration Report. – Receiving benchmarking data on executive pay and peer practice. – Approving agenda planners and ensuring the Committee is meeting all its obligations under its ToR. – Considering matters escalated by other Board Committees and subsidiary Performance and Remuneration Committees. – Overseeing the MRT identification process. – Approving submissions through the year to the UK regulators. – Receiving quarterly updates on accountability reviews and approving accountability decisions for the population within its governance. – Carrying out the annual evaluation of its performance. 173 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Annual remuneration report continued Operation of the policy The remuneration policy operated broadly as intended during the year, with adjustments made for performance where appropriate. Some shareholders continued to express concerns with some parts of the policy for executive directors, as explained earlier in this report, and the challenges in maintaining a competitive level of pay for executive directors have heightened over the past year. This led the Committee to believe that amendments should be proposed to shareholders at the 2022 AGM. Managing conflicts To mitigate potential conflicts of interest, directors are not involved in decisions regarding their own remuneration and the Committee rather than management appoint remuneration advisers. Attendees also play an important role in advising the Committee but are not present when their own remuneration is discussed. The Group Chief People & Transformation Officer may be present when discussions take place on senior executive pay, as there is considerable benefit from her participation. However, she is never present for discussions on her remuneration. Committee Advisers PricewaterhouseCoopers LLP (PwC) was first appointed as remuneration adviser by the Committee in 2010 and reappointed in 2021, following an annual review of the quality of advice and the level of fees. PwC is a signatory to the voluntary code of conduct in relation to remuneration consulting in the UK. The Committee also took account of the views of the Chairman, the CEO, the CFO, the Group Chief HR Officer, the Group Chief People & Transformation Officer, the Director of Reward & Employment, the Group Chief Risk Officer and the Group Chief Audit Executive. The Committee also received input from the BRC, the GAC, the SBC and the Performance and Remuneration Committees for the principal legal entities across NatWest Group. The professional services PwC provides in the ordinary course of business include assurance, advisory, tax and legal advice to NatWest Group subsidiaries. The Committee is satisfied that the advice received is independent and objective. We also receive an annual statement setting out the protocols PwC has followed to maintain independence. There are no connections between PwC and individual directors to be disclosed. Fees paid to PwC for advising the Committee are based on a fixed fee structure with any exceptional items charged on a time/cost basis. Fees for 2021 in relation to directors’ remuneration rose compared to last year primarily due to additional work in relation to the new Policy, amounting to £211,041 in total excluding VAT (2020 – £136,830 excluding VAT). Performance evaluation The 2021 performance evaluation for the Committee was conducted externally by Independent Board Evaluation. The Committee was considered to have managed a number of challenging items well in a difficult year. It was noted there had been a number of unscheduled meetings, but on balance the Committee recognised that additional discussions had been necessary. The Committee requested the governance team to explore whether there was an opportunity to simplify and streamline the remuneration governance framework, with it being noted that remuneration outcomes currently flowed through a number of key legal entity performance and remuneration committees and board risk committees. Robert Gillespie Chairman of the NatWest Group Performance and Remuneration Committee 17 February 2022 174 NatWest Group 2021 Annual Report and Accounts Other remuneration disclosures This section contains disclosures which are required in accordance with UK regulatory requirements and the Basel Committee on Banking Supervision Pillar 3 disclosure requirements. They also take into account the European Banking Authority (EBA) guidelines on sound remuneration policies. It should be read in conjunction with the Directors’ remuneration report starting on page 136. Remuneration policy for all colleagues The remuneration policy supports the business strategy and is designed to promote the long-term success of NatWest Group. It aims to reward the delivery of good performance provided this is achieved in a manner consistent with NatWest Group values and within acceptable risk parameters. The remuneration policy applies the same principles to everyone, including Material Risk Takers (MRTs), with some minor adjustments where necessary to comply with local regulatory requirements. The main elements of the Policy are set out below. Base salary The purpose is to provide a competitive level of fixed cash remuneration. Operation We review base salaries annually to ensure they reflect the talents, skills and competencies that the individual brings to the business. Role-based allowance Certain MRT roles receive role-based allowances in order to provide fixed pay that reflects the skills and experience required for the role. Operation Role-based allowances are fixed allowances which form an element of overall fixed remuneration for regulatory purposes. They are based on the role the individual performs. They are delivered in cash and/or shares depending on the level of the allowance and the seniority of the recipient. Shares are subject to a minimum three-year retention period. Benefits and pension The purpose is to provide a range of flexible and competitive benefits. Operation In most jurisdictions, benefits or a cash equivalent are provided from a flexible benefits account. Pension funding forms part of fixed remuneration and NatWest Group does not provide discretionary pension benefits. Annual bonus The purpose is to support a culture where individuals recognise the importance of helping people, families and businesses to thrive and are rewarded for superior performance. Operation The annual bonus pool is based on a balanced scorecard of measures including financial and business delivery, customer, people and culture, climate and risk and control measures. Allocation from the pool depends on the performance of the business area and the individual. We use a structured performance management framework to support individual performance assessment. This is designed to assess performance against longer-term business requirements across a range of financial and non-financial metrics. It also evaluates adherence to internal controls and risk management. We use a balanced scorecard to align with the business strategy. Each individual will have defined measures of success for their role. We also take risk and conduct performance into account. Control functions are assessed independently of the business units that they oversee. Objectives and remuneration are set according to the priorities of the control area, not the targets of the businesses they support. The Group Chief Risk Officer and the Chief Audit Executive have the authority to escalate matters to Board level if management do not respond appropriately. Independent control functions exist for the main legal entities outside the ring fence (NWM Plc and RBSI). Dual solid reporting lines are in place into the respective legal entity CEOs and the NatWest Group Control Function Heads. Awards may be granted up to a maximum of 100% of fixed pay. For awards made in respect of the 2021 performance year, immediate cash awards continue to be limited to a maximum of £2,000. In line with regulatory requirements for MRTs, 40% of awards under £500,000 will be deferred over four, five or seven years. This rises to 60% for awards over £500,000. For MRTs, a minimum of 50% of any variable pay is delivered in shares and a 12-month retention period applies to the shares after vesting. The deferral period is four years for standard MRTs and Risk Manager MRTs who meet the ‘non-higher paid’ condition. It rises to five years for ‘higher paid’ Risk Manager MRTs, FCA Senior Management Functions (SMF) roles and PRA SMFs who meet the ‘non-higher paid’ condition; and to seven years for ‘higher paid’ PRA SMFs. All awards are subject to malus and clawback provisions. Long-term incentive (LTI) awards The purpose and operation of LTI awards is explained in detail in the Directors’ remuneration report. Instead of an annual bonus, NatWest Group provides executive directors and certain members of NatWest Group’s senior executive committees with LTI awards. Any awards made are subject to a performance assessment prior to grant and again prior to vesting. Shareholding requirements The requirements promote long-term alignment between senior executives and shareholders. 175 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Other remuneration disclosures continued Operation Executive directors and certain members of NatWest Group’s senior executive committees are required to build up and hold a shareholding equivalent to a percentage of salary. There is a restriction on the number of shares that individuals can sell until this requirement is met. Company share plans The purpose is to provide an easy way for individuals to hold shares in NatWest Group plc, which helps to encourage long-term thinking and provides a direct involvement in NatWest Group’s performance. Operation Colleagues in certain jurisdictions are offered the opportunity to contribute from salary and acquire shares in NatWest Group plc through company share plans. This includes Sharesave and the Buy As You Earn plan in the UK. Any shares held are not subject to performance conditions. Criteria for identifying MRTs The EBA has issued criteria for identifying MRT roles, which includes those staff whose activities have a material influence over NatWest Group’s performance or risk profile. These criteria are both qualitative (based on the nature of the role) and quantitative (based on the amount a colleague is paid). In 2021, MRTs were identified for 11 legal entities (including at parent holding company and consolidated levels) within NatWest Group. The MRT criteria are applied for each of these entities, and consequently many MRTs are identified in relation to more than one entity. The qualitative criteria can be summarised as: staff within the management body; senior management; other staff with key functional or managerial responsibilities including for risk management; and staff who individually, or as part of a Committee, have authority to approve new business products or to commit to credit risk exposures and market risk transactions above certain levels. The quantitative criteria are: individuals earning £658,000 or more in the previous year; individuals earning less than £658,000 in the previous year, but more than a threshold set at the higher of £440,000 or the average total earnings of the management body and senior management for the relevant legal entity and who can impact the risk profile of a material business unit; and individuals in the top 0.3% of earners of the relevant legal entity for the previous year. In addition to the qualitative and quantitative criteria, NatWest Group has applied its own minimum standards to identify roles that are considered to have a material influence over its risk profile. Personal hedging strategies The conditions attached to discretionary share-based awards prohibit the use of any personal hedging strategies to lessen the impact of a reduction in the value of such awards. Recipients explicitly acknowledge and accept these conditions when any share-based awards are granted. Risk in the remuneration process NatWest Group’s approach to remuneration promotes effective risk management through having a clear distinction between fixed remuneration (which reflects the role undertaken by an individual) and variable remuneration (which is directly linked to performance and can be risk-adjusted). Fixed pay is set at an appropriate level to discourage excessive risk-taking and which would allow NatWest Group to pay zero variable pay. We achieve focus on risk through clear inclusion of risk in performance goals, performance reviews, the determination of variable pay pools, incentive plan design and the application of malus and clawback. The Committee is supported in this by the Group Board Risk Committee (BRC) and the Risk function, as well as independent oversight by the Internal Audit function. We use a robust process to assess risk performance. We consider a range of measures, specifically: capital, liquidity and funding risk; credit risk; market risk; pension risk; compliance and conduct risk; financial crime; climate risk; operational risk; business risk and reputational risk. We also consider our overall risk culture. Remuneration arrangements are in line with regulatory requirements and we fully disclose and discuss the steps taken to ensure appropriate and thorough risk adjustment with the PRA and the FCA. Variable pay determination For the 2021 performance year, NatWest Group operated a robust control function-led, multi-step process to assess performance and determine the appropriate bonus pool by business area and function. At multiple points throughout the process, we made reference to NatWest Group-wide business performance (from both affordability and appropriateness perspectives) and the need to distinguish between ‘go-forward’ and ‘resolution’ activities. The process uses financial, climate, customer and people measures to consider a balanced scorecard of performance assessments at the level of each business area or function. We then undertake risk and conduct assessments at the same level to ensure performance achieved without appropriate consideration of risk, risk culture and conduct controls, is not inappropriately rewarded. BRC reviews any material risk and conduct events and, if appropriate, an underpin may be applied to the individual business and function bonus pools or to the overall bonus pool. BRC may recommend a reduction of a bonus pool if it considers that risk and conduct performance is unacceptable or that the impact of poor risk management has yet to be fully reflected in the respective inputs. Following further review against overall performance and conduct, taking into account input from the CFO on affordability and capital and liquidity adequacy, the CEO will make a final recommendation to the Committee, informed by all the previous steps and her strategic view of the business. The Committee will then make an independent decision on the final bonus pool taking all of these earlier steps into account. 176 NatWest Group 2021 Annual Report and Accounts The assessment process for LTI awards to executive directors and other recipients is also founded on a balanced scorecard approach. The scorecard is aligned with the multi-step bonus pool process, reflecting a consistent risk management performance assessment. Remuneration and culture NatWest Group continues to assess conduct and its impact on remuneration as part of the annual Group-wide bonus pool process and also via the accountability review framework. Many colleagues receive fixed pay only, which provides them with greater security and allows them to fully focus on the needs of the customer. The Committee will continue to review workforce remuneration and the alignment of incentives and reward with culture. The governance of culture is clearly laid out. SMF roles have clearly defined accountabilities. The delivery of these accountabilities is taken into account in their performance and pay decisions. The Board and Group Sustainable Banking Committee (SBC) also play essential roles in building cultural priorities. Frameworks are in place to measure progress. Accountability review process and malus/clawback We introduced the accountability review process in 2012 to identify any material risk management, control and general policy breach failures, and to ensure accountability for those events. This allows NatWest Group to respond to instances where new information would change the variable pay decisions made in previous years and/or the decisions to be made in the current year. Potential outcomes under the accountability review process are: – malus – to reduce (to zero if appropriate) the amount of any unvested variable pay awards prior to payment; – clawback – to recover awards that have already vested; and – in-year bonus reductions – to adjust variable pay that would have otherwise been awarded for the current year. As part of the acceptance of variable pay awards, colleagues must agree to terms that state that malus and clawback may be applied. Any variable pay awarded to MRTs is subject to clawback for seven years from the date of grant. Since the 2016 performance year onwards, this period can be extended to 10 years for MRTs who perform a SMF role under the Senior Managers Regime where there are outstanding internal or regulatory investigations at the end of the normal seven- year clawback period. Awards to other colleagues (non-MRTs) are subject to clawback for 12 months from each vesting date. You can read more about the circumstances in which malus, clawback or in-year bonus reduction may be applied on page 157. During 2021 a number of issues and events were considered under the accountability review framework. The outcomes covered a range of actions including reduction (to zero where appropriate) of unvested awards through malus and the suspension of awards pending further investigation. Remuneration of MRTs The quantitative disclosures below are made in accordance with regulatory requirements in relation to 846 individuals who have been identified as MRTs for one or more entities across NatWest Group plc. The number of MRTs identified has decreased since last year due to a reduction in credit ‘initiators’ and changes in credit authorities. We have excluded two individuals from the tables below on the basis that, although they have been identified as an MRT in relation to a role within a subsidiary entity, they do not receive any remuneration for this role and are not an MRT in relation to their primary role for NatWest Group. You can find details of remuneration paid to MRTs in Pillar 3 reporting on a consolidated, sub-consolidated and solo entity level at natwestgroup.com. 177 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Other remuneration disclosures continued Total remuneration awarded to MRTs for the financial year Other senior management and other MRTs split by business area NatWest Group plc NEDs NatWest Group plc EDs Other senior mngt. Other MRTs NatWest Holdings NatWest Markets RBSI Corporate functions Control functions Total Fixed remuneration (1) Total number of MRTs 9 2 18 817 846 Other senior management – split by business area 3 1 1 7 6 Other MRTs – split by business area 181 128 22 105 381 £m £m £m £m £m £m £m £m £m £m Total fixed remuneration of MRTs 2.40 3.94 16.48 186.99 42.57 57.16 3.94 34.50 65.30 209.81 Cash-based 2.40 2.09 13.97 185.77 41.76 55.76 3.79 34.02 64.39 204.23 Share-based – 1.85 2.51 1.22 0.81 1.39 0.15 0.48 0.91 5.58 Other instruments or forms – – – – – – – – – – Variable remuneration (2) Total number of MRTs – 2 16 661 679 Other senior management – split by business area 3 1 1 7 4 Other MRTs – split by business area 142 94 17 79 329 £m £m £m £m £m £m £m £m £m £m Total variable remuneration of MRTs – 2.65 9.99 76.28 18.86 27.27 2.17 15.44 22.52 88.92 Cash-based – – 1.25 40.52 8.82 13.29 0.88 7.36 11.41 41.77 Of which: deferred cash – – 0.55 15.05 3.08 5.87 0.25 2.97 3.43 15.60 Share-based (annual bonus) – – 1.24 35.76 7.57 13.23 0.63 7.14 8.43 37.00 Of which: deferred shares – – 0.55 15.05 3.08 5.87 0.25 2.97 3.43 15.60 Share-based (LTI awards) – 2.65 7.50 – 2.46 0.75 0.66 0.94 2.69 10.15 Of which: deferred shares – 2.65 7.50 – 2.46 0.75 0.66 0.94 2.69 10.15 Other instruments or forms – – – – – – – – – – Total remuneration of MRTs 2.40 6.59 26.47 263.27 61.43 84.43 6.11 49.94 87.82 298.73 (1) Fixed remuneration consists of salaries, allowances, pension and benefit funding. (2) Variable remuneration consists of a combination of annual bonus and long-term incentive awards, deferred over a four to seven year period in accordance with regulatory requirements. Under the NatWest Group bonus deferral structure, immediate cash awards are limited to £2,000 per person, with a further payment of cash and shares within Year 0. (3) Long-term incentive awards vest subject to the extent to which performance conditions were met and can result in zero payment. (4) Under CRD V regulations, a notional discount is available which allows variable pay to be awarded at a level that would otherwise exceed the 1:1 ratio, provided that variable pay is delivered ‘in instruments’ (shares) and deferred over five years or more. The discount rate was not used for remuneration awarded in respect of the 2021 performance year. Derogations The regulations allow some flexibility not to apply certain requirements that would normally apply to MRTs where an individual’s annual variable remuneration does not exceed £44,000 and does not represent more than one third of the individual’s total annual remuneration (derogations permitted under point (b) of Article 94(3) of CRD V). We have used this flexibility to disapply MRT rules relating to deferral and delivery of awards in shares for 274 MRTs in respect of the performance year 2021. Total remuneration for these individuals in 2021 was £35.88 million (of which £31.16 million was fixed pay and £4.72 million was variable pay). Ratio between fixed and variable remuneration The variable component of total remuneration for MRTs at NatWest Group shall not exceed 100% of the fixed component (except where local jurisdictions apply a lower maximum ratio for variable pay). The average ratio between fixed and variable remuneration for 2021 was approximately 1 to 0.42. The majority of MRTs were based in the UK. 178 NatWest Group 2021 Annual Report and Accounts Outstanding deferred remuneration The table below includes deferred remuneration awarded or paid out in 2021 relating to prior performance years. Deferred and retained remuneration Total amount of deferred remuneration awarded for previous performance periods £m Of which: due to vest in the financial year £m Of which: vesting in subsequent financial years £m Amount of performance adjustment to deferred remuneration that was due to vest in the financial year £m Amount of performance adjustment to deferred remuneration due to vest in future financial years £m Total amount of adjustment during the financial year due to ex post implicit adjustments (1) £m Total amount of deferred remuneration awarded before the financial year actually paid out in the financial year £m Total amount of deferred remuneration awarded for previous performance period that has vested but is subject to retention £m NatWest Group plc NEDs – No deferred or retained remuneration held NatWest Group plc EDs Cash-based – – – – – – – – Shares or equivalent interests 7.23 0.88 6.36 (0.01) (0.06) 1.93 0.86 0.36 Other instruments or forms – – – – – – – – Other senior management Cash-based – – – – – – – – Shares or equivalent interests 18.46 3.08 15.37 – – 4.96 3.09 2.04 Other instruments or forms – – – – – – – – Other MRTs Cash-based – – – – – – – – Shares or equivalent interests 91.65 38.97 52.68 0.17 – 24.75 38.32 34.67 Other instruments or forms – – – – – – – – Total amount 117.34 42.93 74.41 0.16 (0.06) 31.64 42.27 37.07 (1) i.e. Changes of value of deferred remuneration due to the changes of prices of instruments. (2) Deferred remuneration reduced during the year relates to long-term incentives that lapsed when performance conditions were not met, long-term incentives and deferred awards forfeited on leaving and malus adjustments of prior year deferred awards and long-term incentives. 179 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Guaranteed awards (including ‘sign-on’ awards) and severance payments Special payments NatWest Group plc NEDs NatWest Group plc EDs Other senior management Other MRTs Guaranteed awards and sign on awards Number of MRTs – – 1 2 £m £m £m £m Total amount – – 0.12 0.26 Of which: paid during the financial year that are not taken into account in the bonus cap – – – – Severance payments awarded in previous periods, paid out during the financial year Number of MRTs – – 2 10 £m £m £m £m Total amount – – 0.42 2.17 Severance payment awarded during the financial year Number of MRTs – – 2 57 £m £m £m £m Total amount – – 0.26 12.10 Of which: paid during the financial year – – 0.26 11.31 Of which: deferred – – – 0.79 Of which: paid during the financial year that are not taken into account in the bonus cap – – 0.26 12.10 Of which: highest payment that has been awarded to a single person – – 0.16 0.77 (1) NatWest Group does not offer sign-on awards. Guaranteed awards may only be granted for new hires in exceptional circumstances in compensation for awards forgone on their previous company and are limited to first year of service. (2) Severance payments and/or arrangements can be made to colleagues who leave NatWest Group in certain situations, including redundancy. Such payments are calculated by a pre-determined formula set out within the relevant social plans, policies, agreements or local laws. Where local laws permit, there is a cap on the maximum amount that can be paid. (3) No severance payments in excess of contractual payments, local policies, standards or statutory amounts were made to MRTs during the year, other than payments to five individuals totalling £522,373. There were four non-standard payments totalling £443,973 in relation to litigation and one non compete payment of £78,410. Total remuneration by band for all colleagues earning >€1million 2021 Number of MRTs €1.0 million to below €1.5 million 42 €1.5 million to below €2.0 million 14 €2.0 million to below €2.5million 6 €2.5 million to below €3.0 million – €3.0 million to below €3.5 million 1 €3.5 million to below €4.0 million – More than €4.0 million – Total 63 (1) Total remuneration in the table above includes fixed pay, pension and benefit funding and variable pay. (2) Where applicable, the table is based on an average exchange rate of €1.163 to £1 for 2021. Colleagues who earned total remuneration of over €1 million in 2021 represent 0.09% of the workforce. These individuals include those who manage major businesses and functions with responsibility for significant assets, earnings or areas of strategic activity and can be grouped as follows: – The CEOs responsible for each area and their direct reports. – Those who manage large business areas. – Income generators responsible for high levels of income including those involved in managing trading activity and supporting clients with more complex financial transactions, including financial restructuring. – Those responsible for managing balance sheet and liquidity and funding positions across the business. Other remuneration disclosures continued 180 NatWest Group 2021 Annual Report and Accounts Compliance report Statement of compliance NatWest Group plc is committed to high standards of corporate governance, business integrity and professionalism in all its activities. Throughout the year ended 31 December 2021, NatWest Group plc has applied the Principles and complied with all of the Provisions of the UK Corporate Governance Code issued by the Financial Reporting Council dated July 2018 (the ‘Code’) except in relation to: – Provision 17, in respect of the requirement that the Group Nominations and Governance Committee should ensure plans are in place for orderly succession to both the Board and senior management positions and oversee the development of a diverse pipeline for succession; and – Provision 33 that the Group Performance and Remuneration Committee (Group RemCo) should have delegated responsibility for setting remuneration for the Chairman and executive directors. In respect of Provision 17, whilst the Board is supported on board succession by the Group Nominations and Governance Committee, the Board considers this is a matter of significant importance which should rightly be reserved for the full Board. Adopting this approach ensures that all directors have an opportunity to contribute to succession planning discussions for Board and senior management, in support of achieving an appropriate balance of skills, experience, knowledge and diversity at senior levels within NatWest Group and on the Board. It also means that all directors have an opportunity to review, consider and become familiar with the next generation of executive leaders. The Board does not anticipate any changes to its approach on these aspects of the Code. Further information on how NatWest Group plc has applied the Principles, and complied with the Provisions, of the Code can be found in the Corporate governance section of this report, which includes cross-references to relevant sections of the Strategic report and other related disclosures. NatWest Group plc has complied in all material respects with the Financial Reporting Council Guidance on Audit Committees issued in September 2012 and April 2016. Under the US Sarbanes-Oxley Act of 2002, specific standards of corporate governance and business and financial disclosures and controls apply to companies with securities registered in the US. NatWest Group plc complies with all applicable sections of the US Sarbanes-Oxley Act of 2002, subject to a number of exceptions available to foreign private issuers. Internal control The Board of Directors is responsible for the system of internal controls that is designed to maintain effective and efficient operations, compliant with applicable laws and regulations. The system of internal controls is designed to manage, or mitigate, risk to an acceptable residual level rather than eliminate it entirely. Systems of internal control can only provide reasonable and not absolute assurance against material misstatement, fraud or loss. Ongoing processes for the identification, evaluation and management of the principal risks faced by NatWest Group operated throughout the period from 1 January 2021 to 17 February 2022, the date the directors approved the Annual Report and Accounts. These included the semi-annual Control Environment Certification process, which requires senior members of the executive and management to assess the adequacy and effectiveness of their internal control frameworks and certify that their business or function is compliant with the requirements of Sarbanes-Oxley Section 404 and the UK Corporate Governance Code. The policies that govern these processes – and reports on internal controls arising from them – are reviewed by the Board and meet the requirements of the Financial Reporting Council’s Guidance on Risk Management Internal Control and Related Financial and Business Reporting. NatWest Group operates a three lines of defence model, which provides an effective apportionment of responsibilities and accountabilities across the organisation. As part of its second line of defence role, the Risk oversight function exercises oversight and challenge of the risk management activities undertaken by the first line of defence, which is responsible for designing, implementing and maintaining effective processes, procedures and controls to mitigate risks within risk appetite. The Internal Audit function, which is the third line of defence, undertakes independent and objective assurance activities and provides reports to the Board and executive management on the quality and effectiveness of governance, risk management and internal controls to monitor, manage and mitigate risks in achieving NatWest Group’s objectives. The effectiveness of NatWest Group’s internal controls is reviewed regularly by the Board, the Group Audit Committee and the Group Board Risk Committee. In addition, the Board receives a risk management report at each scheduled Board meeting. Executive management committees in each of NatWest Group’s businesses also receive regular reports on significant risks facing their business and how these are being controlled. Details of the bank’s approach to risk management are given in the Risk & Capital Management section of the Annual Report and Accounts. 181 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements In respect of Provision 33, the Board also considers that this is a matter which should rightly be reserved for the Board and this is an approach the Board has adopted for a number of years. Remuneration for the executive directors is first considered by the Group RemCo which then makes recommendations to the Board for consideration. This approach allows all non-executive directors, and not just those who are members of the Group RemCo, to participate in decisions on the executive directors’ and the Chairman’s remuneration and also allows the executive directors to input to the decision on the Chairman’s remuneration. The Board believes this approach is very much in line with the spirit of the Code and no director is involved in decisions regarding his or her own remuneration. A copy of the Code can be found at frc.org.uk. Compliance report continued While work continues to enhance the control environment relating to financial crime risk, operational weaknesses between 2012 and 2016 resulted in the inadequate monitoring of a UK-incorporated NatWest Bank Plc customer. Regulations require risk-sensitive ongoing monitoring of customers for the purposes of preventing money laundering. NatWest Bank Plc co-operated fully with the regulator’s investigation into this case and, in October 2021, pleaded guilty to three breaches of the Money Laundering Regulations 2007. NatWest Group takes its responsibility to prevent and detect financial crime extremely seriously and continues to make significant multi- year investments to strengthen and improve its overall financial crime framework with prevention systems and capabilities. Almost £700 million has been invested in the last five years, including upgrades to transaction monitoring systems, automated customer screening and new customer due diligence solutions. NatWest Group continued to make enhancements to other aspects of the wider control environment in 2021. This has included the management of delivery of regulated programmes such as the IRB programme, as required by Prudential Regulatory Authority (PRA) and the European Banking Authority (EBA). NWG continued to focus on the embedding of a strong risk culture to support a robust control environment. The remediation of known control issues continued to be an important focus for both the Group Audit Committee and the Board Risk Committee during 2021. For further information on their oversight of remediation of the most significant issues, please refer to the Report of the Group Audit Committee and the Report of the Group Board Risk Committee. As part of its activities, the Group Audit Committee has received confirmation that management has taken, or is taking, action to remedy significant failings or weaknesses identified through NatWest Group’s control framework. While not being part of the bank’s system of internal control, the Group’s independent auditors present to the Group Audit Committee reports that include details of any significant internal control deficiencies they have identified. Further, the system of internal controls is also subject to regulatory oversight in the UK and overseas. Additional details of regulatory oversight are given in the Risk & Capital Management section. While several planned activities designed to enhance the control environment were disrupted by the extensive impact of COVID-19 (thereby delaying the achievement of the NatWest Group’s control environment target), the control environment remained largely stable in 2021. There was continuing management focus on the delivery of regulatory programmes – including the internal transformation programme established in response to updated IRB regulation from the Prudential Regulatory Authority (PRA) and the European Banking Authority (EBA) – as well as a review of the controls and processes relating to certain regulatory reporting. There was also significant focus on work to enhance controls relating to financial crime risks – including ongoing work to strengthen customer due diligence standards. The focus of the of NatWest Group in establishing and maintaining a robust risk culture made a valuable contribution to the overall control environment. The remediation of known control issues remained a focus of the Group Audit Committee and the Group Board Risk Committee during 2021. For further information on their oversight of remediation of the most significant issues, please refer to the Report of the Group Audit Committee and the Report of the Group Board Risk Committee. The Group Audit Committee has received confirmation that management has taken, or is taking, action to remedy significant failings or weaknesses identified through NatWest Group’s control framework. The Group Audit Committee and the Group Board Risk Committee will continue to focus on such remediation activity, particularly in view of the transformation agenda. While not being part of the Group’s system of internal control, the Group’s independent auditors present to the Group Audit Committee reports that include details of any significant internal control deficiencies they have identified. Further, the system of internal controls is also subject to regulatory oversight in the UK and overseas. Additional details of regulatory oversight are given in the Risk and capital management section. Internal control over financial reporting NatWest Group plc is required to comply with Section 404 of the US Sarbanes-Oxley Act of 2002 and assess the effectiveness of internal control over financial reporting as of 31 December 2021. NatWest Group has assessed the effectiveness of its internal control over financial reporting as of 31 December 2021 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in the 2013 publication of ‘Internal Control – Integrated Framework’. Based on its assessment, management has concluded that, as of 31 December 2021, NatWest Group’s internal control over financial reporting is effective. NatWest Group’s auditors have audited the effectiveness of NatWest Group’s internal control over financial reporting and have given an unqualified opinion. Management’s report on NatWest Group’s internal control over financial reporting will be filed with the Securities and Exchange Commission as part of the 2021 Annual Report on Form 20-F. Disclosure controls and procedures As required by Exchange Act rules, management (including the Group CEO and Group CFO) have conducted an evaluation of the effectiveness and design of NatWest Group’s disclosure controls and procedures (as defined in the Exchange Act rules) as at 31 December 2021. Based on this evaluation, management (including the Group CEO and Group CFO) concluded that NatWest Group plc’s disclosure controls and procedures were effective as of the end of the period covered by this Annual Report and Accounts. 182 NatWest Group 2021 Annual Report and Accounts Changes in internal control There was no change in NatWest Group’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, NatWest Group’s internal control over financial reporting. The New York Stock Exchange As a foreign private issuer with American Depository Shares representing ordinary shares, preference shares and debt securities listed on the New York Stock Exchange (the NYSE), NatWest Group plc is not required to comply with all of the NYSE governance standards applicable to US domestic companies (the NYSE Standards) provided that it follows home country practice in lieu of the NYSE Standards and discloses any significant ways in which its corporate governance practices differ from the NYSE Standards. NatWest Group plc is also required to provide an Annual Written Affirmation to the NYSE of its compliance with the mandatory applicable NYSE Standards. In March 2021 NatWest Group plc submitted its most recent Annual Written Affirmation to the NYSE which confirmed NatWest Group plc’s full compliance with the applicable provisions. The Group Audit Committee fully complies with the mandatory provisions of the NYSE Standards (including by reference to the rules of the Exchange Act) that relate to the composition, responsibilities and operation of audit committees. More detailed information about the Group Audit Committee and its work during 2021 is set out in the Group Audit Committee report on pages 116 to 123. The Board has reviewed its corporate governance arrangements and is satisfied that these are consistent with the NYSE Standards, subject to the following departures: i. NYSE Standards require the majority of the Board to be independent. The NYSE Standards contain different tests from the Code for determining whether a director is independent. NatWest Group plc follows the Code’s requirements in determining the independence of its directors and currently has eight independent non-executive directors, one of whom is the Senior Independent Director. ii. The NYSE Standards require non-management directors to hold regular sessions without management present, and that independent directors meet at least once a year. The Code requires the Chairman to hold meetings with non- executive directors without the executives present and non-executive directors are to meet without the Chairman present at least once a year to appraise the Chairman’s performance and NatWest Group plc complies with the requirements of the Code. iii. The NYSE Standards require that the nominating/ corporate governance committee of a listed company be composed entirely of independent directors. The Chairman of the Board is also the Chairman of the Group Nominations and Governance Committee, which is permitted under the Code (since the Chairman was considered independent on appointment). The terms of reference of the Group Nominations and Governance Committee differ in certain limited respects from the requirements set out in the NYSE Standards, including because the Group Nominations and Governance Committee does not have responsibility for overseeing the evaluation of management. iv. The NYSE standards require that the compensation committee of a listed company be composed entirely of independent directors. Although the members of the Group RemCo are deemed independent in compliance with the provisions of the Code, the Board has not assessed the independence of the members of the Group RemCo and Group RemCo has not assessed the independence of any compensation consultant, legal counsel or other adviser, in each case, in accordance with the independence tests prescribed by the NYSE Standards. The NYSE Standards require that the compensation committee must have direct responsibility to review and approve the CEO’s remuneration. As stated at the start of this Compliance report, in the case of NatWest Group plc, the Board rather than the Group RemCo reserves the authority to make the final determination of the remuneration of the CEO. v. The NYSE Standards require listed companies to adopt and disclose corporate governance guidelines. Throughout the year ended 31 December 2021, NatWest Group plc has complied with all of the provisions of the Code (subject to the exception described above) and the Code does not require NatWest Group plc to disclose the full range of corporate governance guidelines with which it complies. vi. The NYSE Standards require listed companies to adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. NatWest Group has adopted a code of conduct which is supplemented by a number of key policies and guidance dealing with matters including, among others, anti-bribery and corruption, anti-money laundering, sanctions, confidentiality, inside information, health, safety and environment, conflicts of interest, market conduct and management records. This code of conduct applies to all officers and employees and is fully aligned to the PRA and FCA Conduct Rules which apply to all directors. The Code of Conduct is available to view on NatWest Group’s website at natwestgroup.com. This Compliance report forms part of the Corporate governance report and the Report of the directors. 183 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements The directors present their report together with the audited accounts for the year ended 31 December 2021. Other information incorporated into this report by reference can be found at: Page/Note Strategic report 2 Our colleagues 58 Climate-related financial disclosures 64 Stakeholder engagement 14, 52 Governance at a glance 80 Section 172(1) statement 52 Viability statement 76 Financial review 86 Board of directors and secretary 98 Corporate governance 103 Segmental analysis Note 4 Share capital and other equity Note 22 Post balance sheet events Note 34 Risk factors 406 Group structure During 2018, in preparation for ring-fencing a number of changes were made to the NatWest Group structure. Following these changes the company owns three main subsidiaries, NatWest Holdings Limited (the parent of the ring-fenced group which includes National Westminster Bank Plc, The Royal Bank of Scotland plc and Ulster Bank Ireland DAC), NatWest Markets Plc (the investment bank and the parent of NatWest Markets N.V.) and The Royal Bank of Scotland International (Holdings) Limited (the parent of The Royal Bank of Scotland International Limited). Further details of the principal subsidiary undertakings are shown in Note 33 of the consolidated financial statements and a full list of subsidiary undertakings and overseas branches is shown in Note 12 of the parent company accounts. Following placing and open offers in December 2008 and in April 2009, HM Treasury (HMT) owned approximately 70.3% of the enlarged ordinary share capital of the company. In December 2009, the company issued a further £25.5 billion of new capital to HMT in the form of B shares. HMT sold 630 million of its holding of the company’s ordinary shares in August 2015. In October 2015 HMT converted its entire holding of 51 billion B shares into 5.1 billion new ordinary shares of £1 each in the company. HMT sold a further 925 million of its holding of the company’s ordinary shares in June 2018. In March 2021, the company carried out an off-market purchase of 591 million of its ordinary shares from HMT. In May 2021, HMT sold 580 million ordinary shares through an accelerated book building process to institutional investors. In July 2021, HMT announced its intention to sell part of its shareholding over a 12 month period from August 2021 via a trading plan, for up to 15% of the aggregate total trading volume. At 31 December 2021, HMT’s holding in the total voting rights of the company was 52.96%. The percentage was correct as at the date of notification on 5 November 2021. Activities NatWest Group is engaged principally in providing a wide range of banking and other financial services. Further details of the organisational structure and business overview of NatWest Group, including the products and services provided by each of its operating segments and the markets in which they operate are contained in the Business review. Details of the strategy for delivering the company’s objectives can be found in the Strategic report. Results and dividends UK company law provides that dividends can only be paid if a company has sufficient distributable profits available to cover the dividend. A company’s distributable profits are its accumulated, realised profits not previously distributed or capitalised, less its accumulated, realised losses not previously written off in a reduction or re-organisation of capital. At 31 December 2021, NatWest Group Plc’s distributable profits were £31 billion. The profit attributable to the ordinary shareholders of NatWest Group plc for the year ended 31 December 2021 amounted to £2,950 million compared with a loss of £753 million for the year ended 31 December 2020, as set out in the consolidated income statement on page 300. In 2021 NatWest Group paid an interim dividend of £347 million, or 3.0p per ordinary share (2020 – nil). The company has announced that the directors have recommended a final dividend of £844 million, or 7.5p per ordinary share (2020 – £364 million or 3.0p per ordinary share). The final dividend recommended by directors is subject to shareholders’ approval at the Annual General Meeting on 28 April 2022. If approved, payment will be made on 4 May 2022 to shareholders on the register at the close of business on 18 March 2022. The ex-dividend date will be 17 March 2022. Subject to above mentioned condition, the payment of interim dividends on ordinary shares is at the discretion of the Board. Colleagues As at 31 December 2021, NatWest Group employed 57,800 people (excluding temporary staff). Details of all related costs are included in Note 3 to the consolidated accounts. Employment for disabled persons For colleagues with disabilities NatWest Group supports them with workplace adjustments so that they can succeed. If a colleague becomes disabled NatWest Group will, wherever possible, make adjustments to support them in their existing role or re-deploy them to a more suitable alternative role. With external recruitment, the NatWest Group Careers site gives comprehensive insights into NatWest Group jobs, culture, locations and application processes. It also hosts a variety of blog content to portray stories of what it is like to work at NatWest Group. The company also makes sure that candidates can easily request any adjustments to help complete their application or assessment. Going concern NatWest Group’s business activities and financial position, the factors likely to affect its future development and performance and its objectives and policies in managing the financial risks to which it is exposed and its capital are discussed in the Business review. The risk factors which could materially affect NatWest Group’s future results are set out on pages 406 to 426. NatWest Group’s regulatory capital resources and significant developments in 2021 and anticipated future developments are detailed in the Capital, liquidity and funding section on pages 249 to 265. This section also describes NatWest Group’s funding and liquidity profile, including changes in key metrics and the build up of liquidity reserves. Report of the directors 184 NatWest Group 2021 Annual Report and Accounts Having reviewed NatWest Group’s principal risks, forecasts, projections and other relevant evidence, the directors have a reasonable expectation that the Group will continue in operational existence for a period of 12 months from the date of this report. Accordingly, the financial statements of NatWest Group and of the company have been prepared on a going concern basis. UK Code for Financial Reporting Disclosure NatWest Group plc’s 2021 financial statements have been prepared in compliance with the principles set out in the Code for Financial Reporting Disclosure published by the British Bankers’ Association in 2010. The Code sets out five disclosure principles together with supporting guidance. The principles are that NatWest Group and other major UK banks will provide high quality, meaningful and decision-useful disclosures; review and enhance their financial instrument disclosures for key areas of interest to market participants; assess the applicability and relevance of good practice recommendations to their disclosures, acknowledging the importance of such guidance; seek to enhance the comparability of financial statement disclosures across the UK banking sector; and clearly differentiate in their annual reports between information that is audited and information that is unaudited. Enhanced Disclosure Task Force (EDTF) and Disclosures on Expected Credit Losses (DECL) Taskforce recommendations The EDTF, established by the Financial Stability Board, published its report ‘Enhancing the Risk Disclosures of Banks’ in October 2012, with an update in November 2015 covering IFRS 9 expected credit losses (ECL). The DECL Taskforce, jointly established by the Financial Conduct Authority, Financial Reporting Council and the Prudential Regulatory Authority, published its phase 2 report recommendations in December 2019. NatWest Group plc’s 2021 Annual Report and Accounts and Pillar 3 Report reflect EDTF and have regard to DECL Taskforce recommendations. Authority to repurchase shares At the Annual General Meeting in 2021 shareholders authorised the company to make market purchases of up to 1,216,656,575 ordinary shares. The directors utilised the authority obtained at the 2021 AGM to conduct a share buyback programme (the ‘Programme’) of up to £750 million, as announced to the market on 30 July 2021. The Programme’s purpose is to reduce the ordinary share capital of NatWest Group. Taking into account the reduction in issued ordinary share capital which occurred as a result of the off-market buyback announced on 19 March 2021, the maximum number of ordinary shares that could be purchased by the company under the Programme was 1,157,583,542. The Programme commenced on 2 August 2021 and, as at 31 December 2021, 310,802,416 ordinary shares (nominal value £310,802,416) had been purchased by the company at an average purchase price of 217.5796p per ordinary share for the total consideration of £676,242,656. A further 29,735,044 ordinary shares (nominal value £29,735,044) were purchased by the company from 1 January to 18 January 2022 at an average purchase price of 245.5264p per ordinary share for the total consideration of £73,007,375. All of the purchased ordinary shares were cancelled, representing 2.93% of the company’s issued ordinary share capital. Shareholders will be asked to renew this authorisation at the Annual General Meeting in 2022. On 6 February 2019 the company held a General Meeting and shareholders approved a special resolution to give the company authority to make off-market purchases of up to 4.99% of its ordinary share capital in issuance from HMT (or its nominee) at such times as the directors may determine is appropriate. Full details of the proposal are set out in the Circular and Notice of General Meeting available at natwestgroup.com. This authority was renewed at the Annual General Meeting in 2021 and shareholders will be asked to renew the authority at the Annual General Meeting in 2022. The company utilised the authority it obtained at the 2020 AGM to make an off-market purchase of 590,730,325 ordinary shares (nominal value £590,730,325) in the company from HMT on 19 March 2021, at a price of 190.50p per ordinary share for the total consideration of £1,125,341,269, representing 4.86% of the company’s issued ordinary share capital. The company cancelled 390,730,325 of the purchased ordinary shares and held the remaining 200,000,000 ordinary shares in treasury. The company has used a total of 19,062,290 treasury shares to satisfy the exercise of options and the vesting of share awards under the employee share plans and the balance of ordinary shares held in treasury as at 31 December 2021 was 180,937,710. At the 2021 Annual General Meeting, shareholders authorised the company to make an off-market purchase of preference shares in the company. The company announced on 15 December 2021 that it had utilised this authority to purchase 157,546 5.5% cumulative preference shares (nominal value £157,546), representing 39.39% of the share class, at a purchase price of 102%, for the total consideration of £160,697 and 259,314 11.00% cumulative preference shares (nominal value £259,314), representing 51.86% of the share class, at a purchase price of 155%, for the total consideration of £401,937. The company cancelled all of the purchased preference shares. Additional information Where not provided elsewhere in the Report of the directors, the following additional information is required to be disclosed by Part 6 of Schedule 7 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008. The rights and obligations attached to the company’s ordinary shares and preference shares are set out in our Articles of Association, copies of which can be obtained from Companies House in the UK or can be found at natwestgroup.com. Non- cumulative preference share details are set out in Note 22 of the consolidated accounts. The cumulative preference shares represent less than 0.005% of the total voting rights of the company, the remainder being represented by the ordinary shares. In a show of hands at a General Meeting of the company, every holder of ordinary shares and cumulative preference shares, present in person or by proxy and entitled to vote, shall have one vote. On a poll, every holder of ordinary shares or cumulative preference shares present in person or by proxy and entitled to vote, shall have four votes for every share held. The notices of Annual General Meetings and General Meetings specify the deadlines for exercising voting rights and appointing a proxy or proxies to vote in relation to resolutions to be passed at the meeting. There are no restrictions on the transfer of ordinary shares in the company other than certain restrictions which may from time to time be imposed by laws and regulations (for example, insider trading laws). At the 2021 Annual General Meeting, shareholders gave authority to directors to offer a scrip dividend alternative on any dividend paid up to the conclusion of the Annual General Meeting in 2024. Pursuant to the UK Listing Rules, certain employees of the company require the approval of the company to deal in the company’s shares. The rules governing the powers of directors, including in relation to issuing or buying back shares and their appointment, are set out in our Articles of Association. It will be proposed at the 2022 Annual General Meeting that the directors’ authorities to allot shares under the Companies Act 2006 (the Companies Act) be renewed. The Articles of Association may only be amended by a special resolution at a General Meeting of shareholders. The company is not aware of any agreements between shareholders that may result in restrictions on the transfer of securities and/or voting rights. There are no persons holding securities carrying special rights with regard to control of the company. A number of the company’s employee share plans include restrictions on transfers of shares while shares are subject to the plans. Note 3 sets out a summary of the plans. 185 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Report of the directors continued Under the rules of certain employee share plans, voting rights are exercised by the Trustees of the plan on receipt of participants’ instructions. If a participant does not submit an instruction to the Trustee no vote is registered. For shares held in the company’s other employee share trusts, the voting rights are exercisable by the Trustees. However, in accordance with investor protection guidelines, the Trustees abstain from voting. The Trustees would take independent advice before accepting any offer in respect of their shareholdings for the company in a takeover bid situation. The Trustees have chosen to waive their entitlement to the dividend on shares held by the Trusts. A change of control of the company following a takeover bid may cause a number of agreements to which the company is party to take effect, alter or terminate. All of the company’s employee share plans contain provisions relating to a change of control. In the context of the company as a whole, these agreements are not considered to be significant. Directors The names and brief biographical details of the current directors are shown on pages 98 to 101. Howard Davies, Frank Dangeard, Patrick Flynn, Morten Friis, Robert Gillespie, Yasmin Jetha, Katie Murray, Mike Rogers, Alison Rose, Mark Seligman and Lena Wilson all served throughout the year and to the date of signing of the financial statements. All directors of the company are required to stand for election or re-election annually by shareholders at the Annual General Meeting and, in accordance with the UK Listing Rules, the election or re-election of independent directors requires approval by all shareholders and also by independent shareholders. Directors’ interests The interests of the directors in the shares of the company at 31 December 2021 are shown on page 171. None of the directors held an interest in the loan capital of the company or in the shares or loan capital of any of the subsidiary undertakings of the company, during the period from 1 January 2021 to 17 February 2022. Directors’ indemnities In terms of section 236 of the Companies Act, Qualifying Third Party Indemnity Provisions have been issued by the company to its directors, members of the NatWest Group and NWH Executive Committees, individuals authorised by the PRA/FCA, certain directors and/or officers of NatWest Group subsidiaries and all trustees of NatWest Group pension schemes. Controlling shareholder In accordance with the UK Listing Rules, the company has entered into an agreement with HM Treasury (the ‘Controlling Shareholder’) which is intended to ensure that the Controlling Shareholder complies with the independence provisions set out in the UK Listing Rules. The company has complied with the independence provisions in the relationship agreement and as far as the company is aware the independence and procurement provisions in the relationship agreement have been complied with in the period by the controlling shareholder. Shareholdings The table below shows shareholders that have notified NatWest Group that they hold more than 3% of the total voting rights of the company at 31 December 2021. Ordinary shares (millions) % of issued share capital with voting rights held 1 Solicitor For The Affairs of Her Majesty’s Treasury as Nominee for Her Majesty’s Treasury 6,038 52.96 Norges Bank 348 3.07 (1) Percentages provided were correct at the date of notification on 5 November 2021. On 11 February 2022 a notification under Rule 5 of the Disclosure and Transparency Rules (‘DTR’) was received from HMT notifying that they held 5,735 million ordinary shares, representing 50.94% of the issued share capital with voting rights. As at 17 February 2022, no further notifications have been received under Rule 5 of the DTR. Listing rule 9.8.4 The information to be disclosed in the Annual Report and Accounts under LR 9.8.4, is set out in this Directors’ report with the exception of details of contracts of significance under LR 9.8.4 (10) and (11) given in Additional information on page 427. Political donations At the Annual General Meeting in 2021, shareholders gave authority under Part 14 of the Companies Act 2006, for a period of one year, for the company (and its subsidiaries) to make political donations and incur political expenditure up to a maximum aggregate sum of £100,000. This authorisation was taken as a precaution only, as the company has a longstanding policy of not making political donations or incurring political expenditure within the ordinary meaning of those words. During 2021, NatWest Group made no political donations, nor incurred any political expenditure in the UK or EU and it is not proposed that NatWest Group’s longstanding policy of not making contributions to any political party be changed. Shareholders will be asked to renew this authorisation at the Annual General Meeting in 2022. Directors’ disclosure to auditors Each of the directors at the date of approval of this report confirms that: (a) so far as the director is aware, there is no relevant audit information of which the company’s auditors are unaware; and (b) the director has taken all the steps that he/she ought to have taken as a director to make himself/herself aware of any relevant audit information and to establish that the company’s auditors are aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act. Auditors Ernst & Young LLP (EY LLP) are the auditors and have indicated their willingness to continue in office. A resolution to re-appoint EY LLP as the company’s auditors will be proposed at the forthcoming Annual General Meeting. By order of the Board Jan Cargill Chief Governance Officer and Company Secretary 17 February 2022 NatWest Group plc is registered in Scotland No. SC45551 186 NatWest Group 2021 Annual Report and Accounts This statement should be read in conjunction with the responsibilities of the auditor set out in their report on pages 287 to 299. The directors are responsible for the preparation of the Annual Report and Accounts. The directors are required to prepare Group financial statements, and as permitted by the Companies Act 2006 have elected to prepare company financial statements, for each financial year in accordance with UK adopted International Accounting Standards, International Financial Reporting Standards as issued by the International Accounting Standards Board and IFRS as adopted by the European Union. They are responsible for preparing financial statements that present fairly the financial position, financial performance and cash flows of NatWest Group. In preparing those financial statements, the directors are required to: – select suitable accounting policies and then apply them consistently; – make judgments and estimates that are reasonable, relevant and reliable; and – state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements. – prepare the financial statements on a going concern basis unless it is inappropriate to presume that the company and Group will continue in business. The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of NatWest Group and to enable them to ensure that the Annual Report and Accounts complies with the Companies Act 2006. They are also responsible for safeguarding the assets of NatWest Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Under applicable law and regulations, the directors are also responsible for preparing a Strategic report, Directors’ report, Directors’ remuneration report and Corporate governance statement that comply with that law and those regulations. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. The directors confirm that to the best of their knowledge: – the financial statements, prepared in accordance with UK adopted International Accounting Standards, International Financial Reporting Standards as issued by the International Accounting Standards Board and IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and – the Strategic report and Directors’ report (incorporating the Financial review) include a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. In addition, the directors are of the opinion that the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the company’s position and performance, business model and strategy. By order of the Board Howard Davies Chairman Alison Rose-Slade Group Chief Executive Officer Katie Murray Group Chief Financial Officer 17 February 2022 Board of directors Chairman Howard Davies Executive directors Alison Rose-Slade Katie Murray Non-executive directors Frank Dangeard Patrick Flynn Morten Friis Robert Gillespie Yasmin Jetha Mike Rogers Mark Seligman Lena Wilson Statement of directors’ responsibilities 187 NatWest Group 2021 Annual Report and Accounts Strategic report Financial review Governance Risk and capital management Additional information Financial statements Risk and capital management 188 Risk and capital management 189 Presentation of information 189 Update on COVID-19 189 Risk management framework 189 Introduction 189 Culture 190 Governance 192 Risk appetite 193 Identification and measurement 193 Mitigation 193 Testing and monitoring 193 Stress testing 197 Credit risk 197 Definition, sources of risk and key developments 197 Governance and risk appetite 197 Identification and measurement 197 Mitigation 198 Assessment and monitoring 199 Problem debt management 200 Forbearance 200 Impairment, provisioning and write-offs 203 Significant increase in credit risk and asset lifetimes 205 Economic loss drivers and UK economic uncertainty 211 Measurement uncertainty and ECL sensitivity analysis 213 Measurement uncertainty and ECL adequacy 214 Banking activities 245 Trading activities 249 Capital, liquidity and funding risk 249 Definitions and sources of risk 250 Capital, liquidity and funding management 251 Key points 252 Minimum requirements 253 Measurement 266 Market risk 266 Non-traded market risk 274 Traded market risk 277 Market risk – linkage to balance sheet 278 Pension risk 279 Compliance & conduct risk 279 Financial crime risk 280 Climate risk 281 Operational risk 284 Model risk 284 Reputational risk Risk and ca pital managem ent NatWest Group A nnual Repor t and Accou nts 2021 189 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Presentation of information Where marked as audited in the se ction header, certain information in the Risk and cap ital management section (pages 188 to 285) is within the scope of the Independen t auditor’s report. Update on COVID-19 While the immediate disruption diminished duri ng the year, the ongoing impacts of the global p andemic remained a significant focus for risk management in 20 21 and uncertainty in the operating environment continued. NatWes t Group remained committed to supporting its cus tomers while operating safely and soundly in line with its strategic objecti ves. Against the backdrop of a slowly -recovering economy, the credit risk profile remains heightened and there is an expectation that the impacts of the pandemic will continue to be seen in the performance of NatWest G roup’s portfolios for some time. NatWest Group anti cipates increased default levels in 2022 as a result. While the direct impact on NatWest Group’s operation al risk profile reduced, NatWest Group continued to closely monitor the second-order impacts on its transformation agenda, with a significant focus on managing res ource to protect key regulatory deliveries. The continued evolution of N atWest Group’s ways of working – to include lar ge-scale working from home – also required significant operational risk focus, particularly in terms of business resilie nce. As a result of its strong balanc e sheet and prudent approach to risk management, NatWest Group remains well pl aced to withstand these aftershocks as well as providing supp ort to customers when they need it most. Risk management framework Introduction NatWest Group operates an enterprise-wide risk m anagement framework, which is centred around the embedding of a strong risk culture. The framework ensures the gove rnance, capabilities and methods are in place to facilitate risk management and decision-making ac ross the organisation. The framework ensures that NatWest G roup’s principal risks – which are detailed in this section – are appropri ately controlled and managed. It sets out the standards and objec tives for risk management as well as defining the division of role s and responsibilities. This seeks to ensure a consistent app roach to risk management across NatWest Group and its subsidiaries. It aligns risk management with NatWest Group’s over all strategic objectives. The framework, which is designed and m aintained by NatWest Group’s independent Risk funct ion, is owned by the Chief Risk Officer. It is reviewed and approved annually by t he Board. The framework incorporates risk governance, Nat West Group’s three lines of defence operating model and the Risk functi on’s mandate. Risk appetite, supported by a robust set of p rinciples, policies and practices, defines the levels of tolerance for a variety of risks and provides a structured approach to risk-takin g within agreed boundaries. While all NatWest Group colleagues are responsible for managing risk, the Risk function provides ove rsight and monitoring of risk management activities, includin g the implementation of the framework and adherence to its supporting policies, standards and ope rational procedures. The Chief Risk Office r plays an int egral role in providin g the Board with advice on NatWest Group’ s risk profile, the performance of its controls and in providing challenge whe re a proposed business strategy may exceed risk tolerance . In addition, there is a process to identify and man age top risks, which are those that could hav e a significant negative impact on NatWest Group’s ability to meet its strategic objec tives. A complementary process operates to identify emerging risks. Both top and emerging risks may incorporate aspects of – or correlate to – a number of principal risks and are reported alongside them to the Board on a regular basis. Culture Risk culture is at the heart of NatWest G roup’s risk management framework and its risk manage ment practice. The risk culture target is to mak e risk part of the way employees work and think. A focus on leaders as role models and action to build clarity, develop capability and motivate e mployees to reach the required standards of behaviour are key to achieving the risk culture target. Colleagues are expected to:  Take personal resp onsibility for underst anding and proacti vely managing the risks as sociated with indi vidual roles.  Respect risk manag ement and the part it plays in daily work.  Understand the risks associated with individual roles.  Align decision-maki ng to NatWest Group’s risk appetite.  Consider risk in all actions and de cisions.  Escalate risks and issues early; taking actio n to mitigate risks and learning from mistakes and near- misses.  Challenge others’ at titudes, ideas and actions.  Report and comm unicate risks tr ansparently. The target risk culture behaviours are embedde d in NatWest Group’s Critical People Capabilities and are clea rly aligned to the core values of “serving cust omers”, “working together”, “doing the right thing” and “thinking long te rm”. These act as an effective basis for a strong risk culture because the C ritical People Capabilities form the ba sis of all recruitment and selection processes . Training Enabling employees to have th e capabilities and confidence to manage risk is core to NatWest Group’s le arning strategy. NatWest Group offers a wide r ange of learning, both technical and behavioural, across the ris k disciplines. This training can be mandatory, role-specific or for personal develop ment. Mandatory learning for all staff is f ocused on keeping employees, customers and NatWest Group safe. This is e asily accessed online and is assigned to each perso n according to their role and business area. The system allows monitoring at all levels to ensure completion. Our Code NatWest Group’s conduct guidance, Our Code, provides direction on expected behaviour and sets out the st andards of conduct that support the values . The code explains the effect of decisions that are taken and describes the p rinciples that must be followed. These principles cover conduct-related issues as well as wider business activities. They focus on desired outcomes, with practical guidelines to align the values wit h commercial strategy and actions. The emb edding of these principles facilitates sound decision-making and a clear focus on good customer outcomes. Where appropriate, if conduct falls short of Na tWest Group’s required standards, the accoun tability review process is used to assess how this should be reflec ted in pay outcomes for the individuals concerned (for more information on this process refer to page 155). The NatWest Group remune ration policy ensures that the remuneration arrangements for all employees reflect the principles and standards prescribed by the PRA rulebook and the FCA handbook. Any e mployee falling short of the expected standards would also be subject to internal disciplinary policies and procedures. If appro priate, the relevant authority would be notified. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 190 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Risk management framework continu ed Governance Committee structure The diagram shows NatWest Group’s risk com mittee structure in 2021 and the main purpose s of each committee. (1) The Group Executive Risk Committee is chaired by the Group Chief Executive Officer and supports her (and other accountable executives) in discharging risk management accountabilities. (2) The Group Executive Committee is chaired by th e Group Chief Executive Officer and supports her in discharging her individual accountabilities in accordance with the authority delegated to her by the Board. (3) The Group Asset & Liability Management Committee is chaired by the Group Chief Financial Officer and supports her in discharging her individual accountabilities relating to treasury and balance sheet management. (4) In addition, the Group Technical Asset & Liability Manag ement Committee, chaired by the Group Treasurer, provides oversight of capital and balance sheet management in line with approved risk appetite under normal and stress con ditions. Reviews and challenges the financial strategy, risk management, balance sheet and remuneration and policy implications of the Group’s pension schemes. (5) The Group Executive Disclosure Committee is cha ired by the Group Chief Financial Officer and supports her in discharging her accountabilities relating to the production and integrity of the Group’s financial information an d disclosures. NatWest Group p lc Board Gr oup B oar d Ri sk Committee Provides ov ersight and advice to the Board o n current and future r isk exposures, r isk pro file, ri sk appetite and risk c ulture. Reviews the design and implement ation of th e risk management framework and provi des inpu t to remuneratio n decis ions. Gro up Asse t & Lia bil ity Man age men t Committee (3, 4) Supports the Group CF O in overseeing the effect ive management of t he Group’s current and future balance sheet in line wit h Board- approved strateg y and risk appetite. Group Executive R isk Committee (1) Reviews, challenges a n d debates all material risk and control matters across the Group. Supports t he CEO and other accountable e xecutives in discharging risk ma nagement accountabilitie s. Considers the Group’s risk profile rela tive to current and future strategy and oversees impleme ntation of the risk manageme nt framework. Gro up Exe cutiv e Committee (2) Supports the Group CE O in discharging her i ndividual accountabilitie s including matters relating to strategy, fi nancials, capital, risk and operati o nal issues. Monitors the implementation of cultu re change. Supports the Group CEO in forming recomme ndations to the Board and to rele vant Board committees. Gr oup A udi t Committee Assists the Board in carrying out its accounting, i nternal control and financial reporting responsibil ities. Reviews the effective ness of internal controls s ystems relating to fina ncial management and compliance wit h financial reporting, asse t safeguarding and accounting standards . Considers material risks and approves, as appropriate, acti ons recommended by the Group Board Risk Committee. Monitors performance against ris k appetite. Reviews and ap proves the risk appetite framework and q ualitative statements of risk app etite for all key risks . Gro up Exe cutiv e Di sclo sure Committee (5) Ensures that NatWe st Group and relevant subsid iary disclosures are accu rate, complete and fair. Sup ports the Group CRO in re viewing and evaluating all significa nt expected credit losse s and the Group CFO in re viewing and evaluating related pr ovisions and valuations. . Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 191 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Risk management framework continu ed Risk management structure The diagram shows NatWest Group’s risk m anagement structure in 2021 and key risk m anagement responsibilities. (1) The Group Chief Executive Officer a lso performs the NWH Chief Executive Officer role. (2) The Group Chief Risk Off icer also performs the NWH Chief Risk Officer role. (3) The NWH Risk function provides risk management services across NWH, including to the NWH Chief Risk Officer and – where agreed – to NWM and R BSI Chief Risk Officers. These services are managed, as appropriate, through s ervice level agreements. (4) The NWH Risk function is independent of the NW H customer-facing franchises and support functions. Its structure is divided into three parts (Directors of Risk, Specialist Risk Directors and Chief Operating Officer) to facilitate effective management of the risks facing NWH. Risk committees in the customer businesses oversee risk exposures arising from management and business activities and focus on ensuring that these are adequately monitored and controlled. The Directors of Risk, (Retail Banking; Commercial Banking; wea lth businesses; Financial & Strategic Risk; Non-Financial Risk & Frameworks and Compliance & Conduct) as well as the Director, Financial Crime Risk NatWest Holdings and the Chief Operating Officer report to the NWH Chief Risk Officer. The Director of R isk, Ulster Bank I reland DA C reports to the Ulster Bank Ireland DAC Chief Executive. He also has a reporting line to the NWH Chief Risk Officer and to the Chair of the Ulster Bank Ireland DAC Board Risk Committee. (5) The Chief Risk Officers for NWM and RBSI have d ual reporting lines into the Group Chief Risk Officer and the respective Chief Executive Officers of their entities. There are additional reporting lines to the NWM and RBSI Board Risk Committee chairs and a right of access to the respective Risk Committees. NWM Chief Ris k Of f ic er NWH Chief Risk Officer Leads the NatWest Group Risk fu nction. Defines and delivers the risk, conduct, compliance and financial crime st rategies. Defines overall risk service provision requiremen ts to enable delivery of NatWest Group strategies, including policies, governance, frameworks, oversight and challenge, risk culture and risk reporting. Contributes to the development of strategy, transformation and culture as a me mber of the Executive Committee. RBSI Chief Executive Officer NWH Chief Exe cu ti ve Of fi cer NWM Chief Exec utive Offic er RBS Chief Executive Group Chief Risk Officer RBSI Chief Risk Officer Group Chief Exe cutive Officer Leads the NWH Risk function. Re sponsibilities include policy, governance, frameworks, oversight and challenge, risk culture and reporting. Delivers risk services ac ross NatWest Group governed by appropriate se rvice level agreements. Contributes to NWH strategy as a member of the NWH Executive Committee. Leads the NWM Risk function. Responsibilities include p olicy, governance, frameworks, oversight and challenge, risk culture and reporting. Contributes to NWM strategy as a member of the NWM Executive Committee. Leads the RBSI Risk function. R esponsibilities include policy, governance, frameworks, oversight and challenge, risk culture and reporting. Contributes to RBSI strategy as a member of the RBSI Executive Committee. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 192 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Risk management framework continu ed Three lines of defence NatWest Group uses the industry-standard th ree lines of defence model to articulate accountabilities a nd responsibilities for managing risk. This supports the embedding of eff ective risk management throughout the organisation. All roles below the CEO sit within one of the three l ines. The CEO ensures the efficient use of resources and the eff ective management of risks as stipulated in the risk management framewo rk and is therefore considered to be outs ide the three lines of defence principles. First line of defence The first line of defence incorporates most roles in N atWest Group, including those in the customer-facing f ranchises, Technology and Services as well as support func tions such as Human Resources, Legal and Finance. The first line of defence is emp owered to take risks within the constraints of the risk management framework and policie s as well as the risk appetite stateme nts and measures set by the Board. The first line of defence is responsible for managing its di rect risks. With the support of specialist functio ns such as Legal, Human Resources and Technology, it is also responsible for managing its consequential risks by identifying, assessing, mitigating, monitoring and reporting risks. Second line of defence The second line of defence comprises the Risk function and is independent of the first line. The second line of defence is empowered to design and maintain the risk management framework and its components. It undertakes proactive risk oversight and con tinuous monitoring activities to confirm that NatWest Group eng ages in permissible and sustainable risk-taking activities. The second line of defence advis es on, monitors, challenges, approves, escalates and reports on the risk-taking activities of the first line, ensuring that thes e are within the constraints of the risk management framework and policies as well a s the risk appetite statements and measures set by the Board. Third line of defence The third line of defence is the Internal Audi t function and is independent of the first and se cond lines. The third line of defence is responsible for providing independent and objective assu rance to the Board, its subsidiary legal entity boards and executive management on the adequacy and effectiveness of ke y internal controls, governance and the risk management in place to monitor, manage and mitigate the key ris ks to NatWest Group and its subsidiary companies achieving their objectives. The third line of defence executes its duties freel y and objectively in accordance with the Charte red Institute of Internal Auditors’ Code of Ethics and Internation al Standards. Risk appetite Risk appetite defines the type and aggregate level of risk NatWest Group is willing to accept in pursuit of i ts strategic objectives and business plans. Ris k appetite supports sound risk taking, the promotion of robust risk practices and risk behaviours, and is calibrated annually. For certain principal risks, risk capacity defines the maximum level of risk NatWest Group can assume before b reaching constraints determined by regulatory capital and liquidity requirements, the operational environment, and fr om a conduct perspective. Establishing risk capacity helps dete rmine where risk appetite should be set, ensuring there is a buffer between internal risk appetite and NatWest Group’s ultima te capacity to absorb losses. Risk appetite framework The risk appetite framework supports eff ective risk management by promoting sound risk-taking t hrough a structured approach, within agreed bounda ries. It also ensures emerging risks and risk-taking activities that might be out of appetite are identified, assessed, es calated and addressed in a timely manner. To facilitate this, a detailed annu al review of the framework is carried out. The review includes:  Assessing the adequacy of the f ramework when compared to internal and external expectations.  Ensuring the framework remains ef fective and acts as a strong control environment for risk appetite.  Assessing the level of embedding of risk appetite across the organisation. The Board approves the risk appe tite framework annually. Establishing risk appetite In line with NatWest Group’s risk appetite framewo rk, risk appetite is maintained across NatWest G roup through risk appetite statements. These are in place for all principal risks and describe the extent and type of activities that can be undertaken. Risk appetite statements consist of quali tative statements of appetite supported by risk limits and triggers tha t operate as a defence against excessive risk-taking. Risk measures and their associated limits are an integral part of the risk a ppetite approach and a key part of embedding risk a ppetite in day-to- day risk management decisions. A cle ar tolerance for each principal risk is set in alignment with busi ness activities. The annual process of reviewing and upd ating risk appetite statements is completed alongside the business an d financial planning process. This ensures that plans and risk appetite are appropriately aligned. The Board sets risk appetite for all principal risks to help ensure NatWest Group is well placed to meet its priorities and lo ng- term targets even in challenging economic enviro nments. This supports NatWest Group in remaining resilie nt and secure as it pursues its strategic business objec tives. NatWest Group’s risk profile is frequently reviewed and monitored. Management focus is concentrated on all principal risks as well as the top and emerging risk issue s which may correlate to them. Risk profile re lative to risk appetite is reported regularly to senior management and the Board. NatWest Group policies directly support the quali tative aspects of risk appetite. They define the qualitative ex pectations, guidance and standards that stipulate the nature and extent of permissible risk taking and are consistently a pplied across NatWest Group and its subsidiaries. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 193 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Risk management framework continu ed Identification and measuremen t Identification and measurement within the risk management process comprises:  Regular assessment of the overall risk profile, inco rporating market developments and trends, as well as ex ternal and internal factors.  Monitoring of the risks associat ed with lending and credit exposures.  Assessment of trading and non -trading portfolios.  Review of potential risks in new business activities and processes.  Analysis of potential risks in any complex and unusu al business transactions. The financial and non-financial risks that NatWest Group faces are detailed in its Risk Directory . This provides a common risk language to ensure consistent terminology is use d across NatWest Group. The Risk Directory is subject to annual review to ensure it continues to fully ref lect the risks that NatWest Group faces. Mitigation Mitigation is a critical aspect of ensuring that risk profile remains within risk appetite. Risk mitigation st rategies are discussed and agreed within NatWest G roup. When evaluating possible strategies , costs and benefits, residual risks (risks that are retained) and secondary risks ( those that arise from risk mitigation actions themselves) are also considered. Monitoring and review processes are in place t o evaluate results. Early identification, an d effective management of changes in legislation and regulation are cri tical to the successful mitigation of compliance an d conduct risk. The effects of all changes are managed to ensure the timely achievement of compliance. Those c hanges assessed as having a high or medium-high impact are managed mo re closely. Emerging risks that could affect future results and performance are also closely monitored. Action is taken to mitigate potential risks as and when required. Further in-depth an alysis, including the stress testing of exposures, is also carried out. Testing and monitoring Targeted risk processes and controls – including con trols within the scope of Section 404 of the Sarbanes-Oxley Act 200 2 – are subject to independent testing and moni toring. This activity is carried out to confirm to both internal and external stakeholders – including the Board, senior management, the customer-facing franchises, Intern al Audit and NatWest Group’s regulators – that such processes and controls are being correctly implemented and operate adequ ately and effectively. A consistent testing and monitoring methodology is in place across NatWest Group. Testing and monitoring activity f ocuses on processes and controls relating to credit risk, f inancial crime risk, operational resilience, and compliance and conduct risk. However, a range of controls and processes relating to othe r risk types is also subject to testing and monitoring activity as deemed appropriate within the context of a robust control environment. The Risk Testing & Monitoring Forum assesses and validates the annual plan as well as the ongoing prog ramme of reviews. Stress testing Stress testing – capital management Stress testing is a key risk managemen t tool and a fundamental component of NatWest Group’s approach to c apital management. It is used to quan tify and evaluate the potential impact of specified changes to risk factors on the fina ncial strength of NatWest Group, including its capital position. Stress testing includes:  Scenario testing, which examines the impact of a hypothetical future state to define changes in risk f actors.  Sensitivity testing, which exami nes the impact of an incremental change to one or more risk factors. The process for stress testing consists of four bro ad stages: Define scenarios  Identify macro and NatWest Group specific vulnerabilities and risks.  Define and calibrate scenarios to examine risks and vulnerabilitie s.  Formal governance process to agree scenarios. Assess impact  Translate scenarios into risk drivers.  Assess impact to current and projected P&L and balance sheet across NatWest Group. Calculate results and assess implications  Aggregate impacts into overall results.  Results form part of the risk management process.  Scenario results are used to inf orm business and capital plans. Develop and agree management actions  Scenario results are analysed by subject matter experts. Appropria te management actions are then developed.  Scenario results and manageme nt actions are reviewed by the relevant Executive Risk Committees and B oard Risk Committees and agreed by the relevant Boards. Stress testing is used widely across NatWest Grou p. The diagram below summarises key areas of focus. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 194 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Risk management framework continu ed Specific areas that involve capi tal management include:  Strategic financial and capital planning – by asse ssing the impact of sensitivities and scenarios on the capital pl an and capital ratios.  Risk appetite – by gaining a better understanding of t he drivers of, and the underlying risks associated with, risk appetite.  Risk monitoring – by monitoring the risks a nd horizon scanning events that could potentially affect NatWest Group’s financial strength and capital posi tion.  Risk mitigation – by identifying actions to mitigate risks, or those that could be taken, in the e vent of adverse changes to the business or economic environment. Key risk mitigating actions are documented in NatWest Gr oup’s recovery plan. Reverse stress testing is also ca rried out in order to identify circumstances that may lead to specific, defined outcomes such as business failure. Reverse stres s testing allows potential vulnerabilities in the business model to be exami ned more fully. Capital sufficiency – going concern forward-looking view Going concern capital requireme nts are examined on a forward-looking basis – including as part of t he annual budgeting process – by assessing the resilience of capital adequacy and leverage ratios under hypothe tical future states. These assessments include assumptions about regula tory and accounting factors (such as IFRS 9). The y incorporate economic variables and key ass umptions on balance sheet and P&L drivers, such as impairmen ts, to demonstrate that NatWest Group and its operating subsidiaries main tain sufficient capital. A range of future states are tested. In pa rticular, capital requirements are assessed:  Based on a forecast of future busines s performance, given expectations of economic and market conditio ns over the forecast period.  Based on a forecast of future busines s performance under adverse economic and market conditions over the forecast period. Scenarios of different severity may be exa mined. The potential impact of normal and adverse economic and market conditions on capital requirements is asse ssed through stress testing, the results of which are not only us ed widely across NatWest Group but also by the regulators to se t specific capital buffers. NatWest Group takes part in st ress tests run by regulatory authorities to test industry-wide vulne rabilities under crystallising global and domestic sy stemic risks. Stress and peak-to-trough mov ements are used to help assess the amount of capital NatWest Group nee ds to hold in stress conditions in accordance with the capital risk appe tite framework. Internal assessment of capital adequacy An internal assessment of material risks is c arried out annually to enable an evaluation of the amount, type and distribution of capital required to cover these risks. T his is referred to as the Internal Capital Adequacy Assess ment Process (ICAAP). The ICAAP consists of a point-in-time assess ment of exposures and risks at the end of the financial y ear together with a forward- looking stress capital assessment. The ICAAP is a pproved by the Board and submitted to the PRA. The ICAAP is used to form a vie w of capital adequacy separately to the minimum regulatory requiremen ts. The ICAAP is used by the PRA to assess NatWest Group’s specific capital requirements through the Pillar 2 f ramework. Capital allocation NatWest Group has mechanisms to allocate capital ac ross its legal entities and businesses. These aim to optimise the use of capital resources taking into account applicable regul atory requirements, strategic and business objec tives and risk appetite. The framework for allocating ca pital is approved by the CFO with support from the Asse t & Liability Management Committee. Governance Capital management is subject to substantial review and governance. The Board approves the capital pl ans, including those for key legal entities and busines ses as well as the results of the stress tests relating to those capital plans. Stress testing – liquidity Liquidity risk monitoring and contingency planning A suite of tools is used to monitor, limit and st ress test the risks on the balance sheet. Limit frameworks are in place t o control the level of liquidity risk, asset and liability mism atches and funding concentrations. Liquidity risks are reviewed at significant legal entity and business levels daily, with performance reported to the A sset & Liability Management Committee on a regular basis. Liquidity Con dition Indicators are monitored daily. This ensures any build-up of s tress is detected early and the response escalate d appropriately through recovery planning. Internal assessment of liquidity Under the liquidity risk management fra mework, NatWest Group maintains the Internal Liquidity Adequ acy Assessment Process. This includes assessme nt of net stressed liquidity outflows under a range of severe but plausible stress scenarios. Each scenario evaluates either an idiosyncratic, marke t-wide or combined stress event as described in the table bel ow. Type Description Idiosyncratic scenario The market perceives NatWest Group to be suffering from a severe stress event, which results in an immediate assump tion of increased credit risk or concerns over solvency. Market-wide scenario A market stress event affecting all participants in a market through contagion, potential counterparty failure and other market risks. NatWest Group is affe cted under this scenario but no more severely than any other participants with equivalent exposure. Combined scenario This scenario models the combined impact of an idiosyncratic and market str ess occurring at once, severely affecting funding markets and the liquidity of some assets. NatWest Group uses the most severe outco me to set the internal stress testing scenario which underpins its internal liquidity risk appetite. This complements the regulatory liquidi ty coverage ratio requirement. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 195 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Risk management framework continu ed Stress testing – recovery and resolution plan ning The NatWest Group recovery plan explains ho w NatWest Group and its subsidiaries – as a consolidated g roup – would identify and respond to a financial stress event and restore its fin ancial position so that it remains viable on an ongoing b asis. The recovery plan ensures risks that could del ay the implementation of a recovery strategy are highligh ted and preparations are made to minimise the impac t of these risks. Preparations include:  Developing a series of recovery indica tors to provide early warning of potential stress eve nts.  Clarifying roles, responsibilities and escal ation routes to minimise uncertainty or delay.  Developing a recovery playbook to provide a concise description of the actions required during recovery.  Detailing a range of options to address diff erent stress conditions.  Appointing dedicated option owners to reduce the risk of delay and capacity concerns. The plan is intended to enable NatWest G roup to maintain critical services and products it provides to i ts customers, maintain its core business lines and operate wi thin risk appetite while restoring NatWest Group’ s financial condition. It is assessed for appropriateness on an ongoin g basis and is updated annually. The plan is reviewed and ap proved by the Board prior to submission to the PRA each ye ar. Individual recovery plans are also prepared for NatWest Holdin gs Limited, NatWest Markets Plc, RBS International (Holdi ngs) Limited, Ulster Bank Ireland DAC and NatWest Ma rkets N.V.. These plans detail the recovery options, recovery indic ators and escalation routes for each entity. Fire drill simulations of possible recovery even ts are used to test the effectiveness of NatWest Group and individu al legal entity recovery plans. The fire drills are designed to replicate possible financial stress conditions and allow seni or management to rehearse the res ponses and decisions that may be required in an actual stress event. The results a nd lessons learnt from the fire drills are use d to enhance NatWest Group’s approach to recovery planning. Under the resolution assessment part of the PRA rulebook, NatWest Group is required to carry out an assess ment of its preparations for resolution, sub mit a report of the assessment to the PRA and publish a summary of this repo rt. Resolution would be implement ed if NatWest Group was assessed by the UK authorities to have failed a nd the appropriate regulator put it into resolution. T he process of resolution is owned and implemented by the B ank of England (as the UK resolution authority). A multi-year program me is in place to further develop resolution capability in line wit h regulatory requirements. Stress testing – market risk Non-traded market risk Non-traded exposures are reported to the PRA on a quarterly basis. This provides the regulator with an ove rview of NatWest Group’s banking book interest rate exposu re. The report includes detailed product information analysed by in terest rate driver and other characteristics, including accounting classification, currency and counterparty type. Scenario analysis based on hypothetic al adverse scenarios is performed on non-traded exposures as part of the Bank of England and European Banking Authority stress test exercises. NatWest Group also produces an in ternal scenario analysis as part of its financial planning cycles . Non-traded exposures are capitalised through the ICAAP. This covers gap risk, basis risk, credit spread risk, pipeline risk, structural foreign exchange risk, prepayment risk, e quity risk and accounting volatility risk. The ICAA P is completed with a combination of value and earni ngs measures. The total non- traded market risk capital requirement is determined by adding the different charges for each sub risk type. The ICAAP methodology captures at least ten years of his torical volatility, produced with a 99% confidence level. Methodologies are reviewed by NatWest Group Model Risk and the results are approved by the NatWest Group T echnical Asset & Liability Management Committee. Non-traded market risk stress res ults are combined with those for other risks into the capital plan p resented to the Board. The cross-risk capital planning proce ss is conducted once a year, with a planning horizon of five years. The scenario narratives cover both regulatory scenarios and macroecono mic scenarios identified by NatWest Group. Vulnerability-based stress testing begins with the analysis of a portfolio and expresses its key vulnerabilities in terms of plausible, vulnerability scenarios under which the portfolio would suffer material losses. These scenarios can be historical, macroeconomic or forward-looking/hypothetical. Vulner ability- based stress testing is used for internal man agement information and is not subject to limits. The resul t s for relevant scenarios are reported to senio r management. Traded market risk NatWest Group carries out regul ar market risk stress testing to identify vulnerabilities and potential losses in excess of, or not captured in, value-at-risk. The calculated stresses measu re the impact of changes in risk factors on the fai r values of the trading portfolios. NatWest Group conducts histor ical, macroeconomic and vulnerability-based stress testing. Historical s tress testing is a measure that is used for intern al management. Using the historical simulation framework e mployed for value-at-risk, the current portfolio is stressed usi ng historical data since 1 January 2005. This methodology simulates the impact of the 99.9 percentile loss that would be incur red by historical risk factor movements over the period, assuming variable hol ding periods specific to the risk factors and the busine sses. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 196 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Risk management framework continu ed Historical stress tests form part of the m arket risk limit framework and their results are reported re gularly to senior management. Macroeconomic stress tests are ca rried out periodically as part of the bank-wide, cross-risk ca pital planning process. The scenario narratives are tra nslated into risk factor shocks using historical events a nd insights by economists, risk managers and the first line. Market risk stress results are combined wit h those for other risks into the capital plan presented to the Boa rd. The cross- risk capital planning process is conducted once a year, with a planning horizon of five years. The sc enario narratives cover both regulatory scenarios and macroeconomic scenarios identified by NatWest Group. Vulnerability-based stress testing begins with the analysis of a portfolio and expresses its key vulnerabilities in terms of plausible, vulnerability scenarios under which the portfolio would suffer material losses. These scenarios can be historical, macroeconomic or forward-looking/hypothetical. Vulner ability- based stress testing is used for internal man agement information and is not subject to limits. The resul t s for relevant scenarios are reported to senio r management. Internal scenarios During 2021, NatWest Group continuously refined and reviewed a series of internal scenarios – benchmarked against the Bank of England’s illustrative scenario – as the imp act of COVID-19 evolved, including actual and potential ef fects on economic fundamentals. These scenarios included:  The impact of travel restrictions, social distancing policie s, self-isolation and sickness on GDP, employmen t and consumer spending.  The impacts on business investment in critical secto rs.  The effect on house prices, commercial real estate values and major project finance.  The effect of government interventions such as the Job Retention Scheme and the Coronavirus Busines s Interruption Loan Scheme. Applying the macro-scenarios to NatWes t Group’s earnings, capital, liquidity and funding positions did not result in a breach of any regulatory thresholds. Internal scenarios were also used to assess the p otential impacts of severe weather events on NatWes t Group’s operations in the UK and India. Regulatory stress testing In 2021, NatWest Group participated in the regulatory stress tests conducted by the Bank of England following their suspension in 2020 as a result of COVID-19. The s cenario was hypothetical in nature and does not represent a fo recast of NatWest Group’s future business or profitability. T he results of regulatory stress tests are carefully asse ssed and form part of the wider risk management of NatWest Group. Follo wing the UK’s exit from the European Union on 31 Dec em ber 2020, only relevant European subsidiaries of NatWest Group will take part in the European Banking Authority stress tes ts going forward. NatWest Group itself will not participate. NatWest Group also took part in the Bank of England’s Climate Biennial Exploratory Scenario (CB ES). This exercise was designed to assess the resilience of the largest UK banks and insu rers to the physical and transition ris ks associated with climate change. The CBES used three 30-year scenarios to explore t he risks – Early Action (in which the trans ition to a net-zero emissions economy gets underway with carbon taxes and associ ated policies intensifying gradually), Late Action (i n which the transition is delayed until 2031, with a sudden increase in the intensity of carbon taxes and cli mate policy leading to a recession) and No Addition al Action (in which no new climat e policies are introduced and the physical impacts of climate change are most severe). The B ank of England is expected to publish aggregate findings in 20 22 though, given the exploratory natu re of the exercise, it will not use CBES to set capital requirements. Bank of England stress test Scenario Designed to assess the resilience of major UK banks to reasonable worst-case stress in the current environment. The severity of the test is related to policym akers’ assessments of risk levels ac ross markets and regions. The 2021 stress test assess ed the impact of a severe economic path from 2021 to 2025 on top of the economic shocks arising from the pandemic. The s cenario implied a cumulative th ree-year loss of 37% of 2019 UK GDP and 31% of 201 9 global GDP with the UK’s trading partners expe riencing severe and synchronised slowdowns, a decline in equity p rices and a rise in bond spreads. The sce nario also included a 33% fall in UK residential property prices and a rise in UK unemploymen t of 5.6 percentage points to peak at 11.9%. The stress was based on an end-of-202 0 balance sheet starting position. Results Under the 2021 Bank of England solvency s tress test, on an IFRS 9 transitional basis, the CET1 ratio reached a low point of 10.4%. This was above the reference rate of 7%. Tier 1 leverage ratio was projected to be 4.4 % under stress. This was above the reference r ate of 3.6% On an IFRS 9 non-transitional basis, the CET1 ratio reac hed a low point of 10.3%. This was above the reference rate of 7%. Tier 1 leve rage ratio was projected to be 4.4% under s tress. This was above the reference rate of 3.6% What does this mean? The 2021 Bank of England solve ncy stress result demonstrated that the b alance sheet continues to be robust with a strong capital position. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 197 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk Definition (audited) Credit risk is the risk that custo mers and counterparties fail to meet their contractual obligatio n to settle outstanding amounts. Sources of risk (audited) The principal sources of credit risk for NatWest Group are lending, off-balance sheet products, derivati ves and securities financing, and debt securities. NatWest G roup is also exposed to settlement risk through foreign exchange, t rade finance and payments activities. Key developments in 2021  The outlook for credit risk and asset quali ty improved during 2021 with the economic recovery from the disruption caused by COVID-19 being faster than initially forec ast.  The overall expected credit loss (ECL) decre ased materially as a result, with lower than expe cted defaults and exposures moving from Stage 2 into Stage 1. S tage 3 ECL charges remained low, reflecting the effe ct of government support schemes mitigating against defaul ts.  In Personal, lending criteria and underwri ting standards, which had been tightened during 20 20 in response to COVID-19, were selectively relaxed as economic co nditions improved and portfolio performance stabilis ed following the conclusion of payment holidays.  In Wholesale, sector specific risk appetite continued t o be closely monitored and appropriately adjus ted during the year for those sectors most aff ected by COVID-19. As in Personal, a selective relaxation of lending criteria and underwriting standards was poss ible as economic conditions improved and portfolio performance sta bilised.  NatWest Group continued to progress embed ding climate change considerations in credit asse ssment and monitoring, including scenario analysis to asse ss the materiality of climate change risks. For further information refer to the 2021 Climate-related disclosures report. Governance (audited) The Credit Risk function provid es oversight and challenge of frontline credit risk management activities. Governance activities include:  Defining credit risk appetite me asures for the management of concentration risk and credit policy to establish the key causes of risk in the process of providing credit and the controls that must be in place to mitiga te them.  Approving and monitoring operational limits for busine ss segments and credit limits for c ustomers.  Oversight of the first line of defence to ensure that credi t risk remains within the appetite set by the Board and that controls are being operated ade quately and effectively.  Assessing the adequacy of ECL provisions i ncluding approving key IFRS 9 inputs (su ch as significant increase in credit risk (SICR) thresholds) an d any necessary in-model and post model adjustments through Nat West Group and business unit provisions and model com mittees.  Development and approval of credit gr ading models. Risk appetite Credit risk appetite aligns to th e strategic risk appetite set by the Board and is set and monit ored through risk appetite frameworks tailored to NatWes t Group’s Personal and Wholesale segments. Personal The Personal credit risk appetite framework sets limits that control the quality and concentration of both e xisting and new business for each relevant busines s segment. These risk appetite measures consider the se gments’ ability to grow sustainably and the level of losses expected under stress. Credit risk is further controlled through o perational limits specific to customer or product characteristics. Wholesale For Wholesale credit, the framework has been desi gned to reflect factors that influence the ability to operate within risk appetite. Tools such as stress te sting and economic capital are used to measure credit risk volatility and develop links between the framework and risk appetite limits. Four formal frameworks are use d, classifying, measuring and monitoring credit risk exposure across single na me, sector and country concentrations and product and asset cl asses with heightened risk characteristics. The framework is supported by a suite of t ransactional acceptance standards that set out the risk par ameters within which businesses should operate . Credit policy standards are in p lace for both the Wholesale and Personal portfolios. They are expressed as a set of m andatory controls. Identification and measuremen t Credit stewardship (audited) Risks are identified through relationship man agement and credit stewardship of customers and portfolios. Credit risk stewardship takes place throughout the custo mer relationship, beginning with the initial approval. It includes the ap plication of credit assessment standards, c redit risk mitigation and collateral, ensuring that credit documen tation is complete and appropriate, carrying out regular portfolio o r customer reviews and problem debt identification and ma nagement. Asset quality (audited) All credit grades map to an ass et quality (AQ) scale, used for financial reporting. This AQ scale is based on Basel p robability of defaults. Performing loans are de fined as AQ1-AQ9 (where the probability of default (PD) is less than 100%) and defaulted non-performing loans as AQ10 or Stage 3 under IFRS 9 ( where the PD is 100%). Loans are defined as defaul ted when the payment status becomes 90 day s past due, or earlier if there is clear evidence that the borrower is unlikely to repay, for example bankruptcy or insolvency . Counterparty credit risk Counterparty credit risk arises from the obli gations of customers under derivative and secu rities financing transactions. NatWest Group mitigates counte rparty credit risk through collateralisation and netting agreements, w hich allow amounts owed by NatWest Group to a counterparty to be net ted against amounts the counterparty owe s NatWest Group. Mitigation Mitigation techniques, as set out in the ap propriate credit policies and transactional acceptance s tandards, are used in the management of credit portfolios across N atWest Group. These techniques mitigate credit concent rations in relation to an individual customer, a borrower group or a collec tion of related borrowers. Where possible, cus tomer credit balances are netted against obligations. Mitigation tools c an include structuring a security interest in a physical or financial asset, the use of credit derivatives including credit default sw aps, credit-linked debt instruments and securi tisation structures, and the use of guarantees and similar ins truments (for example, credit insurance) from related and third parties . Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 198 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk continued Property is used to mitigate credit risk across a number of portfolios, in particular residential mortga ge lending and commercial real estate (CRE). The valuation methodologies for collater al in the form of residential mortgage property and CRE are detailed below. Residential mortgages – NatWest Group takes colla teral in the form of residential property to mitigate the credit risk arising from mortgages. NatWest Grou p values residential property individually during the loan underwriting proce ss, either by obtaining an appraisal by a suitably qualified appraiser (for example, Royal Institution of Chartered Surveyo rs (RICS)) or using a statistically valid model. In both cases, a sample of the valuation outputs are periodically reviewed by an independent RICS qualified appraiser. NatWest Group updates residential property values quarterly using the relevant residential property index namely: Region Index used UK (including Northern Ireland) Office for National Statistics House Price Index Republic of Ireland Central Statistics Office Re sidential Property Price Index The current indexed value of th e property is a component of the ECL provisioning calculation. Commercial real estate valuations – NatWest Group has an actively managed panel of chartered survey ing firms that cover the spectrum of geography and property sectors in w hich NatWest Group takes collateral . Suitable RICS registered valuers for particular assets are typically contracted through a service agreement to ensure consistency of quality and advice. Valuations are generally commiss ioned when an asset is taken as security; a material increase in a facility is reques ted; or a default event is anticipated or has occur red. In the UK, an independent third-party market indexation is applied to update external valuations once they are mo re than a year old and every three years, a formal independent valuation review is commissioned. In the Republic of Ireland, assets are revalued in line with the Central Bank of Ire land threshold requirements, which permits indexation for lower value residential assets, bu t demands regular valuations for higher value assets. Assessment and monitoring Practices for credit stewardship – including cre dit assessment, approval and monitoring as well as the identification a nd management of problem debts – differ between the Personal and Wholesale portfolios. Personal Personal customers are served through a lendin g approach that entails offering a large number of small-value lo ans. To ensure that these lending decisions are ma de consistently, NatWest Group analyses internal credi t information as well as external data supplied by credit reference a gencies (including historical debt servicing behaviour of custo mers with respect to both NatWest Group and other le nders). NatWest Group then sets its lending rules accordingl y, developing different rules for different products. The process is then largely automated, wi th each customer receiving an individual credit score that reflects bo th internal and external behaviours and th is score is compared with the lending rules set. For relatively high-value, com plex personal loans, including some residential mortgage lending, s pecialist credit managers make the final lending decisions. These decisions are made within spec ified delegated authority limits that are issued dependent on the experience of the individual. Underwriting standards and portfolio performance a re monitored on an ongoing basis to ensure the y remain adequate in the current market environment and are not weakened materially to sustain growth. The actual performance of each portfolio is tracked relative to o perational limits. The limits apply to a range of credit risk-rel ated measures including projected credit default rates across products and the loan-to- value (LTV) ratio of the mortgage portfolios. Whe re operational limits identify areas of concern management action is taken to adjust credit or business strategy . Wholesale Wholesale customers – including corporates, b anks and other financial institutions – are grouped by industry secto rs and geography as well as by product/asset class and are managed on an individual basis. Customers are aggregated as a single risk when sufficiently interconnected. A credit assessment is carried out before credit facilities are made available to customers. The assessment process is dependent on the complexity of the t ransaction. Credit approvals are subject to environmental, social and governance risk policies which restrict expos ure to certain highly carbon intensive industries as well as those with poten tially heightened reputational impacts. Customer specif ic climate risk commentary is now mandatory . In response to COVID-19, a new framework was int roduced to categorise clients in a consistent manne r across the Wholesale portfolio, based on the effect of CO VID-19 on their financial position and outlook in relation to the sector risk appetite. This framework has been retained and updated to co nsider viability impacts beyond those directly related to COVID-19 and classification via the framework is now mandatory and must be refreshed annually. The framework extends t o all Wholesale borrowing customers and supple ments the Risk of Credit Loss framework in assessing whethe r customers exhibit a SICR, if support is considered to be granting forbe arance and the time it would take for customers to return to ope rating within transactional acceptance standards. Tailored appro aches were also introduced for business banking, co mmercial real estate and financial institution customers. For lower risk transactions below spec ific thresholds, credit decisions can be approved through self -sanctioning within the business. This process is facilitated through an au to-decision making system, which utilises s corecards, strategies and policy rules. Such credit decisions mus t be within the approval authority of the relevant busine ss approver. For all other transactions, credit is only g ranted to customers following joint approval by an approver f rom the business and the credit risk function or by two credit of ficers. The joint business and credit approvers act wi thin a delegated approval authority under the Wholesale Credit Authorities F ramework Policy. The level of delegated a uthority held by approvers is dependent on their experience and expertise with only a small number of senior executives holding the highest approval authority. Both business and credit approvers are acc ountable for the quality of each decision taken, although the credit risk approver holds ultimate sanctioning authority. Transactional acceptance standards provide de tailed transactional lending and risk a cceptance metrics and structuring guidance. As such, these standards provide a mechanism to manage risk appetite at the customer/transaction level and are supplementary to the established credit risk appetite. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 199 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk continued Credit grades (PD) and loss give n default (LGD) are reviewed and if appropriate reapproved annually. The review process assesses borrower performance, including reconfir mation or adjustment of risk parameter estimates; the adequacy of security; compliance with terms and conditions; and refin ancing risk. Problem debt management Personal Early problem identification Pre-emptive triggers are in place to help iden tify customers that may be at risk of being in financial diff iculty. These triggers are both internal, using NatWes t Group data, and external using information from credit ref erence agencies. Proactive contact is then made with the customer to establish if t hey require help with managing their finances. By adopting this approach, the aim is to prevent a customer’s financial p osition deteriorating which may then require intervention fro m the Collections and Recoveries teams. Personal customers experienci ng financial difficulty are managed by the Collections team. If the Collec tions team is unable to provide appropriate s upport after discussing suitable options with the customer, managemen t of that customer moves to the Recoveries team. If at any point in the collections and recoveries process, the custome r is identified as being potentially vulnerable, the customer will be se parated from the regular process and supported by a specialist tea m to ensure the customer receives appropriate suppor t for their circumstances. Collections When a customer exceeds an agreed limi t or misses a regular monthly payment the customer is contacted by Na tWest Group and requested to remedy the position. If the situ ation is not regularised then, where approp riate, the Collections team will become more involved and the customer will be supported by skilled debt management staff who endeavour to provide customers with bespoke solutions. Solutions include s hort-term account restructuring, refinance loans and forbearance w hich can include interest suspension and ‘breathing space’. In the event that an affordable/sustainable agreement wi th a customer cannot be reached, the debt will transiti on to the Recoveries team. For provisioning pu rposes, under IFRS 9, exposure to customers managed by the Collecti ons team is categorised as Stage 2 and sub ject to a lifetime loss assessment, unless it is 90 days past due or has an interest non-accrual status, in which case it is categorised as S tage 3. In the Republic of Ireland, the re lationship may pass to a specialist support team prior to any transfer to recoveries, depending on the outcome of c ustomer financial assessment. Recoveries The Recoveries team will issue a notice of intenti on to default to the customer and, if appropriate , a formal demand, while also registering the account with cr edit reference agencies where appropriate. Following this, the c ustomer’s debt may then be placed with a third-party debt collec tion agency, or alternatively a solicitor, in order to agree an aff ordable repayment plan with the customer. An option that may also be considered, is the sale of unsecured debt. Exposu res subject to formal debt recovery are defaul ted and, under IFRS 9, categorised as Stage 3. Wholesale Early problem identification Each segment and sector have defined early w arning indicators to identify customers experiencing financial difficulty, a nd to increase monitoring if needed. Ea rly warning indicators may be internal, such as a customer’s bank account activity, o r external, such as a publicly-liste d customer’s share price. If early warning indicators show a custo mer is experiencing potential or actual difficulty, or if relationship managers or credit officers identify other signs of f inancial difficulty, they may decide to classify the customer within the Risk of C r edit Loss framework. Risk of Credit Loss framework The framework focuses on Wholesale customers whose credi t profiles have deteriorated materially since origin ation. Expert judgment is applied by experience d credit risk officers to classify cases into categories that reflect progressively deteriorating credit risk to Nat West Group. There are two classifications in the framework that apply to non- defaulted customers – Heightened Monitoring and Risk of C redit Loss. For the purposes of provisioning, all exposures subject to the framework are categorised as Stage 2 and subjec t to a lifetime loss assessment. The framewor k also applies to those customers that have met NatWes t Group’s default criteria (AQ10 exposures). Defaulted exposures are ca tegorised as Stage 3 impaired for provisioni ng purposes. Heightened Monitoring customers are perfor ming customers that have met certain characteristics, which ha ve led to significant credit deterioration. C ollectively, characteristics reflect circumstances that may affect the customer’s ability to meet repayment obligations. Characte ristics include trading issues, covenant breaches, mate rial PD downgrades and past due facilities. Heightened Monitoring customers require pre-e mptive actions (outside the customer’s normal trading patte rns) to return or maintain their facilities within NatWest Group’s cu rrent risk appetite prior to maturity. Risk of Credit Loss customers a re performing customers that have met the criteria for Heighte ned Monitoring and also pose a risk of credit loss to NatWest Group in the next 12 months should mitigating action not be taken or not be succ essful. Once classified as either Heightened Monitoring o r Risk of Credit Loss, a number of mandatory actions a re taken in accordance with policies. Actions include a review of the customer’s credit grade, facility and security documentation and the valuation of security. De pending on the severity of the financial difficulty and the size of the exposu re, the customer relationship strategy is reassesse d by credit officers, by specialist credit risk or relationship m anagement units in the relevant business, or by Restructuring. Agreed customer management strategies a re regularly monitored by both the business and credit tea ms. The largest Risk of Credit Loss exposures are regularly re viewed by a Risk of Credit Loss forum. The forum members are expe rienced credit, business and restructuring specialists. The pu rpose of the forum is to review and challe nge the strategies undertaken for customers that pose the largest risk of credit loss t o NatWest Group. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 200 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk continued Appropriate corrective action is taken whe n circumstances emerge that may affect the custome r’s ability to service its debt (refer to Heightened Monitoring characteristics). Co rrective actions may include granting a c ustomer various types of concessions. Any decision to approve a concess ion will be a function of specific appetite, the c redit quality of the customer, the market environment and the loan structure and security. All customers granted forbearance are classifie d Heightened Monitoring as a minimum. Other potential outcomes of the relationship review are to: remove the customer from the Risk of Credit Loss framework, offer additional lending and continue monitorin g, transfer the relationship to Restructuring if appropriate, or e xit the relationship. The Risk of Credit Loss framework does not apply t o problem debt management for business banking customers. Thes e customers are, where necessary, managed by speci alist problem debt management tea ms, depending on the size of exposure or by the business banking recoveries tea m where a loan has been impaired. Restructuring Where customers are categoris ed as Risk of Credit Loss and the lending exposure is above £1 million, relationships a re supported by the Restructuring team. The o bjective of Restructuring is to protect NatWes t Group’s capital. Restructuring does this by working with corpo rate and commercial customers in financial difficulty to hel p them understand their options and how their restructu ring or repayment strategies can be de livered. Helping the customer return to financial health and re storing a normal banking relationship is always the preferred outco me, however, where a solvent outcome is not possible, insolvency may be considered as a last resort. Restructuring will always aim to recover capital fai rly and efficiently. Throughout Restructuring’s involvemen t, the mainstream relationship manager will remain a n integral part of the customer relationship. Restructuring’s work helps NatWest Group remain safe and sustainable, contributin g to its ability to champion potential. Forbearance (audited) Forbearance takes place when a conces sion is made on the contractual terms of a loan/debt in response to a customer’s financial difficulties. The aim of forbearance is to support and resto re the customer to financial health while minimising risk. To ensure t hat forbearance is appropriate for the needs of the customer, minimum standards are applied when asses sing, recording, monitoring and reporting forbearance. A credit exposure may be forborne more tha n once, generally where a temporary concession has been granted and circumstances warrant another temporary o r permanent revision of the loan’s terms. Loans are reported as forborne u ntil they meet the exit criteria as detailed in the appropriate r egulatory guidance. These include being classified as performing fo r two years since the last forbearance event, making regular repaymen ts and the loan/debt being less than 30 day s past due. Types of forbearance Personal In the Personal portfolio, forbearance may involve payment concessions and loan rescheduli ng (including extensions in contractual maturity), capitalisation of a rrears and, in the Republic of Ireland only, temporary inte rest-only or partial capital and interest arrangements. Forbear ance support is provided for both mortgages and unsecured lendi ng. Wholesale In the Wholesale portfolio, forbe arance may involve covenant waivers, amendments to margi ns, payment concessions and loan rescheduling (including extensions in contrac tual maturity), capitalisation of arrears, and de bt forgiveness or debt-for- equity swaps. Monitoring of forbearance Personal For Personal portfolios, forborne loans are separate d and regularly monitored and reported while the fo rbearance strategy is implemented, until they exit forbearance. Wholesale In the Wholesale portfolio, customer PDs and facility LGDs are reassessed prior to finalising any f orbearance arrangement. The ultimate outcome of a forbearance str ategy is highly dependent on the co-operation of the bo rrower and a viable business or repayment outcome. Where forbe arance is no longer appropriate, NatWest Group will consider o ther options such as the enforcement of security, insol vency proceedings or both, although these are options of last resort. Provisioning requirements on f orbearance are detailed in the Provisioning for forbearance sec tion. Credit grading models Credit grading models is the colle ctive term used to describe all models, frameworks and methodologies used to c alculate PD, exposure at default (EAD), LGD , maturity and the production of credit grades. Credit grading models are designed to provide:  An assessment of customer and transaction characteristics.  A meaningful differentiation of credit risk.  Accurate internal default rate, loss and exposure estimates that are used in the capital calc ulation or wider risk management purposes. Impairment, provisioning and write-offs (audited) In the overall assessment of cre dit risk, impairment provisioning and write-offs are used as key indica tors of credit quality. NatWest Group’s IFRS 9 provisioning models, which use existing Basel models as a starting point, inco rporate term structures and forward-looking information. Regulatory conse rvatism within the Basel models has been removed as app ropriate to comply with the IFRS 9 requirement fo r unbiased ECL estimates. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 201 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk continued Five key areas may materially influence the measurement of credit impairment under IFRS 9 – two of these relate to model build and three relate to model application: Model build:  The determination of economic indica tors that have most influence on credit loss for each portfolio and the severity of impact (this leverages existing s tress testing models which are reviewed annually).  The build of term structures to extend the deter mination of the risk of loss beyond 12 mont hs that will influence the impact of lifetime loss for exposures in Stage 2. Model application:  The assessment of the SICR an d the formation of a framework capable of consistent application.  The determination of asset lifetimes that refl ect behavioural characteristics while also repre senting management actions and processes (using historical data and expe rience).  The choice of forward-looking economic scenarios a nd their respective probability weights. Refer to Accounting policy 11 for fur ther details. IFRS 9 ECL model design principles (audited) Modelling of ECL for IFRS 9 follows the conventio nal approach to divide the estimation of credit losse s into its component parts of PD, LGD and EAD. To meet IFRS 9 requirements, the PD, LGD and EA D parameters differ from their Pillar 1 in ternal ratings based counterparts in the following aspects:  Unbiased – material regulatory conservatism has been removed from IFRS 9 parameters to produce unbiased estimates.  Point-in-time – IFRS 9 parameters reflec t actual economic conditions at the reporting date instead of lo ng-run average or downturn conditions.  Forward-looking – IFRS 9 PD e stimates and, where appropriate, EAD and LGD estimates refle ct forward- looking economic conditions.  Lifetime measurement – IFRS 9 PD, L GD and EAD are provided as multi-period term structures up to exposure lifetimes instead of over a fixed one-ye ar horizon. IFRS 9 requires that at each repor ting date, an entity shall assess whether the credit risk on an accoun t has increased significantly since initial recognition. Part of this asse ssment requires a comparison to be made between the cur rent lifetime PD (i.e. the PD over the remaining life time at the reporting date) and the equivalent lifetime PD as de termined at the date of initial recognition. For assets originated before IFRS 9 was introduced, comparable lifetime origination PDs did no t exist. These have been retrospectively created using the relevan t model inputs applicable at initial recognition. PD estimates Personal models Personal PD models use the Exogenous, Maturity and Vin tage (EMV) approach to model default rates. The EMV approach separates portfolio default risk trends into three components: vintage effects (quality of new busi ness over time), maturity effects (changes in risk relating to time on book) and exogenous effects (changes in risk relating to changes in macro-economic conditions). The EMV methodology h as been widely adopted across the industry because it en ables forward- looking economic information to be sys tematically incorporated into PD estimates. Wholesale models Wholesale PD models use a point-in-time/th rough-the-cycle framework to convert one-year regulatory PDs into point-in- time estimates that reflect economic conditions at the reporting date. The framework utilises cr edit cycle indices (CCIs) for a comprehensive set of region/industry seg ments. Further detail on CCIs is provided in the Economic loss d rivers section. One year point-in-time PDs are e xtended to forward-looking lifetime PDs using a conditional transition matrix approach and a set of econometric forecasting models. LGD estimates The general approach for the IFRS 9 LGD models is to leverage corresponding Basel LGD models with bespoke adjust ments to ensure estimates are unbiased and, where relevant, forward- looking. Personal Forward-looking information has only been inco rporated for the secured portfolios, where change s in property prices can be readily accommodated. Analysi s has shown minimal impact of economic conditions on LGDs for the othe r Personal portfolios. Wholesale Forward-looking economic information is inco rporated into LGD estimates using the existing CCI framewo rk. For low default portfolios, including sovereigns and b anks, loss data is too scarce to substantiate estimates that vary with economic conditions. Consequently, for th ese portfolios, LGD estimates are assumed to be constant throughout the p rojection horizon. EAD estimates Personal The IFRS 9 Personal modelling approach for EAD is dependent on product type.  Revolving products use the existing Basel models as a basis, with appropriate adjustments incorpor ating a term structure based on time to default.  Amortising products use an amortising schedule, whe re a formula is used to calculate the e xpected balance based on remaining terms and interest r ates.  There is no EAD model for Pers onal loans. Instead, debt flow (i.e. combined PD x EAD) is modelled directly. Analysis has indicated that there is minimal impact on EAD arising from changes in the economy for all Pe rsonal portfolios except mortgages. Therefore, f orward-looking information is only incorporated in the mortgage EAD model (through forecast changes in interest rates ). Wholesale For Wholesale, EAD values are projected using produc t specific credit conversion factors (CCFs), closely f ollowing the product segmentation and approach of the respective B asel model. However, the CCFs are estimate d over multi-year time horizons and contain no regulatory conse rvatism or downturn assumptions. No explicit forward-looking information is inco rporated, on the basis of analysis showing the temporal varia tion in CCFs is mainly attributable to changes in exposure ma nagement practices rather than economic conditions. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 202 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk continued Governance and post model adjustm ents (audited) The IFRS 9 PD, EAD and LGD models are subject to Na tWest Group’s model risk policy that stipulates periodic model monitoring, periodic re-validation and define s approval procedures and authorities according to mo del materiality. Various post model adjustments were applied whe re management judged they were necessary to ensure an adequate level of overall ECL p rovision. All post model adjustments were subject to formal approval throu gh provisioning governance, and were categorised as follows (business level commentary is provided below):  Deferred model calibrations – EC L adjustments where PD model monitoring indicated that actual defaul ts were below estimated levels but where it was judged that an implied ECL release was not supportable due to the influence of government support schemes. As a consequence, any potential ECL release was deferred and ret ained on the balance sheet.  Economic uncertainty – ECL adjustments primarily a rising from uncertainties associated with multiple economic scenarios (also for 2020) and credit outco mes as a result of the effect of COVID-19 and the consequences of government support schemes. In both cases , management judged that additional ECL was required until furthe r credit performance data became available on the behaviou ral and loss consequences of COVID-19 .  Other adjustments – ECL adjustments where it w as judged that the modelled ECL required to be amended. Post model adjustments will re main a key focus area of NatWest Group’s ongoing ECL adequacy asse ssment process. A holistic framework has been established including reviewi ng a range of economic data, external benchmark inform ation and portfolio performance trends, particularl y with more observable outcomes from the unwinding of COVID-19 support schemes. A key part of the assessment is also understandi ng the current levels of ECL coverage (portfolio by portfolio) ag ainst pre- COVID-19 levels, recognising changes in f ranchise portfolio/sector mix. ECL post model adjustments The table below shows ECL post model adjust ments. Retail Banking Wholesale Ulster Ban k RoI Mortgages Other Commercial Other Mortgages Other Total 2021 £m £m £m £m £m £m £m Deferred model calibrations 58 97 62 — — 2 219 Economic uncertainty 60 99 373 23 6 23 584 Other adjustments 37 — 2 3 156 — 198 Total 155 196 437 26 162 25 1,001 Of which: - Stage 1 9 5 13 2 4 1 34 - Stage 2 126 164 424 24 7 26 771 - Stage 3 20 27 — — 151 (2) 196 2020 Deferred model calibrations 25 9 13 — — 2 49 Economic uncertainty 79 79 526 18 113 63 878 Other adjustments 20 — 19 3 26 — 68 Total 124 88 558 21 139 65 995 Of which: - Stage 1 21 8 37 2 15 — 83 - Stage 2 93 78 521 19 47 65 823 - Stage 3 10 2 — — 77 — 89 (1) 2021 data excludes £49 million of p ost model adjustments (mortgages – £4 million; other – £45 million) for Ulster Bank RoI disclosed as discontinued operations. While in aggregate the post mo del adjustments have only seen a modest increase since 31 December 2020 , there was an increase on the proportion of ECL and notable shifts ac ross and within categories. These reflect:  Changes in profile in Ulster Bank RoI to reflect both the portfolio performance and the s trategic shift to exit the market.  A modest reduction in the judgmental uncertainty post model adjustments in the Whole sale portfolios, which was directionally in line with the portfolio quality an d some reduction in uncertainty about recovery in affe cted sectors in the economy.  In the Retail Banking portfolio, t o reflect a risk that default levels were being unsustainably suppressed due to the various temporary government le d support schemes (with the sustainability requiring further outcome d ata), management effected a hold back of further modelle d releases judgmentally through t he deferred model calibrations category. Retail Banking – The post model adjustment for deferred model calibrations increased to £155 million from £34 million at 31 December 2020. This reflected manageme nt’s continued judgment that the implied ECL decreases that continued to manifest themselves through the standard PD model monitoring process during the year, were not fully s upportable. Management retained this view on the basis that u nderlying portfolio performance is believed to be unde rpinned by government support schemes and further ou tcome data is required on the level of default suppression. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 203 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk continued The post model adjustment for economic uncertainty remained elevated at £159 million. The total included an ECL uplift of £26 million on a subset of customers who had accessed payment holiday support where their risk profile was identifie d as relatively high risk. In addition, NatWest Group continued to retain a holdback of a modelled ECL release of £ 69 million, again due to the delayed default emer gence reflective of the various customer support schemes (£15 million rel ated to mortgages and £54 million related to unse cured lending). The year end overlay position also included an ECL uplift on buy-to- let mortgages of £12 million to mitigate the risk of a disproportionate credit deterioration in challen ging economic circumstances. Other judgmental overlays incre ased due to the introduction of a new post model adjustment of £ 14 million to capture the impact of potential cladding risk in the portfoli o. Commercial Banking – The post model adjustmen t for economic uncertainty reduced f rom £526 million to £373 million during the year. It included an overlay of £328 million (£360 million across NatWest Group’s Wholesale po rtfolio) reflecting continued concern that the unprecedented natu re of COVID-19 might indicate that default level may be higher in f uture periods above that currently expected. In addition, it refle cted a risk that government support schemes during CO VID-19 could have suppressed defaults that may materialise in futu re periods above expected default levels. The reduction during t he year was mainly due to a sustained improvement in un derlying credit metrics which resulted in a decrease in St age 2 assets and reduced levels of uncertainty around economic ou tcome. The post model adjustment also included an ove rlay of £7 million in respect of elevated concerns aroun d borrowers’ ability to refinance facilities at the end of the contractu al term. The post model adjustment for deferred model cali brations on the business banking portfolio increased to £6 2 million during the year. This reflected manag ement’s judgment that the continued beneficial modelling impact, and i mplied ECL decrease, remained unsupportable while portfolio perfo rmance was being underpinned by the various suppo rt schemes. Other adjustments included an overlay of £2 million to mitigate the effect of operational timing delays in the identification and flagging of a SICR. This reduced from £19 million at 31 December 2020, mainly as a resu lt of a significantly reduced Stage 2 population and lower de faults across the portfolio. Ulster Bank RoI – Similar to Commercial Banki ng, the post model adjustment for economic uncertainty included an adjustment of £12 million reflecting concerns that the unprecedented nature of COVID-19 could resul t in longer debt recovery periods and lower value s than history suggested. It also included an adjustment of £9 million deferring the benefits of improvements in economic forecasts given ongoing uncertainty as well as an adjustment of £9 millio n in the SME portfolio, reflective of the elevated risk fo r this sector. Other judgmental overlays increased to £156 million from £2 6 million reflected management opinion that con tinuing actions on the phased withdrawal of Ulster Bank RoI from the I rish market will lead to higher, and/or earlier, crystallisation of losses. Other – The post model adjust ments held in other businesses were for similar reasons as those described above. Significant increase in credit risk (SICR) (audited) Exposures that are considered significantly c redit deteriorated since initial recognition are classifie d in Stage 2 and assessed for lifetime ECL measurement (e xposures not considered deteriorated carry a 12 month ECL). NatWest Group has adopted a framework to identify deterioration b ased primarily on relative movements in lifetime PD suppo rted by additional qualitative backstops. The princ iples applied are consistent across NatWest Group and align to c redit risk management practices, where appropriate. The framework comprises the following elements:  IFRS 9 lifetime PD assessment ( the primary driver) – on modelled portfolios, the assessment is base d on the relative deterioration in forward-lookin g lifetime PD and is assessed monthly. To assess whether credit dete rioration has occurred, the residual lifetime PD at balance she et date (which PD is established at date of initial recogni tion (DOIR)) is compared to the current PD. If the current lifeti me PD exceeds the residual origination PD by mo re than a threshold amount, deterioration is assu med to have occurred and the exposure transferred into Stage 2 fo r a lifetime loss assessment. For Whole sale, a doubling of PD would indicate a SICR subject to a minimum PD uplift of 0.1%. For Personal portfolios, the criteria vary by risk band, with lower risk exposures needing to deterior ate more than higher risk exposures, as outline d in the following table:  Qualitative high-risk backstops – the PD assessmen t is complemented with the use of qualitative high-risk backstops to further inform whe ther significant deterioration in lifetime risk of default has occur red. The qualitative high-risk backstop ass essment includes the use of the mandatory 30+ days past due backstop, as prescribed by IFRS 9 guidance, and other featu res such as forbearance support, Wholesale e xposures managed within the Risk of Credit Loss framework, and adverse c redit bureau results for Personal cus tomers. Where a Personal customer was granted a payment holiday (also referred to as a payment deferral) in response to COVI D-19, they were not automatically transferred in to Stage 2. However, a subset of Personal customers who had accessed p ayment holiday support, and where their risk profile w as identified as relatively high risk, were collectively migrated to St age 2 (if not in Stage 2 already). Any support provide d beyond completion of the second payme nt holiday was considered forbearance.  Persistence (Personal and busine ss banking customers only) – the persistence rule ensures that accounts which have met the criteria for PD driven d eterioration are still considered to be significantly deteriorated for three months thereafter. This additional rule e nhances the timeliness of capture in Stage 2. The persiste nce rule is applied to PD driven deterioration only. Personal risk bands PD bandings (based on residual lifetime PD calculated at DOIR) PD deterioration threshold criteria Risk band A <0.762% PD@DOIR + 1% Risk band B <4.306% PD@DOIR + 3% Risk band C >=4.306% 1.7 x PD@DOIR Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 204 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk continued The criteria are based on a significant amount of e mpirical analysis and seek to meet thre e key objectives:  Criteria effectiveness – the criteria should be e ffective in identifying significant credit deterioration and p rospective default population.  Stage 2 stability – the criteria should not in troduce unnecessary volatility in the Stage 2 popul ation.  Portfolio analysis – the criteria should produce results which are intuitive when reported as part of the wider credi t portfolio. Provisioning for forbearance (audited) Personal The methodology used for provis ioning in respect of Personal forborne loans will differ depen ding on whether the loans are performing or non-performing and which business is managing them due to local market conditions. Granting forbearance will only change the arrears status of the loan in specific circumstances, which ca n include capitalisation of principal and interest in arrears, where t he loan may be returned to the performing book if the custome r has demonstrated an ability to meet regul ar payments and is likely to continue to do so. The loan would continue to be reported as forborne un til it meets the exit criteria set out by the appropriate regulatory guidance. Additionally, for some forbearance types, a loa n may be transferred to the performing b ook if a customer makes payments that reduce loan arrears below 90 days (Retail Banking collections function). For ECL provisioning, all forborne but performing exposures are categorised as Stage 2 and are subject to a lif etime loss provisioning assessment. Where the forbear ance treatment includes the cessation of interest on the custome r balance (i.e. non-accrual), this will be treated as a Stage 3 default. For non-performing forborne lo ans, the Stage 3 loss assessment process is the sam e as for non-forborne loans. In the absence of any other forbearance or SICR triggers, customers granted COVID-19 re lated payment holidays were not considered forborne. However, any support pro vided beyond completion of a second payment holiday is conside r ed forbearance. Wholesale Provisions for forborne loans are assessed in accordance with normal provisioning policies. Th e customer’s financial position and prospects – as well as the likely effect of the forbearance, including any concessions granted, and revised PD or L GD gradings – are considered in or der to establish whether an impairment provision increase i s required. Wholesale loans granted forbearance are individually credit assessed in most cases. Performing loans subject to forbearance treatment are cate gorised as Stage 2 and subject to a lifetime loss assessment. Forbearance may result in the value of the outst anding debt exceeding the present value of the es timated future cash flows. This difference will lead to a cus tomer being classified as non- performing. In the case of non-performing f orborne loans, an individual loan impairment provision assessment generally t akes place prior to forbearance being granted. The amount of the loan impairment provision may change once the terms of the forbea rance are known, resulting in an addition al provision charge or a release of the provision in the period the f orbearance is granted. The transfer of Wholesale loans f rom impaired to performing status follows assessment by re lationship managers and credit. When no further losses are anticipated and the custo mer is expected to meet the loan’s revise d terms, any provision is written-off or released and the balance of the loan returned to performing status. This is not d ependent on a specified time period and follows the credit risk manager’s assessment. Customers seeking COVID-19 related support, includi ng payment holidays, who were not subject to any wider SICR triggers and who were assessed as having the ability in the medium term post-COVID-19 to be viable and meet credit appetite metrics, were not consi dered to have been granted forbearance. Asset lifetimes (audited) The choice of initial recognition and asse t duration is another critical judgment in determining the quantu m of lifetime losses that apply.  The date of initial recognition re flects the date that a transaction (or account) was firs t recognised on the balance sheet; the PD recorded at that time provides the baseline used for subsequent de termination of SICR as detailed above.  For asset duration, the approach applied (in line with IFRS 9 requirements) is:  Term lending – the contractual maturity date, reduced for behavioural trends where a ppropriate (such as, expected prepayment and amo rtisation).  Revolving facilities – for Person al portfolios (except credit cards), asset duration is based on behaviour al life and this is normally greater than contr actual life (which would typically be overnight). Fo r Wholesale portfolios, asset duration is based on annual cust omer review schedules and will be set to the nex t review date. In the case of credit cards, the most significan t judgment is to reflect the operational practice of card reissuance a nd the associated credit assessment as enabling a formal re- origination trigger. As a conseq uence, a capped lifetime approach of up to 36 months is us ed on credit card balances. If the approach was uncapped the ECL impact is esti mated at approximately £70 million (2020 – £11 0 million). However, credit card balances originated under the 0% b alance transfer product, and representing approximately 13 % of performing card balances, have their ECL calculated on a be havioural lifetime approach as opposed to being capped at a maximum of three years. The capped approach reflects NatWest G roup practice of a credit-based review of custome rs prior to credit card issuance and complies with IFRS 9. Benchmarking inf ormation indicates that peer UK banks use behavioural approaches in t he main for credit card portfolios with average durations betwee n three and ten years. Across Europe, durations are sho rter and are, in some cases, as low as one year. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 205 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk continued Economic loss drivers (audited) Introduction The portfolio segmentation and se lection of economic loss drivers for IFRS 9 follow closely the approach used in stress testing. To enable robust modelling the fo recasting models for each portfolio segment (defined by pro duct or asset class and where relevant, industry sector and region) are based on a selected, small number of econ omic factors, (typically three to four) that best explain the temporal varia tions in portfolio loss rates. The process to select economic loss d rivers involves empirical analysis and expert judgment. The most material economic loss drivers are shown in the table below. Portfolio Economic loss drivers UK retail mortgages UK unemployment rate, sterling swap rate, UK house price index, UK household debt to income UK retail unsecured UK unemployment rate, sterling swap rate, UK household debt to income UK large corporates World GDP, UK unemployment rate, sterling swap rate, stock price index UK commercial UK GDP, UK unempl oyment rate, sterling swap rate UK commercial real estate UK GDP, UK commercial property price index, sterling swap rate, stock price index RoI retail mortgages RoI unemployment rate, Europe an Central Bank base rate, RoI house price index (1) This is not an exhaustive list of econ omic loss drivers but shows the most material drivers for the most significant portfolios. Economic scenarios At 31 December 2021, the range of anticipated future economic conditions was defined by a set of four inte rnally developed scenarios and their respective probabilities. In addition to the base case, they comprised upside , downside and extreme downside scenarios. The scenarios primarily reflected a range of outcomes for the path of COVID-19 as well as reco very, and the associated effects on labour and asset markets. The four economic scenarios a re translated into forward-looking projections of CCIs using a set of e conometric models. Subsequently the CCI projections for the indivi dual scenarios are averaged into a single central CCI projection accor ding to the given scenario probabilities. The ce ntral CCI projection is then overlaid with an additional mean reversion assum ption i.e. that after reaching their worst forec ast position the CCIs start to gradually revert to their long-run average of zero. Upside – This scenario assumes a very stron g recovery through 2022 as consumers dip into excess savings built up over the last two years. The labour market remains resilie nt, with the unemployment rate falling below pre-COVID-19 levels. Infl ation is higher than the base case but eventu ally comes back close to the target. The strong economic recovery enable s tightening to be quicker than the base case. The housing market c ontinues its recent strong performance. Base case – COVID-19 related risks remain contai ned. After a strong recovery in 2021, the gr owth moderates in 2022. Most of the furloughed workers can go back to their existin g job or find a new job very quickly, with the unemployment rate reaching 4.1% by the end of 2022. Inflation initi ally increases but retreats over 2022. Interest rates are rais ed, starting in early 2022. There is a gradual cool down in the housing marke t but activity is still at healthy levels. Downside – This scenario assumes a reve rsal in recovery as inflation build up leads to a less ening of expectations. Interest rates are raised aggressively to counter the inflation risks. However, starting in 2023, the interest hikes are reversed to assist the recovery. Unemployment is higher than the base case and there is a modest decline in house prices. Extreme downside – This scenario assu mes a resurgence of COVID-19 related risks. There is a renewed downturn wi th declines in consumer spending and business investment. Interest rates are reduced into negative territory to -0.5 %. There is wide- spread job shedding in the labour market while asse t prices see deep corrections, with housing market falls hi gher than those seen during previous episodes. The recovery is tepid throughout the five-year period, meaning only a gradual decline in joblessness. The approach of using four scenarios is s imilar to that as at 31 December 2020. Previously, NatWest Grou p used five discrete scenarios to characterise the dis tribution of risks in the economic outlook. For 2021, the f our scenarios were deemed appropriate in capturing the uncertainty in econo mic forecasts and the non-linearity in outcom es under different scenarios. These four scenarios were deve loped to provide sufficient coverage across potential rises in unemployment, inf lation, asset price falls and the degree of permanent dama ge to the economy, around which there remains pronounce d levels of uncertainty. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 206 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk continued Economic loss drivers (audited) The tables and commentary be low provide details of the key economic loss drive rs under the four scenarios. The main macroeconomic variables for each of the fou r scenarios used for ECL modelling ar e set out in the main macroeconomic variables table below. The compound annu al growth rate (CAGR) for GDP is shown. It also shows the five-ye ar average for unemployment and the Bank of England base r ate. The house price index and commerci al real estate figures show the total change in each asset over five ye ars. Main macroeconomic variables 2021 2020 Extreme Extreme Upside Base ca se Downside downside Upside Bas e case Down side d ownside Five-year summary % % % % % % % % UK Republic of Ireland GDP - CAGR 4.4 3.7 2.9 1.6 4.2 3.5 3.0 1.6 Unemployment - average 4.2 5.2 6.8 9.3 5.6 7.5 9.3 11.2 House price index - total change 30.3 23.4 16.3 4.6 21.0 13.3 6.8 (7.0) European Central Bank base rate - ave rage 0.8 0.1 0.2 — 0.1 — — — World GDP - CAGR 3.5 3.2 2.6 0.6 3.5 3.4 2.9 2.8 Probability weight 30.0 45.0 20.0 5.0 20.0 40.0 30.0 10.0 (1) The five year period starts after Q3 2021 for 2021 and Q3 2020 for 2020 . (2) The Republic of Ireland unemployment rate in the table above and the tables that follow corresponds to the mid-point of the Irish Central Statistics Office lower and upper bound unemployment rate measures. Probability weightings of scenarios NatWest Group’s approach to IFRS 9 mul tiple economic scenarios (MES) involves selec ting a suitable set of discrete scenarios to characterise the dis tribution of risks in the economic outlook and assigning appropriate p robability weights. The scale of the economic impact of COVID-19 an d the range of recovery paths necessitates a change of appro ach to assigning probability weights from that used in recent updates . Prior to 2020, GDP paths for NatWest Group’s scena rios were compared against a set of 1,000 model runs, following which a percentile in the distribution was established that most closely corresponded to the scenario. Instead, NatWest Group has subjectively applie d probability weights, reflecting expert views within NatWest Group. The probability weight assignment was judged to present good coverage to the central scenarios and the po tential for a robust recovery on the upside and exceptionally challenging ou tcomes on the downside. A 30% weighting was applied to the upside scenario, a 45% weighting applie d to the base case scenario, a 20% weighting applied to the downside sce nario and a 5% weighting applied to the extreme downside sce nario. NatWest Group assessed the downside r isk posed by COVID-19 to be diminishing over the course of 2 021, with the vaccination roll- out and positive economic data being observed since t he gradual relaxing of lockdown res trictions. NatWest Group therefore judged it w as appropriate to apply a higher probability to upside-bias ed scenarios than at 31 December 2020. However, compare d to 31 December 2020, the base case has a higher weight reflec ting reduction in uncertainty as the path of economy recove ry became clearer. The 25% weighting to the two downside scena rios gives appropriate consideration to the threats posed to the recove ry, including inflation, supply and COVID-19-rel ated risks. Balanced against that is the adaptability of the UK economy to succe ssive waves of COVID-19, and the re silience of labour and asset markets. The potential for further better than e xpected outcomes is reflected in the 30% p robability weighting applied to the upside scenario. GDP - CAGR 2.4 1.7 1.4 0.6 3.6 3.1 2.8 1.3 Unemployment - average 3.5 4.2 4.8 6.7 4.4 5.7 7.1 9.7 House price index - total change 22.7 12.1 4.3 (5.3) 12.5 7.6 4.4 (19.0) Bank of England base rate - av erage 1.5 0.8 0.7 (0.5) 0.2 — (0.1) (0.5) Commercial real estate price - total cha nge 18.2 7.2 5.5 (6.4) 4.3 0.7 (12.0 ) (31.5) Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 207 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk continued Economic loss drivers 75 80 85 90 95 100 105 110 115 Q4 2019 Q4 2020 Q4 2021 Q4 2022 Q4 2023 Q4 2024 Q 4 2025 Q4 2026 UK gross domestic product Upside Base Downside Extreme downside -0.75 -0.50 -0.25 0.00 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 Q4 2019 Q 4 2020 Q4 2021 Q4 2022 Q4 2023 Q4 2024 Q4 2025 Q4 2026 % Bank of England base rate Upside Base Downside Extreme downside Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 208 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk continued Economic loss drivers (audited) Annual figures GDP - annual growth Extreme Extreme Upside Base case Downside downside Upside Base case Downside downside UK % % % % Republic of Ireland % % % % 2021 7.0 7.0 7.0 7.0 2021 15.1 15.1 15.1 15.1 2022 8.1 5.0 1.5 (3.6) 2022 8.9 6.8 2.9 (4.9) 2023 2.1 1.6 2.4 4.1 2023 5.8 4.1 3.8 5.3 2024 1.2 0.9 1.6 1.2 2024 3.0 3.1 3.3 3.1 2025 1.2 1.3 1.4 1.4 2025 2.9 3.1 3.1 3.2 2026 1.2 1.5 1.6 1.5 2026 2.8 2.7 2.7 3.1 Unemployment rate - annual average Extreme Extreme Upside Base case Downside downside Upside Base case Downside downside UK % % % % Republic of Ireland % % % % 2021 4.6 4.6 4.6 4.6 2021 11.2 11.2 11.2 11.2 2022 3.5 4.1 5.1 8.3 2022 4.5 5.5 8.8 13.7 2023 3.3 4.0 5.2 8.8 2023 4.1 5.3 7.2 10.2 2024 3.4 4.1 4.7 6.6 2024 4.0 5.1 6.3 8.4 2025 3.4 4.2 4.5 5.2 2025 4.0 5.0 5.7 7.5 2026 3.6 4.2 4.5 4.9 2026 4.0 5.0 5.5 7.0 House price index - four quarter growth Extreme Extreme Upside Base case Downside downside Upside Base case Downside downside UK % % % % Republic of Ireland % % % % 2021 6.9 6.9 6.9 6.9 2021 12.9 12.9 12.9 12.9 2022 7.9 1.6 (2.9) (20.4) 2022 12.2 5.1 (3.3) (17.8) 2023 4.2 1.6 (0.2) (2.6) 2023 3.4 4.0 2.0 (4.7) 2024 3.1 2.9 1.7 13.0 2024 2.6 3.3 4.1 16.1 2025 3.0 2.7 3.0 4.7 2025 3.4 3.4 5.9 6.8 2026 3.0 2.7 3.0 3.6 2026 3.3 3.0 4.4 4.9 Commercial real estate price - four quarter growth Bank of England base rate - annual average Extreme Extreme Upside Base case Downside downside Upside Base case Downside downside UK % % % % UK % % % % 2022 1.02 0.63 1.06 (0.40) 2023 3.4 1.9 4.2 17.2 2023 1.58 1.00 1.06 (0.50) 2024 1.7 0.2 1.7 5.2 2024 1.75 1.00 0.50 (0.50) 2025 0.6 (0.8) 0.3 3.5 2025 1.75 0.90 0.50 (0.50) 2026 (0.8) (0.8) (0.2) 3.2 2026 1.75 0.75 0.50 (0.50) Worst points 31 December 2021 31 December 2020 Extreme Extreme Downside downside Downside downside UK % Quarter % Quarter % Quarter % Quarter GDP (1.8) Q1 2022 (7.9) Q1 2022 (5.1) Q1 2021 (10.4) Q1 2021 Unemployment rate (peak) 5.4 Q1 2023 9.4 Q4 2022 9.4 Q4 2021 13.9 Q3 2021 House price index (3.0) Q3 2023 (26.0) Q2 2023 (11.2) Q2 2021 (32.0) Q4 2021 Commercial real estate price (2.5) Q1 2022 (29.8) Q3 2022 (28.9) Q2 2021 (40.4) Q2 2021 Bank of England base rate 1.5 Q4 2022 (0.5) Q2 2022 (0.1) Q3 2021 (0.5) Q1 2021 Republic of Ireland Unemployment rate (peak) 9.4 Q2 2022 15.1 Q2 2022 16.5 Q2 2020 18.1 Q4 2020 House price index (0.1) Q4 2022 (25.1) Q2 2023 (13.3) Q3 2021 (27.0) Q4 2021 (1) For the unemployment rate , the figures show the peak levels. For the Bank of England base rate, the figures show highest or lowest levels. For other parameters, the figures show falls relative to the starting period. The calculations are performed over five years , with a starting point of Q3 2021 for 31 December 2021 scenarios. 2021 8.4 8.4 8.4 8.4 GDP (0.7) Q1 2022 (8.9) Q2 2022 (5.5) Q1 2021 (13.8) Q1 2021 2021 0.10 0.10 0.10 0.10 2022 10.2 4.4 (2.7) (29.8) Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 209 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk continued Economic loss drivers (audited) Use of the scenarios in Personal lending Personal lending follows a discrete sc enario approach. The PD and LGD values for each discrete sce nario are calculated using product specific econometric models. Each accoun t has a PD and LGD calculated as probability weighted ave rages across the suite of economic scenarios. Use of the scenarios in Wholesale lending The Wholesale lending ECL met hodology is based on the concept of credit cycle indices (CC Is). The CCIs represent, similar to the exogenous comp onent in Personal, all relevant economic loss drivers for a region/industry se gment aggregated into a single index value that describes the loss rate conditions in the respective segment relative to its long-run average. A CCI value of zero corresponds t o loss rates at long- run average levels, a positive CC I value corresponds to loss rates below long run average levels and a nega tive CCI value corresponds to loss rates above long-run ave rage levels. The four economic scenarios a re translated into forward- looking projections of CCIs using a set of econo metric models. Subsequently the CCI projections for the indivi dual scenarios are averaged into a single central CCI projec tion according to the given scenario probabilities. T he central CCI projection is then overlaid with an additional mean reversion assumption i.e. that after one to two years into the forecast ho rizon the CCIs start to gradually revert to their long-run ave rage of zero. Finally, ECL is calculated using a Monte Carlo a pproach by averaging PD and LGD values arising from many CCI p aths simulated around the central CCI projection. The rationale for the Wholesale approach is the long-standing observation that loss rates in Wholesale portfolios ten d to follow regular cycles. This allows NatWes t Group to enrich the range and depth of future economic conditions e mbedded in the final ECL beyond what would be obtained fro m using the discrete macro-economic scenarios alo ne. Business banking, while part of the Wholesale seg ment, for reporting purposes, utilises the Personal lending rather than the Wholesale lending methodology. UK economic uncertainty Treatment of COVID-19 relief mechanisms Use of COVID-19 relief mechan isms (for example, payment holidays, CBILS and BBLS) does not automatically me rit identification of a SICR and trigger a Stage 2 classification in isolation. However, a subset of Personal c ustomers who had accessed payment holiday support, and whe re their risk profile was identified as relatively high risk conti nue to be collectively migrated into Stage 2 (if not alre ady captured by other SICR criteria). For Wholesale customers, NatWest Group continues t o provide support, where appropriate, to existing customers. Those w ho are deemed either (a) to require a prolonged timescale to return to within NatWest Group’s risk ap petite, (b) not to have been viable pre-COVID-19, or (c) not to be able to sustain their debt once COVID-19 is over, will trigger a SICR and, if concessions are sought, be categorised as forbo rne, in line with regulatory guidance. Payment holiday extensions bey ond an aggregate of 12 months in an 1 8 month period to cover continuing COVID-19 business interruption are ca tegorised as forbearance, including for customers where no othe r SICR triggers are present. In February 2021, the British Busi ness Bank announced details of Pay As You Grow (PAYG) options for borrowers of B BLS. The scheme options include the extension of lendi ng terms, periods of reduced repayments and six month payment holidays. PAYG options are a fe ature of BBLS rather than a concession granted by NatWest Group. It is the refore not automatically considered significant credit deterio ration and a Stage 2 trigger. NatWest Group relies on both custo mer attestations and existing credit monitoring procedu res to identify significant financial difficu lty. Should signs of financial stress be identified, a review is performed. If credit deterioration is confirmed, existing problem debt management journeys are followed and forbe arance (if a concession is granted) is marked in line with existing processes. This will result in Stage 2 transfer. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 210 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk continued Economic loss drivers (audited) Model monitoring and enhancement The severe economic impact from COVI D-19 and the ensuing government support schemes have disru pted the normal relationships between key economic loss drivers and credit outcomes. While most governm ent support schemes have now been phased out and economic conditions a re normalising, the effect of this disruption is still evident in model monitoring and accounted for in judgments applied to the use and recalibrations of models. Most significantly, latest PD model moni toring shows general overprediction across all key portfolios, i.e., obse rved default rates still at or even below pre-CO VID-19 levels despite increased PD estimates from a deteriora tion in several key economic variables. Model rec alibrations to adjust for this overprediction have been deferred base d on the judgment that default rate actuals are distorted due to government support. In addition, to account for residual model unce rtainty and the risk of eventual default emergence hitherto sup ressed by government support, lag assumptions of up to 12 m onths are applied in the models. These assumptions are consistent with and unchanged from previous disclosures in 2 021, although their effective impact gradually reduces over time. Industry sector detail – Wholesale only The economic impact of COVID-19 is highly diff erentiated by industry sector, with hospitality and other contact -based leisure, service, travel and pass enger transport activities significantly more affected than the overall econo my. On the other hand, the corporate and commercial econo metric forecasting models used in Wholesale are secto r agnostic. Sector performance was monitored throughou t the year and additional post model adjustments were recognised where a risk of higher than expected future default levels, includi ng their timing and value, was identified. Scenario sensitivity – Personal only For the Personal lending portfolio, the forwa rd-looking components of the IFRS 9 PD models con tinue to be modified, leveraging existing econometric models used in stress testing to ensure that PDs appropriately re flect the forecasts for unemployment and house prices in particular. Additionally, post model ECL a djustments were made in Personal to account for known model weaknes ses pre-dating COVID-19, pending the systematic re-development of the underlying models. Government guarantees In April 2021, the UK governme nt launched the Recovery Loan Scheme, replacing previous support schemes which a re now closed. Consistent with CBILS and the Coron avirus Large Business Interruption Loan Scheme (CLB ILS), the government guarantee is 80%. NatWest Group recognises lowe r LGDs for these lending products as a result, with 0% applied to the government-guaranteed part of the exposure. Nat West Group does not directly adjust the measurement of P D due to the government guarantee and continues to move ex posures into Stage 2 and Stage 3 where a si gnificant deterioration in credit risk or a default is identified. Wholesale support schemes The table below shows the sect or split for the Bounce Back Loan Sche me (BBLS) as well as associated debt spli t by stage. Associated debt refers to the n on-BBLS lending to customers who also have BBLS lendin g. Gross Carrying A mount Associated BBL and Of which: BBL debt associated debt Stage 1 Stage 2 Stage 3 31 December 2021 £m £m £m £ m £m £ m Wholesale Property 1,797 1,452 3,249 2,712 383 154 Financial institutions 39 32 71 41 26 4 Soverign 8 2 10 7,070 1,795 417 Of which: Airlines and aerospace 7 2 9 6 2 1 Automotive 373 160 533 429 81 23 Health 266 431 697 519 158 20 Land transport and logistics 231 85 316 237 58 21 Leisure 883 600 1,483 1,072 331 80 Oil and gas 11 4 15 11 3 1 Retail 956 445 1,401 1,110 236 55 Total 7,474 5,138 12,612 9,832 2,205 575 Not within audi t scope. 9 1 — Corporate 5,630 3,652 9,282 Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 211 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk continued Economic loss drivers (audited) Gross Carrying Amount Associated BBL and Of which: BBL debt associated debt Stage 1 Stage 2 Stag e 3 31 December 2020 £m £m £m £m £m £m Wholesale Property 1,996 1,801 3,797 2,603 1,146 48 Financial institutions 49 35 84 47 37 — Soverign 11 2 13 12 1 — Corporate 6,242 4,105 10,347 7,390 2,861 96 Of which: Airlines and aerospace 7 3 10 7 3 — Automotive 416 177 593 472 119 2 Health 314 510 824 470 343 11 Land transport and logistics 255 112 367 275 83 9 Leisure 989 712 1,701 1,191 477 33 Oil and gas 9 4 13 11 2 — Retail 1,078 512 1,590 1,207 374 9 Total 8,298 5,943 14,241 10,052 4,045 144 (1) The Recovery Loan Scheme, a successor to the closed BBLS was launched on 6 April 2021. Uptake of the new scheme was minimal with 527 customers having drawn down £54 million as at 31 December 2021 Measurement uncertainty and ECL sensitivity analysis (audited) The recognition and measurement of ECL is co mplex and involves the use of significant judgment and esti mation, particularly in times of economi c volatility and uncertainty. This includes the formulation and inc orporation of multiple forward- looking economic conditions into ECL to meet the measu rement objective of IFRS 9. The ECL provision is sensi tive to the model inputs and economic assumptions u nderlying the estimate. The focus of the simulations is on ECL provisioning requirements on performing exposures in S tage 1 and Stage 2. The simulations are run on a stand-alone basis and a re independent of each other; the potential ECL impacts reflect the simulated impact at 31 Dece mber 2021. Scenario impacts on SICR should be considered when evaluating t he ECL movements of Stage 1 and Stage 2. In all scenarios the total exposure was the same but exposure by st age varied in each scenario. Stage 3 provisions are not subje ct to the same level of measurement uncertainty – default is an observed eve nt as at the balance sheet date. Stage 3 provisions therefo re have not been considered in this analysis. The impact arising from the bas e case, upside, downside and extreme downside scenarios has bee n simulated. These scenarios are three of the four discrete sce narios used in the methodology for Personal multiple economic scena rios as described in the Economic loss drivers section. In the simulations, NatWest Group ha s assumed that the economic macro variables associated with these sc enarios replace the existing base case economic ass umptions, giving them a 100% probability weighting and therefore serving as a sin gle economic scenario. These scenarios have been applied to all modelled portfolios in the analysis below, with the simulation impacting both P Ds and LGDs. Modelled post model adjustments present i n the underlying ECL estimates are also sens itised in line with the modelled ECL movements, but those that were judg mental in nature, primarily those for deferred model c alibrations and economic uncertainty, were not (refer to the Go vernance and post model adjustments section). As expected, the s cenarios create differing impacts on EC L by portfolio and the impacts are deemed reasonable. In this simulation, it is assumed that existing modelled relationships between key economic variables and loss drivers hold, but in practice other f actors would also have an impact, for example, potential custo mer behaviour changes and policy changes by lenders that might i mpact on the wider availability of credit. NatWest Group’s core criterion to identify a SICR is fou nded on PD deterioration, as discussed above. Under the simulations, PDs change and result in expos ures moving between Stage 1 and Stage 2 contributing to the ECL impact. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 212 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk continued Measurement uncertainty and ECL sensitivity an alysis (audited) Extreme 2021 Actual Bas e case Upside Downside downside Stage 1 modelled exposure (£m) Retail Banking - mortgages 157,456 157,803 159,093 153,018 128,673 Retail Banking - unsecured 7,386 7,435 7,675 6,939 5,975 Wholesale - property 28,047 28,137 28,181 27,995 26,074 Wholesale - non-property 103,604 104,080 104,309 103,749 92,645 296,493 297,455 299,258 291,701 253,367 Stage 1 modelled ECL (£m) Retail Banking - mortgages 13 12 11 14 22 Retail Banking - unsecured 112 109 107 107 95 Wholesale - property 24 22 26 21 20 Wholesale - non - property 112 113 112 114 98 261 256 256 256 235 Stage 2 modelled exposure (£m) Retail Banking - mortgages 10,728 10,381 9,091 15,166 39,511 Retail Banking - unsecured 2,934 2,885 2,645 3,381 4,345 Wholesale - property 3,220 3,130 3,086 3,272 5,193 Wholesale - non-property 16,908 16,432 16,203 16,763 27,867 33,790 32,828 31,025 38,582 76,916 Stage 2 modelled ECL (£m) Retail Banking - mortgages 155 152 135 177 379 Retail Banking - unsecured 435 435 413 475 562 Wholesale - property 109 105 99 110 191 Wholesale - non-property 701 674 666 680 989 1,400 1,366 1,313 1,442 2,121 Stage 1 and Stage 2 modelled exposure (£m) Retail Banking - mortgages 168,184 168,184 168,184 168,184 168,184 Retail Banking - unsecured 10,320 10,320 10,320 10,320 10,320 Wholesale - property 31,267 31,267 31,267 31,267 31,267 Wholesale - non-property 120,512 120,512 120,512 120,512 120,512 330,283 330,283 330,283 330,283 330,283 Stage 1 and Stage 2 modelled ECL (£m) Retail Banking - mortgages 168 164 146 191 401 Retail Banking - unsecured 547 544 520 582 657 Wholesale - property 133 127 125 131 211 Wholesale - non-property 813 787 778 794 1,087 1,661 1,622 1,569 1,698 2,356 Stage 1 and Stage 2 coverage (%) Retail Banking - mortgages 0.10% 0.10% 0.09% 0.11% 0.24% Retail Banking - unsecured 5.30% 5.27% 5.04% 5.64% 6.37% Wholesale - property 0.43% 0.41% 0.40% 0.42% 0.67% Wholesale - non-property 0.67% 0.65% 0.65% 0.66% 0.90% 0.50% 0.49% 0.48% 0.51% 0.71% Reconciliation to Stage 1 and Stage 2 ECL (£m) ECL on modelled exposures 1,661 1,622 1,569 1,698 2,356 ECL on Ulster Bank RoI modelle d exposures 74 74 74 74 74 ECL on non-modelled exposures 45 45 45 45 45 Total Stage 1 and Stage 2 ECL 1,780 1,741 1,688 1,817 2,475 Variance – (lower)/higher to ac tual total Stage 1 and Stage 2 ECL (39) (92) 37 695 (1) Variations in future undrawn exposure values a cross the scenarios are modelled, however the exposure position reported is that used to calculate modelled ECL as at 31 December 2021 and therefore does not include variation in f uture undrawn exposure values. (2) Reflects ECL for all modelled exp osure in scope for IFRS 9. The analysis excludes non-modelled portfolios and exposure relating to bonds and cash . (3) Exposures related to Ulster Bank RoI continui ng operations have not been included in the simulations, the current Ulster Bank RoI ECL has been included across all scenarios to enable reconciliation to other disclosures. (4) All simulations are run on a stand-alone bas is and are independent of each other, with the potential ECL impact reflecting the simulated impact as at 31 December 2021. The simulations change the composition of Stage 1 and Stage 2 exposure but total exposure is unchanged under each scenario as the loan population is static. (5) Refer to the Economic loss drivers s ection for details of economic scenarios. (6) Refer to the NatWest Group 2020 Ann ual Report and Accounts for 2020 comparatives. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 213 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk continued Measurement uncertainty and ECL adequacy (audited)  During 2021, both the Stage 2 size and overall modelled ECL reduced as a result of the improved economic outlo ok and scenario weightings, together with stable p ortfolio performance. Judgmental ECL post model a djustments, although reduced, continued to refle ct residual economic uncertainty with the expectation of increased defaults la ter in 2022 and beyond, now represe nting 26% of total ECL (2020 – 16%). These combined f actors, in conjunction with a less severe suite of economics in the 2021 extreme downside scenario, contributed to a smalle r range of ECL sensitivities at 31 December 2021 compared to the 20 20 year end.  If the economics were as negative as observed in the extreme downside, total Stage 1 and Stage 2 ECL was simulated to increase by £0.7 bil lion (approximately 39%). In this scenario, Stage 2 exposure increased signific antly and was the key driver of the simulated ECL rise. The mo vement in Stage 2 balances in the other simulations was les s significant.  In th e Wholesale po rtfolios, the outcome range of scenarios, except for the extreme downside, was relatively narrow. This was due to the combined eff ect of the assumption that government support schemes will delay defaults, mea n reversion of CCIs and that only in the extreme downside CCIs do deteriorate beyond their year-end starting point.  The lower modelled ECL in the downside scenario for Wholesale compared to the actual cent ral scenario reflected the net effect of the MES weightings towards the downside for ECL. Single factor sensitivity In addition to scenario sensitivit y, NatWest Group uses single factor analysis to support its evaluation and govern ance. This covers changes such as the variation of an individu al input parameter (economic or credit) or a change of sce nario weightings. The application of single f actor analysis recognises the limitation that it is not normal for one single factor to vary in isolation, but can help identify possible risks in t he credit portfolios. At 31 December 2021, NatWest Group conside red the effect of moving the unemployment peak in the b ase case from 4.1% to 7.5% in 2022 but without changing expectations in subseque nt years. This had the effect of inc reasing ECL requirement by approximately 4.5% and 2.5% for the UK Ret ail and Wholesale portfolios respectively. The lower effect on the Wholes ale portfolio reflected that unemployment is not a significant loss d river for property exposures nor some of NatWest Group’s specialised len ding areas. The improvement in the economic outlook an d scenarios used in the IFRS 9 MES framework in 202 1 resulted in a release of modelled ECL. Given that continued uncertain ty remains due to COVID-19 despite the improve d economic outlook, NatWest Group utilised a framework of quantit ative and qualitative measures to support the directional change and levels of ECL coverage, including economic data, credi t performance insights and problem debt trends. This was particula rly important for consideration of post model adjustments. As government support schem es continued to conclude during 2021, NatWest Group anticipate s further credit deterioration in the portfolios. However, the income statement ef fect of this will be mitigated by the forward-looking provisions retained on the balance sheet as at 31 December 202 1. There are a number of key factors that could d rive further downside to impairments, through deteriorating econo mic and credit metrics and increased stage migr ation as credit risk increases for more customers. A key factor would be a more adverse deterioration in GDP a nd unemployment in the economies in which NatWest Group ope rates, but also, among others:  The ongoing trajectory of lockdown restrictions within the UK and the Republic of Ireland, and any future repeated lockdown requirements.  The progress of the COVID-19 vaccination roll-out and its effectiveness against new variants.  The long-term efficacy of the various government support schemes in terms of their ability to defray cust omer defaults is yet to be proven over an ext ended period.  The effect on customer affordability in the event of sust ained inflationary pressures.  The level of revenues lost by corporate clients and p ace of recovery of those revenues may affect NatWest Group’s clients’ ability to service their borrowing, e specially in those sectors most exposed to the effec ts of COVID-19. Movement in ECL provision The table below shows the mai n ECL provision movements. ECL provision £m At 1 January 2021 6,186 Transfers to disposal groups (166) Changes in economic forecasts (611) Changes in risk metrics and exposure: Stage 1 a nd Stage 2 (931) Changes in risk metrics and exposure: Stage 3 374 Judgmental changes: changes in post model adjustments for Stage 1, Stage 2 and Stage 3 6 Write-offs and other (1,052) At 31 December 2021 3,806 At 1 January 2020 3,792 2020 movements 2,394 At 31 December 2020 6,186 Not within audi t scope. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 214 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities Introduction This section details the credit risk profile of NatWest Grou p’s banking activities. Refer to Accounting policy 1 1 and Note 15 to the consolidated financial statements for policies and critical judgments relating to impai rment loss determination. Presentation of discontinued operations and assets and liabili ties of disposal groups Two legally binding agreements f or the sale of the UBIDAC business were announce d in 2021 as part of the phased withdrawal from the Republic of Ireland: The s ale of commercial lending to Allied Irish B anks p.l.c. and the performing non-tracker mort gages, performing micro-SME loans, UB IDAC’s asset finance business and 25 of its branch locations to Permanent TSB p.l.c.. T he business activities relating to these sales that meet the requirements of IFRS 5 are presented as a disco ntinued operation and as a disposal group on 31 December 2021. The Ulster Bank RoI operating segment continues to be reported separately and reflects the res ults of its continuing operations. Refer to Note 8 to the consolidated financial s tatements for further details. Financial instruments within the scope of the IFRS 9 ECL framework (audited) Refer to Note 10 to the consolidated financial statemen ts for balance sheet analysis of financ ial assets that are classified as amortised cost or fair value through other comprehensive i ncome (FVOCI), the starting point f or IFRS 9 ECL framework assessment. The table below excludes loans in disposal group of £9.1 billion. Financial assets 31 December 2021 31 December 2020 Gross ECL Net Gross ECL Net £bn £bn £bn £bn £bn £bn Balance sheet total gross amortised cost and FVOCI 596.1 555.0 In scope of IFRS 9 ECL framework 590.9 548.8 % in scope 99% 99% Loans to customers - in scope - amortised cost 361.9 3.7 358.2 365.5 6.0 359.5 Loans to customers - in scope - FVOCI 0.3 — 0.3 — — — Loans to banks - in scope - amortised cost 7.6 — 7.6 6.8 — 6.8 Total loans - in scope 369.8 3.7 366.1 372.3 6.0 366.3 Stage 1 330.8 0.3 330.5 287.1 0.5 286.6 Stage 2 34.0 1.4 32.6 78.9 3.0 75.9 Stage 3 5.0 2.0 3.0 6.3 2.5 3.8 Other financial assets - in scope - amortised cost 184.4 — 184.4 132.1 — 132.1 Other financial assets - in scope - FVOCI 36.7 — 36.7 44.4 — 44.4 Total other financial assets - in scope 221.1 — 221.1 176.5 — 176.5 Stage 1 220.8 — 220.8 175.5 — 175.5 Stage 2 0.3 — 0.3 1.0 — 1.0 Out of scope of IFRS 9 ECL framework 5.2 na 5.2 6.2 na 6.2 Loans to customers - out of sco pe - amortised cost 0.8 na 0.8 1.0 na 1.0 Loans to banks - out of scope - amortised cos t 0.1 na 0.1 0.1 na 0.1 Other financial assets - out of scope - amortised cost 4.0 na 4.0 4.6 na 4.6 Other financial assets - out of scope - FVOCI 0.3 na 0.3 0.5 na 0.5 na = not appli cable The assets outside the scope of IFRS 9 ECL framewo rk were as follows:  Settlement balances, items in the course of collection, c ash balances and other non-credit risk asse ts of £3.7 billion (2020 – £4.1 billion). These we re assessed as having no ECL unless there was evidence that they were defaul ted.  Equity shares of £0.3 billion (2020 – £0.3 billion) as not within the IFRS 9 ECL framework by definition.  Fair value adjustments on loans and debt securities hedged by interest rate swaps, where the u nderlying loan was within the IFRS 9 ECL scope – £0 .8 billion (2020 – £1.4 billion).  NatWest Group originated securitisations, where ECL was captured on the underlying loans of £ 0.4 billion (2020 – £0.4 billion). Contingent liabilities and commitments In addition to contingent liabilitie s and commitments disclosed in Note 27 to the consolidated financial statemen ts, reputationally-committed limits are also included in the scope of the IFRS 9 ECL framework. These were offset by £0.8 billion (2020 – £0.2 billion) out of scope balances prima rily related to facilities that, if drawn, would not be classified as amortised cost or FVOCI, or undrawn limits relating to financial assets exclusions. Total contingent lia bilities (including financial guarantees) and commitments within IFRS 9 ECL scope of £127.9 billion (2020 – £1 33.6 billion) comprised Stage 1 £119.5 billion (2020 – £107.4 billion); Stage 2 £7.8 billion (2020 – £25.2 billion); and Stage 3 £0.6 billion (2020 – £1.0 billion). The ECL relating to off balance s heet exposures is £0.1 billion (2020 - £0.2 billion). The total ECL in the re mainder of the credit risk section of £3.8 billion included ECL fo r both on and off balance sheet exposures for continuing opera tions. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 215 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities continued Segment analysis – portfolio summary (audited) The table below shows gross loans and ECL, by segment and stage, within the scope of the IFRS 9 ECL framework. Go - forward group Total Ulster Retail Private Commercial RBS NatWest Central items excluding Bank Banking Banking Banking International Markets & other Ulster Ban k RoI RoI Total 2021 £m £m £m £m £m £m £m £m £m Loans - amortised cost and FV OCI Stage 1 168,013 17,600 82,893 16,185 8,290 32,283 325,264 5,560 330,824 Stage 2 13,594 967 17,853 477 147 90 33,128 853 33,981 Stage 3 1,884 270 1,820 162 99 — 4,235 787 5,022 Of which: individual — 270 631 162 91 — 1,154 61 1,215 Of which: collective 1,884 — 1,189 — 8 — 3,081 726 3,807 Subtotal excluding disposal group loans 183,491 18,837 102,566 16,824 8,536 32,373 362,627 7,200 369,827 Disposal group loans 9,084 9,084 Total 16,284 378,911 ECL provisions (1) Stage 1 134 12 116 7 6 17 292 10 302 Stage 2 590 29 758 23 3 11 1,414 64 1,478 Stage 3 850 37 651 25 75 — 1,638 388 2,026 Of which: individual — 37 221 25 67 — 350 13 363 Of which: collective 850 — 430 — 8 — 1,288 375 1,663 Subtotal excluding ECL provisions on disposal group loans 1,574 78 1,525 55 84 28 3,344 462 3,806 ECL on disposal group loans 109 109 Total 571 3,915 ECL provisions coverage (2) Stage 1 (%) 0.08 0.07 0.14 0.04 0.07 0.05 0.09 0.18 0.09 Stage 2 (%) 4.34 3.00 4.25 4.82 2.04 12.22 4.27 7.50 4.35 Stage 3 (%) 45.12 13.70 35.77 15.43 75.76 — 38.68 49.30 40.34 ECL provisions coverage excluding disposal group loans 0.86 0.41 1.49 0.33 0.98 0.09 0.92 6.42 1.03 ECL provisions coverage on disposal group loans 1.20 1.20 Total 3.51 1.03 Impairment (releases)/losses ECL (release)/charge (3) (36) (54) (1,073) (52) (35) — (1,250) (28) (1,278) Stage 1 (387) (45) (818) (39) (15) (3) (1,307) (70) (1,377) Stage 2 157 (15) (272) (16) (11) 3 (154) (33) (187) Stage 3 194 6 17 3 (9) — 211 75 286 Of which: individual — 6 19 3 (6) — 22 (2) 20 Of which: collective 194 — (2) — (3) — 189 77 266 Continuing operations (36) (54) (1,073) (52) (35) — (1,250) (28) (1,278) Discontinued operations (57) (57) Total (85) (1,335) Amounts written-off 220 6 467 28 67 — 788 88 876 Of which: individual — 6 378 28 43 — 455 — 455 Of which: collective 220 — 89 — 24 — 333 88 421 For the notes to this table refer to the following pa ge. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 216 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities continued Segment analysis – portfolio summary (audited) Go - forward group Total Ulster Retail Private Commercial RBS NatWest Central items excluding Bank Banking Banking Banking International Markets & other Ulster Bank RoI RoI Total 2020 £m £m £m £m £m £m £m £m £m Loans - amortised cost and FV OCI Stage 1 139,956 15,321 70,685 12,143 7,780 26,859 272,744 14,380 287,124 Stage 2 32,414 1,939 37,344 2,242 1,566 110 75,615 3,302 78,917 Stage 3 1,891 298 2,551 211 171 — 5,122 1,236 6,358 Of which: individual — 298 1,578 211 162 — 2,249 43 2,292 Of which: collective 1,891 — 973 — 9 — 2,873 1,193 4,066 174,261 17,558 110,580 14,596 9,517 26,969 353,481 18,918 372,399 ECL provisions (1) Stage 1 134 31 270 14 12 13 474 45 519 Stage 2 897 68 1,713 74 49 15 2,816 265 3,081 Stage 3 806 39 1,069 48 132 — 2,094 492 2,586 Of which: individual — 39 607 48 124 — 818 13 831 Of which: collective 806 — 462 — 8 — 1,276 479 1,755 1,837 138 3,052 136 193 28 5,384 802 6,186 ECL provisions coverage (2) Stage 1 (%) 0.10 0.20 0.38 0.12 0.15 0.05 0.17 0.31 0.18 Stage 2 (%) 2.77 3.51 4.59 3.30 3.13 13.64 3.72 8.03 3.90 Stage 3 (%) 42.62 13.09 41.91 22.75 77.19 — 40.88 39.81 40.67 1.05 0.79 2.76 0.93 2.03 0.10 1.52 4.24 1.66 Impairment (releases)/losses ECL (release)/charge (3,4) 792 100 1,927 107 40 26 2,992 139 3,131 Stage 1 (36) 25 ( 58) 8 (2) 10 (53) (36) (89) Stage 2 619 60 1,667 71 54 15 2,486 115 2,601 Stage 3 209 15 318 28 (12) 1 559 60 619 Of which: individual — 15 166 28 (3) — 206 (12) 194 Of which: collective 209 — 152 — (9) 1 353 72 425 Continuing operations 792 100 1,927 107 40 26 2,992 139 3,131 Discontinued operations 111 111 Total 250 3,242 Amounts written - off 378 5 321 3 11 — 718 219 937 Of which: individual — 5 172 3 11 — 191 — 191 Of which: collective 378 — 149 — — — 527 219 746 (1) Includes £5 million (2020 – £6 million) related t o assets classified as FVOCI. (2) ECL provisions coverage is calculated as ECL provisions divided by loans – amortised cost and FVOCI. It is calculated on third party loans and total ECL provisions. (3) Includes a £3 million charge (2020 – £12 million charge) related to other financial assets, of which £2 million release (2020 – £2 million charge) related to assets classified as FVOCI; and £34 million release (2020 – £28 million charge) related to contingent liabilities. (4) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8 to the consolidated financial statements. (5) The table shows gross loans only and excludes amounts that are outside the scope of the ECL framework. Refer to the Financial instruments within the scope of the IFRS 9 ECL framework section for further details. Other financial assets within the scope of the IFRS 9 ECL framework were cash and balances at central banks totalling £176.3 billion (2020 – £122.7 billion) and debt securities of £44.9 billion (2020 – £53.8 billion).  Stage 1 and Stage 2 ECL reduc ed significantly during 2021, with sustained improvement in underlying risk me trics mainly due to the improved economic outlook and underpinned by various government suppor t schemes.  The Stage 2 population reduce d reflecting lower underlying PDs, resulting in migration of cases back into Stage 1. However, the Stage 2 population remained above pre- COVID-19 levels.  Stage 3 loans and ECL balances reduced, mainly due to write-off, repayment of defaulted debt and portfolio sale of defaulted debt. To date, the various COVI D-19 related government support schemes have mi tigated new flows into default. It is expected that defa ults will increase as the effect of the various government support schemes unwin ds. The table below shows Ulster Bank RoI dispos al groups for Personal and Wholesale, by stage, for gross loans, off-balance sheet exposures and ECL. The tables in the res t of the Credit risk section are shown on a continuin g basis and therefore exclude these exposures. Loans - amortised cos t Off-balance sh eet and FVOCI Loan Contingent ECL provisions Stage 1 Stage 2 Stage 3 Total commitments liabilities Stage 1 Stag e 2 Stag e 3 Total 2021 £m £m £m £m £m £m £m £m £m £m Personal 5,547 210 34 5,791 — — 4 6 7 17 Wholesale 2,647 639 7 3,293 1,665 115 10 78 4 92 Total 8,194 849 41 9,084 1,665 115 14 84 11 109 Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 217 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities continued Segmental loans and impairmen t metrics (audited) The table below shows gross loans and ECL provisions, by days past due, by se gment and stage, within the scope of the ECL framework. Gross loans ECL provisions (2) Stage 2 (1) Stage 2 (1) Not past Not past Stage 1 due 1 - 30 DPD >30 DPD Total Stage 3 Total Stage 1 due 1 - 30 DPD >30 DPD Total Stage 3 Total 2021 £m £m £m £m £m £m £m £m £m £m £m £m £m £m Retail Banking 168,013 12,275 863 456 13,594 1,884 183,491 134 516 38 36 590 850 1,574 Private Banking 17,600 902 27 38 967 270 18,837 12 29 — — 29 37 78 Personal 14,350 137 24 11 172 232 14,754 6 2 — — 2 18 26 Wholesale 3,250 765 3 27 795 38 4,083 6 27 — — 27 19 52 Commercial Banking 82,893 16,792 437 624 17,853 1,820 102,566 116 724 23 11 758 651 1,525 RBS International 16,185 431 18 28 477 162 16,824 7 23 — — 23 25 55 Personal 2,647 21 17 11 49 57 2,753 2 1 — — 1 10 13 Wholesale 13,538 410 1 17 428 105 14,071 5 22 — — 22 15 42 NatWest Markets 8,290 12 9 — 18 147 99 8,536 6 3 — — 3 75 84 Ulster Bank RoI 5,560 74 7 58 48 853 787 7,200 10 58 3 3 64 388 462 Personal 5,165 510 52 46 608 609 6,382 7 15 3 3 21 301 329 Wholesale 395 237 6 2 245 178 818 3 43 — — 43 87 133 Central items & other 32,283 90 — — 90 — 32,373 17 11 — — 11 — 28 Total loans 330,824 31,366 1,403 1,212 33,981 5,022 369,827 302 1,364 64 50 1,478 2,026 3,806 Of which: Personal 190,175 12,943 956 524 14,423 2,782 207,380 149 534 41 39 614 1,179 1,942 Wholesale 140,649 18,423 447 688 19,558 2,240 162,447 153 830 23 11 864 847 1,864 2020 Retail Banking 139,956 30,714 1,080 620 32,414 1,891 174,261 134 762 70 65 897 806 1,837 Private Banking 15,321 1,908 17 14 1,939 298 17,558 31 67 — 1 68 39 138 Personal 12,799 116 17 11 144 263 13,206 7 2 — — 2 19 28 Wholesale 2,522 1,792 — 3 1,795 35 4,352 24 65 — 1 66 20 110 Commercial Banking 70,685 36,451 589 304 37,344 2,551 110,580 270 1,648 44 21 1,713 1,069 3,052 RBS International 12,143 2,176 46 20 2,242 211 14,596 14 72 1 1 74 48 136 Personal 2,676 18 17 14 49 70 2,795 3 1 — — 1 11 15 Wholesale 9,467 2,158 29 6 2,193 141 11,801 11 71 1 1 73 37 121 NatWest Markets 7,780 1,457 — 109 1,566 171 9,517 12 49 — — 49 132 193 Ulster Bank RoI 14,380 2,964 144 194 3,302 1,236 18,918 45 227 15 23 265 492 802 Personal 11,117 1,500 115 130 1,745 1,064 13,926 27 74 9 13 96 392 515 Wholesale 3,263 1,464 29 64 1,557 172 4,992 18 153 6 10 169 100 287 Central items & other 26,859 110 — — 110 — 26,969 13 15 — — 15 — 28 Total loans 287,124 75,780 1,876 1,261 78,917 6,358 372,399 519 2,840 130 111 3,081 2,586 6,186 Of which: Personal 166,548 32,348 1,229 775 34,352 3,288 204,188 171 839 79 78 996 1,228 2,395 Wholesale 120,576 43,432 647 486 44,565 3,070 168,211 348 2,001 51 33 2,085 1,358 3,791 2019 Retail Banking 144,513 11,921 1,034 603 13,558 1,902 159,973 114 375 45 47 467 823 1,404 Private Banking 14,956 478 63 46 587 207 15,750 7 6 — 1 7 29 43 Personal 11,630 180 60 41 281 192 12,103 3 2 — 1 3 23 29 Wholesale 3,326 298 3 5 306 15 3,647 4 4 — — 4 6 14 Commercial Banking 88,100 10,837 254 262 11,353 2,162 101,615 152 195 12 7 214 1,021 1,387 RBS International 14,834 520 18 7 5 45 121 15,500 4 6 — — 6 21 31 Personal 2,799 27 17 6 50 65 2,914 1 1 — — 1 12 14 Wholesale 12,035 493 1 1 495 56 12,586 3 5 — — 5 9 17 NatWest Markets 9,273 176 4 — 180 169 9,622 10 5 — — 5 131 146 Ulster Bank RoI 15,409 1,405 104 133 1,642 2,037 19,088 29 39 6 8 53 693 775 Personal 10,858 944 96 105 1,145 1,877 13,880 12 20 6 6 32 591 635 Wholesale 4,551 461 8 28 497 160 5,208 17 19 — 2 21 102 140 Central items & other 15,282 3 — — 3 — 15,285 6 — — — — — 6 Total loans 302,367 25,340 1,477 1,051 27,868 6,598 336,833 322 626 63 63 752 2,718 3,792 Of which: Personal 169,800 13,072 1,207 755 15,034 4,036 188,870 130 398 51 54 503 1,449 2,082 Wholesale 132,567 12,268 270 296 12,834 2,562 147,963 192 228 12 9 249 1,269 1,710 For the notes to this table refer to the following pa ge. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 218 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities continued Segmental loans and impairmen t metrics (audited) The table below shows ECL and ECL provisio ns coverage, by days past due, by segment and stage, within the scope of the ECL framework. ECL provisions covera ge ECL Stage 2 (1,2) Total Not past (release) / Amounts Stage 1 due 1 - 30 DPD >30 DPD Total Stage 3 Total charge (3) written - off 2021 % % % % % % % £m £m Retail Banking 0.08 4.20 4.40 7.89 4.34 45.12 0.86 (36) 220 Private Banking 0.07 3.22 — — 3.00 13.70 0.41 (54) 6 Personal 0.04 1.46 — — 1.16 7.76 0.18 1 3 Wholesale 0.18 3.53 — — 3.40 50.00 1.27 (55) 3 Commercial Banking 0.14 4.31 5.26 1.76 4.25 35.77 1.49 (1,073) 467 RBS International 0.04 5.34 — — 4.82 15.43 0.33 (52) 28 Personal 0.08 4.76 — — 2.04 17.54 0.47 — 1 Wholesale 0.04 5.37 — — 5.14 14.29 0.30 (52) 27 NatWest Markets 0.07 2.33 — — 2.04 75.76 0.98 (35) 67 Ulster Bank RoI 0.18 7.76 5.17 6.25 7.50 49.30 6.42 (28) 88 Personal 0.14 2.94 5.77 6.52 3.45 49.43 5.16 (7) 76 Wholesale 0.76 18.14 — — 17.55 48.88 16.26 (21) 12 Central items & other 0.05 12.22 — — 12.22 — 0.09 — — Total loans 0.09 4.35 4.56 4.13 4.35 40.34 1.03 (1,278) 876 Of which: Personal 0.08 4.13 4.29 7.44 4.26 42.38 0.94 (42) 300 Wholesale 0.11 4.51 5.15 1.60 4.42 37.81 1.15 (1,236) 576 2020 Retail Banking 0.10 2.48 6.48 10.48 2.77 42.62 1.05 792 378 Private Banking 0.20 3.51 — 7.14 3.51 13.09 0.79 100 5 Personal 0.05 1.72 — — 1.39 7.22 0.21 (5) 1 Wholesale 0.95 3.63 — 33.33 3.68 57.14 2.53 105 4 Commercial Banking 0.38 4.52 7.47 6.91 4.59 41.91 2.76 1,927 321 RBS International 0.12 3.31 2.17 5.00 3.30 22.75 0.93 107 3 Personal 0.11 5.56 — — 2.04 15.71 0.54 4 3 Wholesale 0.12 3.29 3.45 16.67 3.33 26.24 1.03 103 — NatWest Markets 0.15 3.36 — — 3.13 77.19 2.03 40 11 Ulster Bank RoI 0.31 7.66 10.42 11.86 8.03 39.81 4.24 139 219 Personal 0.24 4.93 7.83 10.00 5.50 36.84 3.70 98 212 Wholesale 0.55 10.45 20.69 15.63 10.85 58.14 5.75 41 7 Central items & other 0.05 13.64 — — 13.64 — 0.10 26 — Total loans 0.18 3.75 6.93 8.80 3.90 40.67 1.66 3,131 937 Of which: Personal 0.10 2.59 6.43 10.06 2.90 37.35 1.17 889 594 Wholesale 0.29 4.61 7.88 6.79 4.68 44.23 2.25 2,242 343 2019 Retail Banking 0.08 3.15 4.35 7.79 3.44 43.27 0.88 393 235 Private Banking 0.05 1.26 — 2.17 1.19 14.01 0.27 (6) 1 Personal 0.03 1.11 — 2.44 1.07 11.98 0.24 5 1 Wholesale 0.12 1.34 — — 1.31 40.00 0.38 (11) — Commercial Banking 0.17 1.80 4.72 2.67 1.88 47.22 1.36 391 450 RBS International 0.03 1.15 — — 1.10 17.36 0.20 2 5 Personal 0.04 3.70 — — 2.00 18.46 0.48 — 5 Wholesale 0.02 1.01 — — 1.01 16.07 0.14 2 — NatWest Markets 0.11 2.84 — — 2.78 77.51 1.52 (51) 16 Ulster Bank RoI 0.19 2.78 5.77 6.02 3.23 34.02 4.06 (6) 85 Personal 0.11 2.12 6.25 5.71 2.79 31.49 4.57 11 69 Wholesale 0.37 4.12 — 7.14 4.23 63.75 2.69 (17) 16 Central items & other 0.04 — — — — — 0.04 1 — Total loans 0.11 2.47 4.27 5.99 2.70 41.19 1.13 724 792 Of which: Personal 0.08 3.04 4.23 7.15 3.35 35.90 1.10 409 310 Wholesale 0.14 1.86 4.44 3.04 1.94 49.53 1.16 315 482 (1) 30 DPD – 30 days past due, the mandatory 30 days past d ue backstop as prescribed by IFRS 9 for a SICR. (2) ECL provisions on contingent liab ilities and com mitments are included within th e Financial assets section so as not to distort ECL coverage ratios. (3) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8 to the consolidated financial statements. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 219 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities continued Segmental loans and impairmen t metrics (audited)  Retail Banking – Balance sheet growth during 20 21 was mainly due to mortgages. In lin e with the market, mortgage demand was strong during the year, supported by the extension of the stamp duty holiday and ove rall improvements in economic conditions. The improved economic outlook captured in the updated MES scenarios, including a more positive forecast on unemploy ment levels, resulted in reduced account level PDs. Unsecured len ding balances decreased as customer spend and dema nd for borrowing were subdued as a result of CO VID-19 restrictions, particularly in the first quarter of 2021 . Lending criteria were cautiously relaxed during 202 1 to support growing demand as lockdown res trictions eased.  Portfolio performance remained stable, for further details refer to the Personal portfolio se ction. Arrears levels in both the mortgage and unsecured portfolios remained lo w overall. However, a small number of customers who u tilised their full payment holiday, did migrate into late ar rears during the second half of the year. With COVID-19 p ayment holidays complete, this trend stabilised by the ye ar end and new inflows to arrears were below pre-COVID-19 levels.  ECL in Stage 2 decreased due to migrations back in to Stage 1, following the effects of improving econo mic scenarios during 2021 and cont inued stable portfolio performance supporting improved risk metrics. However, the ECL coverage on remaining Stage 2 e xposures increased simply due to the relative underlying risk p rofile of the remaining Stage 2 expos ures. The various COVID-19 related customer support schemes (for example, loan repayment holidays, government job reten tion scheme) mitigated actual portfolio deteri oration in the short-term, with the arrears levels and flows into Stage 3 yet to be materially affected. Total ECL coverage reduced further in the fourth quarter of 2021, overall mirroring the posi tive trajectory of the COVID-19 vaccinations, labour market trends and portfolio performance , whilst maintaining coverage for the key portfolios above pre-COVID-19 levels given the persisting sources of unce rtainty, including the Omicron variant and inflationar y pressures on customers.  Commercial Banking – Balance shee t reduction was mainly as a result of repayments of both COVI D-19 government lending schemes and conventio nal borrowing where demand was lower, particularly in the second half of the year. Strategic reduction was achie ved in high risk sectors.  The improved economic outlook, including sig nificant increases in GDP and commercial real estate valua tions, resulted in lower IFRS 9 PDs. Conseque ntly, compared to 2020, a smaller proportion of the exposures exhibited a SICR, which resulted in a migration of assets f rom Stage 2 into Stage 1. As a result, the ECL requirement reduced.  Reflecting the continued level of uncertainty caused by COVID-19, management judged that certain ECL p ost model adjustments remained nec essary, refer to the Governance and post model adjus tments section for further details. The increase in Stage 2 e xposures that were past due greater than 30 days was mainly due to the commencement of repayments of governmen t scheme debt with some borrowers failing to meet scheduled repayments. The lower coverage of this population was driven by the guaranteed nature of government support sche mes. Conventional bank debt did not s ee a significant increase in past due balances.  The various COVID-19 related customer suppo rt schemes and economic recovery continued to mitigate agai nst flows into default. The reduction in coverage in Stage 1 a nd Stage 2 was mainly due to the decrease in ECL during 2021, primarily as a result of the improved economic outlook. There was a reduction in Stage 3 c overage as balances reduced and were not replaced by new flo ws, write-offs of existing debt were also higher in the ye ar. Coverage remained above pre-COVID-19 levels . The loss rate was significantly lower than in the prior year.  Other – The reasons for the increased ECL require ment were similar to those described above. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 220 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities continued Sector analysis – portfolio summary (audited) The table below shows financial assets and off -balance sheet exposures gross of ECL and related ECL provisions, impairment and past due by sector, asset quality and geogr aphical region. Personal Wholesale Mortgages Credit Other (1) cards personal Total Property Corporate FI Sovereign Total Total 2021 £m £m £m £m £m £m £m £m £m £m Loans by geography 194,011 3,947 9,422 207,380 32,522 70,851 53,041 6,033 162,447 369,827 - UK 187,847 3,877 9,253 200,977 31,574 62,952 39,086 4,542 138,154 339,131 - RoI 6,164 70 147 6,381 130 1,222 116 4 1,472 7,853 - Other Europe — — — — 439 3,831 5,066 840 10,176 10,176 - RoW — — 22 22 379 2,846 8,773 647 12,645 12,667 Loans by stage 194,011 3,947 9,422 207,380 32,522 70,851 53,041 6,033 162,447 369,827 - Stage 1 180,418 2,924 6,833 190,175 28,679 53,803 52,263 5,904 140,649 330,824 - Stage 2 11,543 933 1,947 14,423 3,101 15,604 732 121 19,558 33,981 - Stage 3 2,050 90 642 2,782 742 1,444 46 8 2,240 5,022 - Of which: individual 269 — 19 288 329 583 7 8 927 1,215 - Of which: collective 1,781 90 623 2,494 413 861 39 — 1,313 3,807 Loans - past due analysis (3,4) 194,011 3,947 9,422 207,380 32,522 70,851 53,041 6,033 162,447 369,827 - Not past due 190,834 3,834 8,619 203,287 31,391 68,630 52,285 6,030 158,336 361,623 - Past due 1-30 days 1,217 28 124 1,369 521 1,081 732 2 2,336 3,705 - Past due 31-89 days 592 25 73 690 256 448 19 1 724 1,414 - Past due 90-180 days 367 22 61 450 91 215 1 — 307 757 - Past due >180 days 1,001 38 545 1,584 263 477 4 — 744 2,328 Loans - Stage 2 11,543 933 1,947 14,423 3,101 15,604 732 121 19,558 33,981 - Not past due 10,259 899 1,785 12,943 2,725 14,870 708 120 18,423 31,366 - Past due 1-30 days 843 16 97 956 125 318 4 — 447 1,403 - Past due 31 - 89 days 441 18 65 524 251 416 20 1 688 1,212 Weighted average life - ECL measurement (years) 8 2 5 5 5 6 3 1 6 6 Weighted average 12 months PDs - IFRS 9 (%) 0.16 4.84 2.73 0.36 0.76 1.85 0.14 0.14 1.00 0.65 - Basel (%) 0.76 3.31 3.22 0.91 1.20 1.74 0.14 0.16 1.04 0.97 ECL provisions by geography 768 260 914 1,942 374 1,411 57 22 1,864 3,806 - UK 449 258 904 1,611 331 1,124 47 18 1,520 3,131 - RoI 319 2 10 331 19 107 3 1 130 461 - Other Europe — — — — 20 77 4 1 102 102 - RoW — — — — 4 103 3 2 112 112 ECL provisions by stage 768 260 914 1,942 374 1,411 57 22 1,864 3,806 - Stage 1 32 59 58 149 24 96 14 19 153 302 - Stage 2 174 141 299 614 111 713 39 1 864 1,478 - Stage 3 562 60 557 1,179 239 602 4 2 847 2,026 - Of which: individual 19 — 12 31 69 261 — 2 332 363 - Of which: collective 543 60 545 1,148 170 341 4 — 515 1,663 ECL provisions coverage (%) 0.40 6.59 9.70 0.94 1.15 1.99 0.11 0.36 1.15 1.03 - Stage 1 (%) 0.02 2.02 0.85 0.08 0.08 0.18 0.03 0.32 0.11 0.09 - Stage 2 (%) 1.51 15.11 15.36 4.26 3.58 4.57 5.33 0.83 4.42 4.35 - Stage 3 (%) 27.41 66.67 86.76 42.38 32.21 41.69 8.70 25.00 37.81 40.34 ECL (release)/charge (58) (14) 30 (42) (477) (724) (38) 3 (1,236) (1,278) - UK (52) (14) 31 (35) (457) (647) (12) 3 (1,113) (1,148) - RoI (6) - (1) (7) (5) (24) 2 — (27) (34) - Other Europe — — — — (7) (7) (21) — (35) (35) - RoW — — — — (8) (46) (7) — (61) (61) Amounts written-off 85 74 141 300 271 271 34 - 576 876 Not within audit scope. For the notes to this table refer to page 223 . Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 221 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities continued Sector analysis – portfolio summary (audited) Personal Wholesale Credit Other Mortgages (1) cards personal Total Property Corporate FI Sover eign Total Total 2021 £m £m £m £m £m £m £m £m £m £m Loans by residual maturity 194,011 3,947 9,422 207,380 32,522 70,851 53,041 6,033 162,447 369,827 - <1 year 3,611 2,532 3,197 9,340 7,497 22,593 41,195 2,809 74,094 83,434 - 1-5 year 12,160 1,415 5,393 18,968 16,293 33,301 10,969 1,967 62,530 81,498 - 5 year 178,240 — 832 179,072 8,732 14,957 877 1,257 25,823 204,895 Other financial assets by asset quality (2) — — — — 55 11 11,516 209,553 221,135 221,135 - AQ1 - AQ4 — — — — — 11 10,974 209,551 220,536 220,536 - AQ5-AQ8 — — — — 55 — 542 2 599 599 Off - balance sheet 16,827 15,354 8,230 40,411 16,342 52,033 17,898 1,212 87,485 127,896 - Loan commitments 16,827 15,354 8,170 40,351 15,882 49,231 16,906 1,212 83,231 123,582 - Financial guarantees — — 60 60 460 2,802 992 — 4,254 4,314 Off-balance sheet by asset quality (2) 16,827 15,354 8,230 40,411 16,342 52,033 17,898 1,212 87,485 127,896 - AQ1-AQ4 14,792 248 6,591 21,631 12,550 30,417 16,192 1,064 60,223 81,854 - AQ5-AQ8 2,028 14,804 1,625 18,457 3,757 21,262 1,703 148 26,870 45,327 - AQ9 — 9 3 12 6 48 1 — 55 67 - AQ10 7 293 11 311 29 306 2 — 337 648 For the notes to this table refer to page 223 . Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 222 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities continued Sector analysis – portfolio summary (audited) Personal Wholesale Credit Other Mortgages (1) cards person al Total Property Corpora te FI Sovereign Tota l Total 2020 £m £m £m £m £m £m £m £m £m £m Loans by geography 190,516 3,895 9,777 204,188 38,076 77,533 47,643 4,959 168,211 372,399 - UK 176,866 3,816 9,580 190,262 35,617 65,968 34,847 3,776 140,208 330,470 - RoI 13,650 79 197 13,926 1,241 4,056 348 30 5,675 19,601 - Other Europe — — — — 772 4,132 4,535 538 9,977 9,977 - RoW — — — — 446 3,377 7,913 615 12,351 12,351 Loans by stage 190,516 3,895 9,777 204,188 38,076 77,533 47,643 4,959 168,211 372,399 - Stage 1 158,387 2,411 5,750 166,548 23,733 48,090 44,002 4,751 120,576 287,124 - Stage 2 29,571 1,375 3,406 34,352 13,021 27,716 3,624 204 44,565 78,917 - Stage 3 2,558 109 621 3,288 1,322 1,727 17 4 3,070 6,358 - of which: individual 308 — 26 334 987 958 9 4 1,958 2,292 - of which: collective 2,250 109 595 2,954 335 769 8 — 1,112 4,066 Loans - past due analysis (3,4) 190,516 3,895 9,777 204,188 38,076 77,533 47,643 4,959 168,211 372,399 - Not past due 186,592 3,770 8,868 199,230 36,818 75,690 47,195 4,689 164,392 363,622 - Past due 1-30 days 1,482 29 192 1,703 348 990 328 270 1,936 3,639 - Past due 31-89 days 863 26 135 1,024 260 251 113 — 624 1,648 - Past due 90-180 days 456 20 66 542 161 67 — — 228 770 - Past due >180 days 1,123 50 516 1,689 489 535 7 — 1,031 2,720 Loans - Stage 2 29,571 1,375 3,406 34,352 13,021 27,716 3,624 204 44,565 78,917 - Not past due 27,893 1,340 3,115 32,348 12,708 27,036 3,484 204 43,432 75,780 - Past due 1-30 days 1,038 18 173 1,229 160 457 30 — 647 1,876 - Past due 31 - 89 days 640 17 118 775 153 223 110 — 486 1,261 Weighted average life - ECL measurement (years) 9 2 5 6 4 6 4 — 5 5 Weighted average 12 months PDs - IFRS 9 (%) 0.72 6.17 4.82 1.03 3.99 3.70 0.51 0.13 2.73 1.81 - Basel (%) 0.85 3.40 3.82 1.03 1.66 2.51 0.32 0.15 1.54 1.25 ECL provisions by geography 1,005 354 1,036 2,395 1,175 2,478 121 17 3,791 6,186 - UK 506 351 1,024 1,881 1,069 1,907 60 12 3,048 4,929 - RoI 499 3 12 514 41 277 3 1 322 836 - Other Europe — — — — 53 125 46 1 225 225 - RoW — — — — 12 169 12 3 196 196 ECL provisions by stage 1,005 354 1,036 2,395 1,175 2,478 121 17 3,791 6,186 - Stage 1 51 53 67 171 123 188 23 14 348 519 - Stage 2 319 225 452 996 507 1,487 90 1 2,085 3,081 - Stage 3 635 76 517 1,228 545 803 8 2 1,358 2,586 - of which: individual 18 — 12 30 360 436 3 2 801 831 - of which: collective 617 76 505 1,198 185 367 5 — 557 1,755 ECL provisions coverage (%) 0.53 9.09 10.60 1.17 3.09 3.20 0.25 0.34 2.25 1.66 - Stage 1 (%) 0.03 2.20 1.17 0.10 0.52 0.39 0.05 0.29 0.29 0.18 - Stage 2 (%) 1.08 16.36 13.27 2.90 3.89 5.37 2.48 0.49 4.68 3.90 - Stage 3 (%) 24.82 69.72 83.25 37.35 41.23 46.50 47.06 50.00 44.23 40.67 ECL (release)/charge (5) 276 191 422 889 733 1,407 95 7 2,242 3,131 - UK 181 190 420 791 703 1,276 48 6 2,033 2,824 - RoI 95 1 2 98 (1) 54 — — 53 151 - Other Europe — — — — 21 34 38 — 93 93 - RoW — — — — 10 43 9 1 63 63 Amounts written-off 221 95 278 594 54 287 2 — 343 937 Not within audit scope. For the notes to this table refer to the following pa ge. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 223 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities continued Sector analysis – portfolio summary (audited) Personal Wholesale Credit Other Mortgages cards personal Total Property Corporate FI Sovereign Total Total 2020 £m £m £m £m £m £m £m £m £m £m Loans by residual maturity 190,516 3,895 9,777 204,188 38,076 77,533 47,643 4,959 168,211 372,399 - <1 year 3,831 2,557 3,249 9,637 8,669 23,015 38,203 2,196 72,083 81,720 - 1-5 year 12,193 1,338 5,509 19,040 20,029 36,640 8,340 1,590 66,599 85,639 - 5 year 174,492 — 1,019 175,511 9,378 17,878 1,100 1,173 29,529 205,040 Other financial assets by asset quality (2) — — — — 98 116 11,093 165,209 176,516 176,516 - AQ1-AQ4 — — — — — 116 10,734 165,184 176,034 176,034 - AQ5-AQ8 — — — — 98 — 359 25 482 482 Off-balance sheet 14,557 14,262 10,186 39,005 17,397 58,635 17,011 1,587 94,630 133,635 - Loan commitments 14,554 14,262 10,144 38,960 16,829 55,496 15,935 1,585 89,845 128,805 - Financial guarantees 3 — 42 45 568 3,139 1,076 2 4,785 4,830 Off-balance sheet by asset quality (2) 14,557 14,262 10,186 39,005 17,397 58,635 17,011 1,587 94,630 133,635 - AQ1 - AQ4 13,610 148 8,008 21,766 12,917 33,939 15,460 1,404 63,720 85,486 - AQ5-AQ8 937 13,809 2,152 16,898 4,372 24,065 1,544 183 30,164 47,062 - AQ9 1 8 9 18 13 76 1 — 90 108 - AQ10 9 297 17 323 95 555 6 — 656 979 (1) Includes a portion of Private Banking lending secured ag ainst residential real estate, in line with ECL calculation methodology. Private Banking and RBS International mortgages are reported in UK, which includes crown dependencies, reflecting the country of lending origination. (2) AQ bandings are based on Basel PDs and map ping is as follows: Internal asset quality band Probability of default range Indicative S&P rating AQ1 0% - 0.034% AAA to AA AQ2 0.034% - 0.048% AA to AA- AQ3 0.048% - 0.095% A+ to A AQ4 0.095% - 0.381% BBB+ to BBB - AQ5 0.381% - 1.076% BB+ to BB AQ6 1.076% - 2.153% BB - to B+ AQ7 2.153% - 6.089% B+ to B AQ8 6.089% - 17.222% B - to CCC+ AQ9 17.222% - 100% CCC to C AQ10 100% D £0.3 billion (2020 – £0.3 billion) of AQ10 Personal ba lances primarily relate to loan commitments, the drawdown of which is effectively prohibited. AQ10 includes £0.2 billion (2020 – £0.4 billion) of RoI mortgages which are not currently considered d efaulted for capital calcul ation purposes f or RoI but are included in Stage 3. (3) 30 DPD – 30 days past due, the mandatory 30 days past d ue backstop as prescribed by IFRS 9 for a SICR. (4) Days past due – Personal prod ucts: at a high level, for amortising prod ucts, the number of days past due is derived from the arrears amount outstanding and the monthly repayment instalment. For credit cards, it is bas ed on payments missed, and for current accounts the number of continual days in excess of borrowing limit. Wholesale products: the number of days past due for all products is the number of continua l days in excess of borrowing limi t. (5) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8 to the consolidated financial statements. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 224 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities continued Sector analysis – portfolio summary (audited) The table below shows ECL by stage, for the Person al portfolios and key sectors of the Wholesale portfolios, t hat continue to be affected by COVID-19. Off-balance sh eet Loans - amortised cost and FVOCI Loan Contingent ECL provisions Stage 1 Stage 2 Stage 3 Total commitments liabilities Stage 1 Stage 2 Stage 3 Total 2021 £m £m £m £m £m £m £m £m £m £m Personal 190,175 14,423 2,782 207,380 40,351 60 149 614 1,179 1,942 Mortgages 180,418 11,543 2,050 194,011 16,827 — 32 174 562 768 Credit cards 2,924 933 90 3,947 15,354 — 59 141 60 260 Other personal 6,833 1,947 642 9,422 8,170 60 58 299 557 914 Wholesale 140,649 19,558 2,240 162,447 83,231 4,254 153 864 847 1,864 Property 28,679 3,101 742 32,522 15,882 460 24 111 239 374 Financial institutions 52,263 732 46 53,041 16,906 992 14 39 4 57 Sovereign 5,904 121 8 6,033 1,212 — 19 1 2 22 Corporate 53,803 15,604 1,444 70,851 49,231 2,802 96 713 602 1,411 Of which: Airlines and aerospace 779 668 44 1,491 1,528 221 1 39 15 55 Automotive 5,133 1,304 38 6,475 3,507 65 9 32 10 51 Health 3,818 1,235 133 5,186 799 9 9 58 48 115 Land transport and logistics 3,721 833 39 4,593 3,069 188 4 53 12 69 Leisure 3,712 4,050 340 8,102 1,874 107 11 247 133 391 Oil and gas 1,482 141 52 1,675 1,126 453 1 14 28 43 Retail 6,380 1,342 180 7,902 4,872 410 8 29 66 103 Total 330,824 33,981 5,022 369,827 123,582 4,314 302 1,478 2,026 3,806 2020 Personal 166,548 34,352 3,288 204,188 38,960 45 171 996 1,228 2,395 Mortgages 158,387 29,571 2,558 190,516 14,554 3 51 319 635 1,005 Credit cards 2,411 1,375 109 3,895 14,262 — 53 225 76 354 Other personal 5,750 3,406 621 9,777 10,144 42 67 452 517 1,036 Wholesale 120,576 44,565 3,070 168,211 89,845 4,785 348 2,085 1,358 3,791 Property 23,733 13,021 1,322 38,076 16,829 568 123 507 545 1,175 Financial institutions 44,002 3,624 17 47,643 15,935 1,076 23 90 8 121 Sovereign 4,751 204 4 4,959 1,585 2 14 1 2 17 Corporate 48,090 27,716 1,727 77,533 55,496 3,139 188 1,487 803 2,478 Of which: Airlines and aerospace 753 1,213 41 2,007 1,888 215 2 42 25 69 Automotive 4,383 1,759 161 6,303 4,205 102 17 63 17 97 Health 2,694 2,984 131 5,809 616 14 13 164 48 225 Land transport and logistics 2,868 1,823 111 4,802 3,782 197 8 98 32 138 Leisure 3,299 6,135 385 9,819 2,199 125 22 439 204 665 Oil and gas 1,178 300 83 1,561 2,225 346 4 20 59 83 Retail 6,702 2,282 187 9,171 5,888 512 18 112 101 231 Total 287,124 78,917 6,358 372,399 128,805 4,830 519 3,081 2,586 6,186 Wholesale forbearance (audited) The table below shows Wholesale forbearance, Heigh tened Monitoring and Risk of Credit Los s by sector. Personal forbearanc e is disclosed in the Personal portfolio sec tion. This table show current exposure but reflects risk tr ansfers where there is a guarantee by another customer. Property FI Other corporate Total 2021 £m £m £m £m Forbearance (flow) 709 27 3,894 4,630 Forbearance (stock) 1,033 35 5,659 6,727 Heightened Monitoring and Risk of Credit Loss 1,225 83 4,492 5,800 2020 Forbearance (flow) 1,597 68 4,201 5,866 Forbearance (stock) 1,744 92 4,983 6,819 Heightened Monitoring and Risk of Credit Loss 1,600 155 5,771 7,526 Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 225 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities continued Sector analysis – portfolio summary (audited)  Loans by geography – In Personal, expos ures continued to be concentrated in the UK and heavily weigh ted to mortgages and the vast majority of exposures in the Republic of Ireland was also mostly in mortgages . Balance sheet growth during the year was mainly in mor tgages. Unsecured lending balances were subdued as n oted previously. In Wholesale, exposures were m ainly in the UK. Balance sheet reduction was primarily due to repayments of both COVID-19 government lending schemes and conventional borrowing where demand w as lower. Strategic reduction was achieved in high risk secto rs.  Loans by stage – In both Wholes ale and Personal, the improved economic outlook resulted in reduced I FRS 9 PDs compared to 2020. This, alongside continued be nign credit performance of the portfolio, resulted in a s maller proportion of accounts exhibiti ng a SICR and thereby an associated migration of exposures f rom Stage 2 into Stage 1. In the absence of any other forbearance or SICR triggers, customers granted COVID-19 re lated payment holidays were not considered forborne and did not result in a n automatic trigger into Stage 2. However, a subset of Personal customers who had acces sed payment holiday support, and where their risk profile was iden tified as relatively high, continued to be collectively mig rated into Stage 2. In Wholesale, BBLS customers grante d PAYG options, including the extension of le nding terms, periods of reduced repayments and six m onth payment holidays, were not automatically considered significan tly credit deteriorated. PAYG options are a feature of BB LS rather than a concession granted by NatWest G roup.  Loans – Past due analysis – The various COVID-19 related customer support schemes (capital repay ment holidays, government job retention scheme, gove rnment supported lending schemes) are mitigating actual po rtfolio deterioration in the short-term, although there have been some small increases in past du e exposures.  Weighted average 12 months PDs – In Perso nal, the Basel II point-in-time PDs improved slightly during 202 1. The forward-looking IFRS 9 PDs reduced significantly during 2021 reflecting the improved economics. PD reductio ns were most evident in Personal mortgages due to benign arrears performance (catalysed by CO VID-19 support schemes) combined with the improved economic outlook, which is connected to the need for collective S ICR migration and judgmental post model adjust ments. In Wholesale, the Basel II PDs wer e based on a through-the- cycle approach and decreased les s than the forward- looking IFRS 9 PDs which redu ced, reflecting the improved economic outlook. For further details refer to the Asset quality section.  ECL provision by geography – In line with the p oint relating to loans by geography above, the vast majority of ECL related to exposures in the UK and the Republic of Ireland.  ECL provisions by stage – Stage 1 and Stage 2 provisions reduced reflecting the improved economic ou tlook. As outlined above, Stage 3 provisions have yet to be materially affected, underpinned by the various customer su pport schemes noted previously.  ECL provisions coverage – Ove rall provisions coverage reduced, mainly due to the improvement in economic outlook and scenario weightings. T he base economic scenario improved reflecting the faster than expected vaccination roll-out, better than expected actual econ omic data and strong government support. Stage 2 coverage increased during the period for some po rtfolios and notably on certain Wholesale sectors due to the inclusion of the recovery risk overlay and lower Stage 2 b alances.  The ECL charge and loss rate – Refle cting the improved economic outlook, the impairment charge was significa ntly lower, with a material reduction in the annualise d loss rate.  Loans by residual maturity – In mortgages, as ex pected, the vast majority of exposures wer e greater than five years. In unsecured lending – cards and other – exposu res were concentrated in less than five years. In Wholesale, with the exception of financial institutions where lending was concentrated in less than one ye ar, the majority of lending was for residual maturity of one to five ye ars, with some greater than five years in line with lending under the government support schemes.  Other financial assets by asset quality – Consis ting almost entirely of cash and balances at cent ral banks and debt securities, held in the course of treasu ry related management activities, these ass ets were mainly within the AQ1-AQ4 bands.  Off-balance sheet exposures by asse t quality – In Personal, undrawn exposures were reflective of available c redit lines in credit cards and current accounts. Addition ally, the mortgage portfolio had undrawn e xposures, where a formal offer had been made to a customer but had not ye t drawn down; the value increased in line with the pipeline of offers. There was also a legacy portfol io of flexible mortgages where a customer had the righ t and ability to draw down further funds. The asset quality was ali gned to the wider portfolio. In Wholesale, undrawn exposures declined i n line with muted credit demand, with customers rep aying revolving credit and working capital facilities to optimise liquidity. In addition, sector appe tite adjustments in high risk sectors reduced off-balance she et exposures to these sectors.  Wholesale forbearance – Custo mers seeking COVID-19 related support, including paym ent holidays, who were not subject to any wider SICR triggers and who we re assessed as having the ability in the medium term post-COVI D-19 to be viable and meet credit appetite me trics, were not considered to have been grante d forbearance. Customers seeking a payment holiday exte nsion beyond an aggregate of 12 months in an 18 month period we re considered to have been granted forbearance and were classed as heightened monitoring. This classifi cation did not apply to customers with BBLS taking a PAYG pay ment holiday option. For Wholesale, forbearance flow decreased in the second half of 2021 following t he lifting of most COVID-19 restrictions. The leisure sector represented the l argest share of forbearance flow throughout 2021 due to disruption caused by the periodic presence of C OVID-19 restrictions and resultant consumer uncertainty. P ayment holidays and covenant waivers were the most common forms of forbearance granted.  Heightened Monitoring and Risk of Credit Loss – Inflows decreased during 2021 compar ed to 2020. The reduction in value was mainly due to the lower nu mber of inflows as well as a small number of high value customers who mo ved out of the framework as economic conditions i mproved. While noting the reduced flows into Heightened Moni toring and Risk of Credit Loss and the i mproved stock position, the volume and value of cases remained higher than p re- COVID-19 levels. The sector bre akdown of exposures remained consistent with prior periods. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 226 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities continued Credit risk enhancement and mi tigation (audited) The table below shows exposures of modelled portfolios within the scope of the ECL framework and related credit risk enhancement and mitigation (CREM). Gross Maximum credit risk CREM by type CREM coverage Exposure post CREM exposure ECL Total Stage 3 Financial (1) Property Other (2) Total Stage 3 Total Stage 3 2021 £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn Financial assets Cash and balances at central banks 176.3 — 176.3 — — — — — — 176.3 — Loans - amortised cost (3) 369.8 3.7 366.1 3.0 41.1 232.7 23.5 297.3 2.7 68.8 0.3 Personal (4) 207.4 1.9 205.5 1.6 1.3 192.6 — 193.9 1.5 11.6 0.1 Wholesale (5) 162.4 1.8 160.6 1.4 39.8 40.1 23.5 103.4 1.2 57.2 0.2 Debt securities 44.9 — 44.9 — — — — — — 44.9 — Total financial assets 591.0 3.7 587.3 3.0 41.1 232.7 23.5 297.3 2.7 290.0 0.3 Contingent liabilities and commitments Personal (6,7) 40.4 — 40.4 0.3 0.5 4.9 — 5.4 — 35.0 0.3 Wholesale 87.5 0.1 87.4 0.3 3.2 7.9 3.9 15.0 0.1 72.4 0.2 Total off-balance sheet 127.9 0.1 127.8 0.6 3.7 12.8 3.9 20.4 0.1 107.4 0.5 Total exposure 718.9 3.8 715.1 3.6 44.8 245.5 27.4 317.7 2.8 397.4 0.8 2020 Financial assets Cash and balances at central banks 122.7 — 122.7 — — — — — — 122.7 — Loans - amortised cost (3) 372.4 6.0 366.4 3.8 38.6 232.7 23.7 295.0 3.3 71.4 0.5 Personal (4) 204.2 2.4 201.8 2.1 0.3 189.5 — 189.8 1.9 12.0 0.2 Wholesale (5) 168.2 3.6 164.6 1.7 38.3 43.2 23.7 105.2 1.4 59.4 0.3 Debt securities 53.8 — 53.8 — — — — — — 53.8 — Total financial assets 548.9 6.0 542.9 3.8 38.6 232.7 23.7 295.0 3.3 247.9 0.5 Contingent liabilities and commitments Personal (6,7) 39.0 — 39.0 0.3 — 4.1 — 4.1 — 34.9 0.3 Wholesale 94.6 0.2 94.4 0.6 3.3 7.6 4.6 15.5 0.1 78.9 0.5 Total off-balance sheet 133.6 0.2 133.4 0.9 3.3 11.7 4.6 19.6 0.1 113.8 0.8 Total exposure 682.5 6.2 676.3 4.7 41.9 244.4 28.3 314.6 3.4 361.7 1.3 (1) Includes cash and securities collateral. (2) Includes guarantees, charges over trade debtors, ot her asset finance related physical collateral as well as the amount by which credit risk exposure is reduced through netting arrangements, mainly cash management pooling, which give NatWest Group a legal right to set off the financial asset against a financial liability due to the same counterparty. (3) NatWest Group holds collateral in resp ect of i ndividual loans – amortised cost to banks and customers. This collateral includes mortgages over property (both personal and commercial); charges over business assets such as plant and equipment; inventories and trade d ebtors; and guarantees of lending from parties other than the borrower. NatWest Group obtains collateral in the form of securities in reverse repurchase agreements. Collatera l values are capped at the value of the loan. (4) Stage 3 mortgage exposures have relatively limited uncovered exposure reflecting the security held. On unsecured credit cards and other personal borrowing, the residual uncovered amount reflects historical experience of continued cash recovery post default through ongoing engagement with customers. (5) Stage 3 exposures post cred it risk enhancement and mitigation in Wholesale mainly represent enterprise value and the impact of written down collatera l values; an individual assessment to determine ECL will consider multiple scenarios a nd in some instances allocate a probability weighting to a collateral value in excess of the written down value. (6) £0.3 billion (2020 – £0.3 billion) Personal Stage 3 balances primarily relate to loan commitments, the draw down of which is effectively prohibited . (7) The Personal gross exposure value includes £11.8 billion (2020 – £10.0 billion) in respect of pipeline mortgages wh ere a committed offer has been made to a customer but where the funds have not yet been drawn down. When drawn down, the exp osure would be covered by a security over the borrower’s property. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 227 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities continued Personal portfolio (audited) Disclosures in the Personal port folio section include drawn exposure (g ross of provisions). 2021 2020 Retail Private RBS Ulster Retail Private RBS Ulster Personal lending Banking Banking International Bank RoI Total Banking Banking International Bank RoI Total £m £m £m £m £m £m £m £m £m £m Mortgages 172,707 12,781 2,444 6,164 194,096 163,107 10,910 2,517 13,678 190,212 Of which: Owner occupied 158,059 11,219 1,597 5,563 176,438 148,614 9,601 1,676 12,781 172,672 Buy-to-let 14,648 1,562 847 601 17,658 14,493 1,309 841 897 17,540 Interest only - variable 4,348 4,889 346 120 9,703 5,135 4,375 347 159 10,016 Interest only - fixed 14,255 5,957 209 3 20,424 13,776 4,758 233 10 18,777 Mixed (1) 8,616 1 17 34 8,668 7,321 1 20 56 7,398 Impairment provisions (2) 429 7 8 318 762 483 5 9 499 996 Other personal lending (3) 10,829 1,974 305 218 13,326 11,116 1,613 279 276 13,284 Impairment provisions (2) 1,140 19 2 11 1,172 1,348 20 1 15 1,384 Total personal lending 183,536 14,755 2,749 6,382 207,422 174,223 12,523 2,796 13,954 203,496 Mortgage LTV ratios - Total portfolio 54% 59% 57% 50% 54% 56% 58% 57% 59% 57% - Stage 1 54% 59% 56% 48% 54% 55% 58% 57% 57% 55% - Stage 2 52% 59% 62% 57% 52% 66% 61% 64% 65% 66% - Stage 3 49% 64% 77% 56% 53% 53% 64% 75% 67% 60% - Buy-to-let 50% 57% 53% 52% 51% 52% 56% 53% 59% 53% - Stage 1 50% 58% 53% 51% 51% 51% 56% 53% 55% 52% - Stage 2 52% 55% 50% 56% 52% 60% 59% 53% 69% 61% - Stage 3 51% 53% 60% 66% 56% 56% 54% 61% 74% 62% Gross new mortgage lending (4) 35,290 2,874 340 40 38,544 30,551 2,148 249 910 33,858 Of which: Owner occupied 33,630 2,583 206 40 36,459 29,608 1,922 167 908 32,605 Weighted average LTV 66% 65% 67% 57% 66% 69% 66% 66% 74% 69% Buy-to-let 1,660 292 134 — 2,086 943 227 82 2 1,254 Weighted average LTV 62% 65% 63% 53% 63% 62% 62% 63% 54% 62% Interest only - variable rate 25 832 37 — 894 81 1,082 7 — 1,170 Interest only - fixed rate 2,388 1,563 36 — 3,987 1,501 695 35 — 2,231 Mixed (1) 2,256 — 7 — 2,263 1,630 — 2 — 1,632 Mortgage forbearance Forbearance flow 316 19 4 50 389 550 50 10 127 737 Forbearance stock 1,156 3 8 944 2,111 1,293 18 10 1,627 2,948 Current 727 — 5 616 1,348 648 13 9 1,070 1,740 1-3 months in arrears 146 2 1 58 207 360 3 — 105 468 > 3 months in arrears 283 1 2 270 556 285 2 1 452 740 (1) Includes accounts which have an interest only sub-a ccount and a capital and interest sub-account to provide a more comprehensive view of interest only exposures. (2) Retail Banking excludes a non-mat erial amount of provisions held on relatively small legacy portfolios. (3) Comprises unsecured lend ing except for Private Banking, which includes both secured and unsecured lending. It excludes loans that are commercial in nature. (4) Retail Banking excludes additiona l lending to existing customers.  The mortgage portfolio grew strongly during 202 1, assisted by the UK stamp duty reduction.  LTV ratios improved as high demand increased house p rices during the year.  The existing mortgage stock and new business were closely monitored against agreed risk appetite par ameters. These included LTV ratios, buy-to-let concentrations, new-build concentrations and credit quality. Le nding criteria were cautiously relaxed during the ye ar as demand returned and economic conditions improved.  Demand for mortgages was mostly within owner occupie r mortgages, consequently there has been a reducti on in the proportion of interest only and buy -to-let mortgages.  In th e Retail Ba nking mortgage portfolio, 37% of the stock of lending was in Greater London and the South East (2020 – 37%). The weighted average loan-to-value for these regions was 53% (2020 – 54%) compared to all regions 54%.  In th e Retail Ba nking mortgage portfolio, 92% of customer balances were on fixed rates (6 2% of these on five-year deals). In addition, 97% of all new mortgage completi ons were fixed rate deals (56% of these on five-y ear deals).  Forbearance flows and arrears levels remained low relative to historic norms, with custome rs able to utilise payment holidays during the first half of the year.  Unsecured lending overall reduced during the yea r as demand was subdued with lowe r levels of consumer spending.  As noted previously, the improved economic outlook including a more positive forecast on unemploy ment and house prices, resulted in reduced ECL. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 228 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities continued Personal portfolio (audited) Mortgage LTV distribution by stage The table below shows gross mortgage lending and related ECL by LTV band. Mortgage lending no t within the scope of IFRS 9 ECL reflected portfolios carried at fair value. Mortgages ECL provisions ECL provisions covera ge (2) Not within Of IFRS 9 which; Retail Banking ECL gross new Stage 1 Stage 2 Stage 3 scope Total lending Stage 1 Stage 2 Stage 3 Total (1) Stage 1 Stage 2 Stage 3 Total 2021 £m £m £m £m £m £m £m £m £m £m % % % % ≤50% 61,233 4,548 644 63 66,488 5,845 7 60 140 207 — 1.3 21.7 0.3 >50% and ≤70% 68,271 4,674 483 9 73,437 12,397 10 64 84 158 — 1.4 17.4 0.2 >70% and ≤80% 24,004 1,255 93 1 25,353 10,964 3 18 15 36 — 1.4 16.1 0.1 >80% and ≤90% 5,983 250 22 1 6,256 4,985 1 8 5 14 — 3.2 22.7 0.2 >90% and ≤100% 1,125 58 10 — 1,193 1,098 — 5 3 8 — 8.6 30.0 0.7 >100% 14 18 6 — 38 — — 1 2 3 — 5.6 33.3 7.9 Total with LTVs 160,630 10,803 1,258 74 172,765 35,289 21 156 249 426 — 1.4 19.8 0.2 Other 14 1 1 — 16 1 — — — — — — — — Total 160,644 10,804 1,259 74 172,781 35,290 21 156 249 426 — 1.4 19.8 0.2 2020 ≤50% 50,170 5,009 554 124 55,857 4,207 4 43 107 154 0.0 0.8 19.4 0.3 >50% and ≤70% 55,263 7,416 488 35 63,202 9,083 7 66 81 154 0.0 0.9 16.5 0.2 >70% and ≤80% 19,994 9,555 141 8 29,698 11,060 7 56 26 89 0.0 0.6 18.5 0.3 >80% and ≤90% 8,029 5,552 52 6 13,639 5,175 3 52 11 66 0.0 0.9 20.3 0.5 >90% and ≤100% 368 137 13 2 520 865 — 5 3 8 0.1 3.4 26.8 1.6 >100% 48 99 20 2 169 — — 6 5 11 0.0 6.1 25.0 6.5 Total with LTVs 133,872 27,768 1,268 177 163,085 30,390 21 228 233 482 0.0 0.8 18.5 0.3 Other 17 4 1 — 22 161 — — 1 1 0.1 3.6 71.9 3.3 Total 133,889 27,772 1,269 177 163,107 30,551 21 228 234 483 0.0 0.8 18.5 0.3 Ulster Ban k RoI 2021 ≤50% 2,660 221 274 — 3,155 13 4 6 138 148 0.2 2.7 50.4 4.7 >50% and ≤70% 1,497 172 128 — 1,797 16 2 5 59 66 0.1 2.9 46.1 3.7 >70% and ≤80% 484 67 60 — 611 9 1 2 28 31 0.2 3.0 46.7 5.1 >80% and ≤90% 231 51 55 — 337 1 1 2 26 29 0.4 3.9 47.3 8.6 >90% and ≤100% 82 26 37 — 145 1 — 1 19 20 — 3.8 51.4 13.8 >100% 33 16 41 — 90 — — 1 23 24 — 6.3 56.1 26.7 Total with LTVs 4,987 553 595 — 6,135 40 8 1 7 293 318 0.2 3.1 49.2 5.2 Other 25 — 4 — 29 — — — — — — — — — Total 5,012 553 599 — 6,164 40 8 1 7 293 318 0.2 3.1 48.9 5.2 2020 ≤50% 4,156 504 354 — 5,014 78 10 24 105 139 0.2 4.8 29.7 2.8 >50% and ≤70% 3,453 453 230 — 4,136 194 8 2 3 66 97 0.2 5.1 28.7 2.3 >70% and ≤80% 1,569 232 114 — 1,915 346 4 1 2 40 56 0.3 5.2 35.1 2.9 >80% and ≤90% 1,214 190 105 — 1,509 286 3 1 1 40 54 0.2 5.8 38.1 3.6 >90% and ≤100% 372 145 88 — 605 1 1 9 40 50 0.3 6.2 45.5 8.3 >100% 183 151 165 — 499 5 1 1 2 90 103 0.5 7.9 54.5 20.6 Total with LTVs 10,947 1,675 1,056 — 13,678 910 27 91 381 499 0.2 5.4 36.1 3.6 (1) Excludes a non-material amount of provisions held on relatively small legacy portfolios. (2) ECL provisions coverage is ECL provisions divided by mortgages.  ECL coverage rates increased through the LTV bands with both Retail Banking and Ul ster Bank RoI having only limited exposures in the highest L TV bands. The relatively high coverage level in the lowest LTV band for Retail Banking included the effect of time-discoun ting on expected recoveries and reflects a modell ing approach that captures losses expected from both reposs ession and also other recovery action.  The improved economic outlook resulted in decreased account level IFRS 9 PDs. Consequently, compa red to the 2020 year end, a lower proportion of accounts exhibi ted a SICR with an associated migration of exposu res from Stage 2 into Stage 1. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 229 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities continued Personal portfolio (audited) Retail Banking mortgage LTV distri bution by region The table below shows gross mortgage lending by LTV band for Retail Banking, by geographical region. Weighted ≤50% 50% ≤80% 80% ≤100% >100% Total average LTV Other Total Total 2021 £m £m £m £m £m % £m £m % South East 13,160 18,298 886 1 32,345 53 3 32,348 19 Greater London 13,308 16,716 1,477 1 31,502 53 3 31,505 18 Scotland 4,493 6,529 559 2 11,583 54 1 11,584 7 North West 6,598 9,212 654 3 16,467 53 2 16,469 10 South West 6,140 8,619 499 1 15,259 53 2 15,261 9 West Midlands 4,323 7,449 553 1 12,326 55 1 12,327 6 East of England 7,467 11,679 820 1 19,967 54 2 19,969 12 Rest of the UK 10,937 20,278 2,001 26 33,242 56 2 33,244 19 Total 66,426 98,780 7,449 36 172,691 54 16 172,707 100 2020 South East 10,980 17,217 2,365 4 30,566 56 5 30,571 19 Greater London 13,044 14,505 1,638 2 29,189 52 5 29,194 18 Scotland 3,594 6,636 1,148 1 11,379 58 1 11,380 7 North West 4,849 9,745 1,402 3 15,999 58 3 16,002 10 South West 5,086 8,551 882 3 14,522 55 2 14,524 9 West Midlands 3,366 7,080 1,265 4 11,715 59 1 11,716 7 East of England 6,487 10,294 1,588 2 18,371 56 2 18,373 11 Rest of the UK 8,451 18,869 3,873 151 31,344 60 3 31,347 19 Total 55,857 92,897 14,161 170 163,085 56 22 163,107 100 Commercial real estate (CRE) The CRE portfolio comprises exposures to entities involved in the development of, or investme nt in, commercial and residential properties (including house builders but e xcluding housing associations, const ruction and the building materials sub-sector). The sector is reviewed regularly by senior executive co mmittees. Reviews include portfolio c redit quality, capital consumption and control frameworks. The CRE tables in this secti on include information on exposures which a re out of scope of ECL calculations or part of disposal groups. 2021 2020 By geography and sub-sector (1) UK RoI Other Total UK R oI Other Total £m £m £m £m £ m £m £m £m Investment Residential (2) 4,422 341 19 4,782 4,507 360 14 4,881 Office (3) 3,037 190 10 3,237 3,386 226 28 3,640 Retail (4) 4,207 81 — 4,288 5,423 6 8 118 5,609 Industrial (5) 2,760 13 106 2,879 2,773 1 8 202 2,993 Mixed/other (6) 1,185 113 50 1,348 2,688 154 74 2,916 15,611 738 185 16,534 18,777 826 436 20,039 Development Residential (2) 1,775 76 2 1,853 2,685 200 3 2,888 Office (3) 79 33 — 112 123 3 0 — 153 Retail (4) 48 — — 48 126 — — 126 Industrial (5) 67 1 — 68 125 2 — 127 Mixed/other (6) 20 2 — 22 24 2 — 26 1,989 112 2 2,103 3,083 234 3 3,320 Total 17,600 850 187 18,637 21,860 1,060 439 23,359 Not within audi t scope. (1) Geograp hical splits are based on country of collateral risk. (2) Properties including houses, flats and student accommodation. (3) Properties including offices in central business districts, regional headquarters and business parks. (4) Properties including high street retail, shopping centres, restaurants, bars and gyms. (5) Properties including distribution centres, manufacturing and warehouses. (6) Properties that do not fall within the other categories above. Mixed generally relates to a mixture of retail/office with resident ial. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 230 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities continued Commercial real estate (CRE) CRE LTV distribution by stage (audited) The table below shows CRE cu rrent exposure and related ECL by LT V band. Current expos ure (gross of provisions) (1,2) ECL provisions ECL provisions covera ge (4) Not within IFRS 9 ECL Stage 1 Stage 2 Stage 3 scope (3) Total Stage 1 Stage 2 Stage 3 Total (1) Sta ge 1 Stage 2 Stage 3 Tota l 2021 £m £m £m £m £m £m £m £m £m % % % % ≤50% 6,767 388 34 268 7,457 5 7 9 21 0.1 1.8 26.5 0.3 >50% and ≤70% 4,367 470 46 469 5,352 3 13 20 36 0.1 2.8 43.5 0.7 >70% and ≤100% 377 192 1 27 9 705 — 9 32 41 — 4.7 25.2 5.8 >100% 215 7 86 4 312 — 2 28 30 — 28.6 32.6 9.6 Total with LTVs 11,726 1,057 29 3 750 13,826 8 31 89 128 0.1 2.9 30.4 0.9 Total portfolio average LTV% 48% 58% 88% 52% 50% Other (5) 2,271 293 61 83 2,708 4 13 28 45 0.2 4.4 45.9 1.7 Development (6) 1,736 228 62 77 2,103 3 6 34 43 0.2 2.6 54.8 2.0 Total 15,733 1,578 41 6 910 18,637 15 50 151 216 0.1 3.2 36.3 1.2 2020 ≤50% 4,918 4,538 13 8 — 9,594 46 145 24 215 0.9 3.2 17.4 2.2 >50% and ≤70% 2,815 3,266 22 6 — 6,307 32 112 63 207 1.1 3.4 27.9 3.3 >70% and ≤100% 169 283 1 24 — 576 3 23 51 77 1.8 8.1 41.1 13.4 >100% 50 64 29 5 — 409 — 6 113 119 — 9.4 38.3 29.1 Total with LTVs 7,952 8,151 78 3 — 16,886 81 286 251 618 1.0 3.5 32.1 3.7 Total portfolio average LTV% 45% 47% 93% — 48% Other (5) 1,776 511 1 59 707 3,153 6 40 93 139 0.3 7.8 58.5 5.7 Development (6) 1,362 1,767 16 1 30 3,320 15 58 70 143 1.1 3.3 43.5 4.3 Total 11,090 10,429 1,103 737 23,359 102 384 414 900 0.9 3.7 37.5 4.0 (1) Comprises gross lending, interest rate hedging derivatives and oth er assets carried at fair value that are managed as part of the overall CRE portfolio. (2) The exposure in Stage 3 mainly relates to legacy assets . (3) Includes exposures relating to non - modelled portfolios and other exposures carried at fair value, including derivatives. (4) ECL provisions coverage is ECL provisions divided by current exposure. (5) Relates mainly to business banking, rate risk manag ement products and unsecured corporat e lending. (6) Relates to the development of commercial and residential properties. LTV is not a meaningful measure for this type of lending activity.  Overall – The majority of the CRE portfolio was located and managed in the UK. Business appetite and strategy w as aligned across NatWest Group.  2021 trends – The continued reduction in the real estate exposure was a consequence of active portfolio management to rebalance the size and comp osition of the CRE portfolio. In addition, customer appeti te to borrow was muted, particularly amongst larger customers. At a sub- sector level, the residential market had a positive out-tu rn over the year; the retail sector e xhibited mixed performance in line with changing consumer habits; the industrial market performed very strongly; with uncertainty con tinuing in the office sub-sector as occupiers moved to a more flexible way of working.  Credit quality – NatWest Group entered the COVID-19 period with a conservatively positioned CR E portfolio, which helped to mitigate the effect of COVID-19. The majori ty of the defaults during 2021 were in the retail sector, particularly in the fashion-led shopping centre sub-secto r. NatWest Group completed a strategic sale of a portfolio of these loans during 2021. Customers expe rienced reduced rent collections during COVID-19 albeit rental paymen ts have now normalised. Outside of retail, the re was limited distress as noted, uncertainty still remains, pa rticularly in relation to the office sub-sector and the portfolio continues to be actively reviewed and ma naged.  Risk appetite – Lending appetite was gradually and selectively increased by sub-sec tor, particularly towards the end of 2021, albeit these remain below pre-COVI D-19 levels. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 231 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities continued Flow statements (audited) The flow statements that follow show the main ECL and related income statement movements. T hey also show the changes in ECL as well as the changes in r elated financial assets used in determining ECL. Due to differences in scope, exposures may differ from those reported in other tables, p rincipally in relation to exposures in Stage 1 and Stage 2. T hese differences do not have a material ECL effect. Other points to note:  Financial assets include treasury liquidity portfolios, comprising balances at central banks and deb t securities, as well as loans. Both modelled and non-modelled p ortfolios are included.  Stage transfers (for example, exposures moving from Stage 1 into Stage 2) are a key feature of the ECL movements, with the net re-measurement cost of t ransitioning to a worse stage being a primary driver of income s tatement charges. Similarly, there is an ECL benef it for accounts improving stage.  Changes in risk parameters shows the reassessment of the ECL within a given stage, including any ECL ove rlays and residual income statement gains or losses at the point of write-off or accounting write-d own.  Other (P&L only items) includes any subsequent changes in the value of written-down assets (for example, fortuitous recoveries) along with other dire ct write-off items such as direct recovery costs. Other (P& L only items) affects the income statement but does not affe ct balance sheet ECL movements.  Amounts written-off represent the gross asset written-down against accounts with ECL, including the net asset write- down for any debt sale activity.  There were flows from Stage 1 into Stage 3 including transfers due to unexpected de fault events. The small number of write-offs in Stage 1 and Stage 2 reflect the effect of portfolio debt sales and also stagin g at the start of the analysis period.  The effect of any change in pos t model adjustments during the year is typically reported under ch anges in risk parameters, as are any effects arising fro m changes to the underlying models. Refer to the section on Governance and post model adjustments for further details.  All movements are captured monthly and aggregated. Interest suspended post default is included within Stage 3 ECL with the movement in the value of su spended interest during the year reported under c urrency translation and other adjustments. Stage 1 Stage 2 Stage 3 Total Financial Financial Financial Financial assets ECL assets ECL assets ECL assets ECL NatWest Group total £m £m £m £m £m £m £m £m At 1 January 2021 446,666 519 81,667 3,081 6,524 2,586 534,857 6,186 Currency translation and other adjustments (4,111) (1) (246) (6) 48 (89) (4,309) (96) Transfers from Stage 1 to Stage 2 (35,307) (160) 35,307 160 — — — — Transfers from Stage 2 to Stage 1 62,702 1,322 (62,702) (1,322) — — — — Transfers to Stage 3 (390) (2) (2,628) (285) 3,018 287 — — Transfers from Stage 3 241 21 1,352 188 (1,593) (209) — — Net re-measurement of ECL on stage transfer (1,114) 869 310 65 Changes in risk parameters (343) (566) 244 (665) Other changes in net exposure 84,331 84 (15,657) (496) (1,795) (148) 66,879 (560) Other (P&L only items) (3) 5 (120) (118) Income statement (releases)/charges (1,376) (188) 286 (1,278) Transfers to disposal groups (7,954) ( 24) (1,511) (120) (113) (22) (9,578) (166) Amounts written-off — — (25) (25) (851) (851) (876) (876) Unwinding of discount — — (82) (82) At 31 December 2021 546,178 302 35,557 1,478 5,238 2,026 586,973 3,806 Net carrying amount 545,876 34,079 3,212 583,167 At 1 January 2020 428,604 322 28,630 752 7,135 2,718 464,369 3,792 2020 movements 18,062 197 53,037 2,329 (611) (132) 70,488 2,394 At 31 December 2020 446,666 519 81,667 3,081 6,524 2,586 534,857 6,186 Net carrying amount 446,147 78,586 3,938 528,671 Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 232 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities continued Flow statements (audited) Stage 1 Stage 2 Stage 3 Total Financial Financial Financial Financial assets ECL assets ECL assets ECL assets ECL Retail Banking - mortgages £m £m £m £m £m £ m £m £m At 1 January 2021 132,390 23 28,079 227 1,291 236 161,760 486 Currency translation and other adjustments — — — — 10 10 10 10 Transfers from Stage 1 to Stage 2 (10,957) (3) 10,957 3 — — — — Transfers from Stage 2 to Stage 1 25,468 162 (25,468) ( 162) — — — — Transfers to Stage 3 (17) — (574) ( 19) 591 19 — — Transfers from Stage 3 11 — 343 25 (354) ( 25) — — Net re-measurement of ECL on stage transfer (156) 117 9 (30) Changes in risk parameters (1) (9) 58 48 Other changes in net exposure 13,071 (1) (2,589) ( 27) (263) ( 19) 10,219 (47) Other (P&L only items) (1) 1 (26) (26) Income statement (releases)/charges (159) 82 22 (55) Amounts written-off — — — — (8) (8) (8) (8) Unwinding of discount — — (30) (30) At 31 December 2021 159,966 24 10,748 155 1,267 250 171,981 429 Net carrying amount 159,942 10,593 1,017 171,552 At 1 January 2020 135,625 12 10,283 86 1,289 215 147,197 313 2020 movements (3,235) 11 17,796 141 2 21 14,563 173 At 31 December 2020 132,390 23 28,079 227 1,291 236 161,760 486 Net carrying amount 132,367 27,852 1,055 161,274  Despite the strong portfolio growth during 20 21, ECL levels for mortgages reduced during the same period. The decrease in ECL was primarily a result of reduced P Ds and LGDs reflecting the improved economic outlook and stable portfolio performance. This resulted in lowe r levels of SICR identification and ECL requirement.  More specifically, the reduced PDs alongside muted portfolio deterioration resulted in a net migration of assets from Stage 2 into Stage 1, with an associated decrease from lifetime ECL to a 12 month ECL.  With various customer support s chemes available and the revised economic outlook, Stage 3 ECL remained stable as new inflows remaining subdued. The relatively small ECL cost for net re-measurement on stage transfer inclu ded the effect of risk targeted ECL adjustments, when previously in Stage 2. Refer to the Governance and post model adjustments section for further details.  Write-off occurs once the reposse ssed property has been sold and there is a residual shortfall balance re maining outstanding. This would typically be within five yea rs from default but can be longer. Given the moratoriu m on repossession activity until later in 20 21, write-offs remained at a subdued level. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 233 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities continued Flow statements (audited) Stage 1 Stage 2 Stage 3 Total Financial Financial Financial Financial assets ECL assets ECL assets ECL assets ECL Retail Banking - credit cards £m £m £m £m £m £m £m £m At 1 January 2021 2,250 52 1,384 220 114 75 3,748 347 Currency translation and other adjustments — — — — (1) (1) (1) (1) Transfers from Stage 1 to Stage 2 (951) (48) 951 48 — — — — Transfers from Stage 2 to Stage 1 1,119 143 (1,119) (143) — — — — Transfers to Stage 3 (17) — (84) (35) 101 35 — — Transfers from Stage 3 — — 9 5 (9) (5) — — Net re-measurement of ECL on stage transfer (88) 184 28 124 Changes in risk parameters (19) (65) 8 (76) Other changes in net exposure 339 18 (194) (73) (41) (2) 104 (57) Other (P&L only items) — — (4) (4) Income statement (releases)/charges (89) 46 30 (13) Amounts written-off — — — — (73) (73) (73) (73) Unwinding of discount — — (5) (5) At 31 December 2021 2,740 58 947 141 91 60 3,778 259 Net carrying amount 2,682 806 31 3,519 At 1 January 2020 2,804 38 1,246 131 127 88 4,177 257 2020 movements (554) 14 138 89 (13) (13) (429) 90 At 31 December 2020 2,250 52 1,384 220 114 75 3,748 347 Net carrying amount 2,198 1,164 39 3,401  The overall decrease in ECL w as mainly due to the reduction in Stage 2 ECL reflecting the improved ec onomic outlook and stable portfolio per formance, causing PDs to decrease. This resulted in reduce d levels of SICR identification and ECL requirement.  More specifically, the reduced PDs alongside muted portfolio deterioration resulted in a net migration of assets from Stage 2 into Stage 1, with an associated decrease from lifetime ECL to a 12 month ECL.  Cards balances remained broadly f lat compared with the 2020 year end. In line with indu stry trends in the UK, credit card balances decreased durin g the first half of the year but then increased as lockdown restrictions e ased and borrowing demand increased.  With various customer support s chemes available and the improved economic outlook, Stage 3 inflows re mained subdued and therefore Stage 3 ECL movement was minimal.  Charge-off (analogous to partial write-off) typic ally occurs after 12 missed payments. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 234 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities continued Flow statements (audited) Stage 1 Stage 2 Stage 3 Total Financial Financial Financial Financial assets ECL assets ECL assets ECL assets ECL Retail Banking - other personal u nsecured £m £m £m £m £m £m £m £m At 1 January 2021 3,385 59 3,487 450 596 495 7,468 1,004 Currency translation and other adjustments — — — — 2 2 2 2 Transfers from Stage 1 to Stage 2 (1,715) (39) 1,715 39 — — — — Transfers from Stage 2 to Stage 1 2,034 164 (2,034) (164) — — — — Transfers to Stage 3 (10) — (339) (120) 349 120 — — Transfers from Stage 3 5 7 96 60 (101) (67) — — Net re-measurement of ECL on stage transfer (133) 161 111 139 Changes in risk parameters (18) (47) 60 (5) Other changes in net exposure 849 12 (958) (85) (79) (26) (188) (99) Other (P&L only items) — — (3) (3) Income statement (releases)/charges (139) 29 142 32 Amounts written - off — — — — (138) (138) (138) (138) Unwinding of discount — — (17) (17) At 31 December 2021 4,548 52 1,967 294 629 540 7,144 886 Net carrying amount 4,496 1,673 89 6,258 At 1 January 2020 5,417 63 2,250 252 608 518 8,275 833 2020 movements (2,032) (4) 1,237 198 (12) (23) (807) 171 At 31 December 2020 3,385 59 3,487 450 596 495 7,468 1,004 Net carrying amount 3,326 3,037 101 6,464  The overall decrease in ECL w as mainly due to the reduction in Stage 2 ECL reflecting the improved economic ou tlook and stable portfolio performance, causing PDs to de crease. This resulted in reduced levels of SICR identificati on and ECL requirement.  More specifically, the reduced PDs alongside muted portfolio deterioration resulted in a net migration of assets f rom Stage 2 into Stage 1, with an as sociated decrease from lifetime ECL to a 12 month ECL.  In line with industry trends in th e UK, unsecured balances reduced, amplifying the ECL reductions wi thin the portfolio. This has stabilised as UK lockdown restric tions have eased and borrowing demand increase d.  With various customer support s chemes available and the improved economic outlook, Stage 3 inflows re mained subdued and therefore Stage 3 ECL movement was minimal.  Write-off occurs once recovery activity wit h the customer has been concluded or there are no further reco veries expected, but no later than six years after default. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 235 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities continued Flow statements (audited) Stage 1 Stage 2 Stage 3 Total Financial Financial Financial Financial Commercial Banking - commercial assets ECL assets ECL assets ECL assets ECL real estate £m £m £m £m £m £m £m £m At 1 January 2021 17,269 90 10,380 364 1,118 428 28,767 882 Currency translation and other adjustments (10) 1 (2) (1) (1) (26) (13) (26) Inter-group transfers — — — — — — — — Transfers from Stage 1 to Stage 2 (2,687) (17) 2,687 17 — — — — Transfers from Stage 2 to Stage 1 7,872 219 (7,872) (219) — — — — Transfers to Stage 3 (55) — (327) (16) 382 16 — — Transfers from Stage 3 71 2 82 7 (153) ( 9) — — Net re-measurement of ECL on s tage transfer (176) 41 21 (114) Changes in risk parameters (119) (68) 8 (179) Other changes in net exposure (107) 16 (2,746) (74) (666) (54) (3,519) (112) Other (P&L only items) — — — — Income statement (releases)/charges (279) (101) (25) (405) Amounts written - off — — — — (235) (235) (235) (235) Unwinding of discount — — (4) (4) At 31 December 2021 22,353 16 2,202 51 445 145 25,000 212 Net carrying amount 22,337 2,151 300 24,788 At 1 January 2020 25,556 31 2,218 28 895 306 28,669 365 2020 movements (8,287) 59 8,162 336 223 122 98 517 At 31 December 2020 17,269 90 10,380 364 1,118 428 28,767 882 Net carrying amount 17,179 10,016 690 27,885  Stage 1 and Stage 2 ECL reduc ed significantly due to the improvement in the economic outlook, causin g both PDs and LGDs to decrease.  The updated economics also resulted in a mig ration of assets from Stage 2 into Stage 1 as imp roved underlying PDs meant assets no longer met Stage 2 cri teria.  Flows into Stage 3 remained low as govern ment support schemes combined with the economic recovery, suppressed a higher level of flows into Stage 3.  The reduction in Stage 3 balances was largely a result of a portfolio sale of non-performing exposure.  Performing exposure reduced due to repaymen ts of existing borrowing with limited appetite f or new lending to replace it. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 236 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities continued Flow statements (audited) Stage 1 Stage 2 Stage 3 Total Financial Financial Financial Financial assets ECL assets ECL assets ECL assets ECL Commercial Banking - business banking £m £m £m £m £m £m £m £m At 1 January 2021 12,122 41 2,184 145 250 173 14,556 359 Currency translation and other adjustments — — — — (7) (5) (7) (5) Transfers from Stage 1 to Stage 2 (3,641) (13) 3,641 13 — — — — Transfers from Stage 2 to Stage 1 2,622 144 (2,622) (144) — — — — Transfers to Stage 3 (75) — (470) (27) 545 27 — — Transfers from Stage 3 12 3 38 9 (50) (12) — — Net re-measurement of ECL on stage transfer (135) 171 38 74 Changes in risk parameters (11) (23) 9 (25) Other changes in net exposure 252 (2) (498) (28) (33) (5) (279) (35) Other (P&L only items) — — (36) (36) Income statement (releases)/charges (148) 120 6 (22) Amounts written-off — — — — (37) (37) (37) (37) Unwinding of discount — — (10) (10) At 31 December 2021 11,292 27 2,273 116 668 178 14,233 321 Net carrying amount 11,265 2,157 490 13,912 At 1 January 2020 6,338 28 767 45 257 200 7,362 273 2020 movements 5,784 13 1,417 100 ( 7) (27) 7,194 86 At 31 December 2020 12,122 41 2,184 145 250 173 14,556 359 Net carrying amount 12,081 2,039 77 14,197  At a total level, exposure remained rela tively stable with reduction mainly due to the repayment of government scheme debt.  The updated economics resulte d in an improvement in underlying credit metrics resulting in migration of exp osure from Stage 2 into Stage 1 with a consequential reduction from lifetime ECL to a 12 month ECL calculatio n. However, the transfer of exposure from Stage 1 in to Stage 2 outweighed the positive migration and was largely related to customers with government s cheme borrowing.  Flows of defaulted exposure into Stage 3 were mainly a result of government scheme lending rather th an conventional debt. This was refle cted in the lower ECL associated with the Stage 3 transf ers.  The portfolio continued to bene fit from cash recoveries post write-off, which are reported as other (P&L only items ). Write-off occurs once recovery activity wit h the customer has been concluded or there are no further reco veries expected, but no later than five y ears after default. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 237 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities continued Flow statements (audited) Stage 1 Stage 2 Stage 3 Total Financial Financial Financial Financial assets ECL assets ECL assets ECL assets ECL Commercial Banking - other £m £m £m £m £m £m £m £m At 1 January 2021 39,279 139 25,981 1,204 1,249 468 66,509 1,811 Currency translation and other adjustments (262) — (70) — 77 21 (255) 21 Inter-group transfers 105 — — — — — 105 — Transfers from Stage 1 to Stage 2 (7,206) (29) 7,206 29 — — — — Transfers from Stage 2 to Stage 1 13,581 350 (13,581) ( 350) — — — — Transfers to Stage 3 (80) — (558) ( 42) 638 42 — — Transfers from Stage 3 30 6 528 41 (558) (47) — — Net re-measurement of ECL on stage transfer (306) 160 87 (59) Changes in risk parameters (119) (286) (7) (412) Other changes in net exposure 1,271 32 (5,003) ( 165) (386) (35) (4,118) (168) Other (P&L only items) — 1 (8) (7) Income statement (releases)/charges (393) (290) 37 (646) Amounts written-off — — — — (195) ( 195) (195) (195) Unwinding of discount — — (6) (6) At 31 December 2021 46,718 73 14,503 591 825 328 62,046 992 Net carrying amount 46,645 13,912 497 61,054 At 1 January 2020 53,722 94 8,788 143 1,386 516 63,896 753 2020 movements (14,443) 45 17,193 1,061 (137) (48) 2,613 1,058 At 31 December 2020 39,279 139 25,981 1,204 1,249 468 66,509 1,811 Net carrying amount 39,140 24,777 781 64,698  The decrease in ECL across Stage 1 and Stage 2 was primarily due to improvement in the econo mic outlook, causing both PDs and LGDs to reduce.  The updated economics also resulted in the migration of assets from Stage 2 into Stage 1 with a conse quential decrease from a lifetime ECL to a 12 month ECL calculation.  For flows into Stage 3, defaults remained suppress ed, reflecting both the effect of increased liquidity from government customer support s chemes and the improving economic environment.  Other changes in net exposure decreased following the commencement of repayments of governmen t scheme debt and strategic reduction in high risk se ctors. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 238 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities continued Flow statements (audited) Stage 1 Stage 2 Stage 3 Total Financial Financial Financial Financial assets ECL assets ECL assets ECL assets ECL NatWest Markets (1) £m £m £ m £m £m £m £m £m At 1 January 2021 33,327 12 1,671 49 168 132 35,166 193 Currency translation and other adjustments (799) — (38) (1) (4) (9) (841) (10) Inter-group transfers (105) — — — — — (105) — Transfers from Stage 1 to Stage 2 (881) (1) 881 1 — — — — Transfers from Stage 2 to Stage 1 1,762 9 (1,762) (9) — — — — Transfers to Stage 3 — — (1) — 1 — — — Net re-measurement of ECL on stage transfer (7) 4 — (3) Changes in risk parameters (7) (9) (2) (18) Other changes in net exposure 79 — (530) (8) (27) (3) (478) (11) Other (P&L only items) — 1 (4) (3) Income statement (releases)/charges (14) (12) (9) (35) Amounts written-off — — (24) (24) (43) (43) (67) (67) At 31 December 2021 33,383 6 197 3 95 75 33,675 84 Net carrying amount 33,377 194 20 33,591 At 1 January 2020 32,892 10 188 5 183 131 33,263 146 2020 movements 435 2 1, 483 44 (15) 1 1, 903 47 At 31 December 2020 33,327 12 1,671 49 168 132 35,166 193 Net carrying amount 33,315 1,622 36 34,973 (1) Reflects the NatWest Markets segment and includes NWM N.V..  Consistent with other Wholesale portfolios, Stage 1 an d Stage 2 ECL reduced due to the improved economic outlook which led to a reductio n in underlying PDs and LGDs.  The Stage 2 population reduce d materially with the improved economic outlook improving c redit metrics and resulting in migration of assets into Sta ge 1. Stage 1 Stage 2 Stage 3 Total Financial Financial Financial Financial assets ECL assets ECL assets ECL assets ECL Ulster Bank RoI - mortgages £m £m £m £m £m £m £m £m At 1 January 2021 10,919 27 1,682 91 1,061 381 13,662 499 Currency translation and other adjustments (342) (1) (72) (4) (57) (55) (471) (60) Transfers from Stage 1 to Stage 2 (488) (2) 488 2 — — — — Transfers from Stage 2 to Stage 1 1,164 54 (1,164) ( 54) — — — — Transfers to Stage 3 (8) — (65) (7) 73 7 — — Transfers from Stage 3 19 2 172 33 (191) (35) — — Net re-measurement of ECL on stage transfer (51) (3) 10 (44) Changes in risk parameters (8) (18) 82 56 Other changes in net exposure (618) (1) (109) (2) (115) (3) (842) (6) Other (P&L only items) (1) — (12) (13) Income statement (releases)/charges (61) (23) 77 (7) Transfers to disposal groups (1) (5,610) ( 13) (373) ( 20) (95) (14) (6,078) (47) Amounts written-off — — (1) (1) (72) (72) (73) (73) Unwinding of discount — — (7) (7) At 31 December 2021 5,036 7 558 17 604 294 6,198 318 Net carrying amount 5,029 541 310 5,880 At 1 January 2020 10,603 11 1,084 30 1,875 581 13,562 622 2020 movements 316 16 598 61 ( 814) (200) 100 (123) At 31 December 2020 10,919 27 1,682 91 1,061 381 13,662 499 Net carrying amount 10,892 1,591 680 13,163 (1) Reflects balance of disposal groups at 1 January 2021 .  The reduction in balances across all stages was primarily a result of the agreed sale of mortgages to Pe rmanent TSB p.l.c..  A further reduction in Stage 2 balances was mainly due to the cessation of the collective migration of high- risk mortgage accounts which were in receipt of COV ID-19 payment support during 2020 due to post-payment sup port performance. Economic uncertainty post model a djustments also decreased significantly during the year.  Like previous years, portfolio improvements an d debt sale activity resulted in deceases in the Stage 3 portfolio.  Write-offs were mainly a result of the execution of the final tranche of the 2019 debt sale. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 239 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities continued Stage 2 decomposition – arrears status and contributi ng factors The tables below show Stage 2 decomposition for the Personal and Wholesale po rtfolios. UK mortgages RoI mortgages Credit cards Other Total Loans ECL Loans ECL Loans ECL Loans ECL Loans ECL 2021 £m £m £m £m £m £m £m £m £m £m Personal Currently >30 DPD 397 9 38 3 11 6 50 13 496 31 Currently <=30 DPD 10,593 148 515 14 922 135 1,897 286 13,927 583 - PD deterioration 2,400 56 58 4 549 96 970 174 3,977 330 - PD persistence 3,088 38 21 1 270 23 770 91 4,149 153 - Other driver (adverse credit, forbearance etc) 5,105 54 436 9 103 16 157 21 5,801 100 Total Stage 2 10,990 157 553 17 933 141 1,947 299 14,423 614 2020 Personal Currently >30 DPD 426 19 109 11 10 6 75 25 620 61 Currently <=30 DPD 27,477 209 1,559 80 1,365 219 3,331 427 33,732 935 - PD deterioration 13,136 163 664 42 901 167 2,242 354 16,943 726 - PD persistence 9,977 22 46 2 350 32 966 57 11,339 113 - Other driver (adverse credit, forbearance etc) 4,364 24 849 36 114 20 123 16 5,450 96 Total Stage 2 27,903 228 1,668 91 1,375 225 3,406 452 34,352 996  The improved economic outlook, including fo recast increases in unemployment, resulted in dec reased account level IFRS 9 PDs during the year. Consequently, co mpared to 2020, a smaller proportion of accounts ex hibited significant PD deterioration causing Stage 2 e xposures to decrease significantly and increase the proportion of cases in Stage 2 for other reasons.  During the year, a subset of cus tomers who had accessed payment holiday support and where thei r risk profile was identified as relatively high risk, were collectively migrated into Stage 2. For mortgages, in Retail Banking, approximately £0.8 billion of exposures were colle ctively migrated from Stage 1 into Stage 2. T he impact of collective migrations on unsecured lending was much more limited.  As expected, ECL coverage was higher in accoun ts that were more than 30 days past du e than those in Stage 2 for other reasons. Property Corporate Financial institutions Sovereign Total Loans ECL Loans ECL Loans ECL Loans ECL Loans ECL 2021 £m £m £m £m £m £m £m £m £m £m Wholesale Currently >30 DPD 239 3 390 8 19 — — — 648 11 Currently <=30 DPD 2,862 108 15,2 14 705 713 39 121 1 1 8,910 853 - PD deterioration 896 57 10,391 549 595 36 84 1 11,966 643 - PD persistence 139 8 552 32 6 — 1 — 698 40 - Other driver (forbearance, RoCL etc) 1,827 43 4,271 124 112 3 36 — 6,246 170 Total Stage 2 3,101 111 15,6 04 713 732 39 121 1 1 9,558 864 2020 Wholesale Currently >30 DPD 136 6 215 28 110 — — — 461 34 Currently <=30 DPD 12,885 501 27,501 1,459 3,514 90 204 1 44,104 2,051 - PD deterioration 11,765 450 23,268 1,229 3,182 85 97 — 38,312 1,764 - PD persistence 162 5 623 20 7 — — — 792 25 - Other driver (forbearance, RoCL etc) 958 46 3,610 210 325 5 107 1 5,000 262 Total Stage 2 13,021 507 27,716 1,487 3,624 90 204 1 44,565 2,085  The improved economic outlook, including u pgrades in GDP and commercial real estate valu ations, resulted in a reduction of IFRS 9 PDs. Conse quently, compared to 2020, a large proportion of exposure no longe r exhibited a SICR and migrated back into Stage 1 resulting in a reduction in Stage 2 exposure.  PD deterioration remained the primary trigger for identifying a SICR and Stage 2 treatment, although there was also an increase in arrears and other drivers.  The increase in arrears greater than 30 days was partially a result of the commencement of payments on gover nment scheme debt with some custome rs unable to make scheduled repayments.  There was a decrease in flows on to the Risk of Credi t Loss framework. At a total level, exposure on the Risk of Credit Loss framework remained above pre-COVI D-19 levels. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 240 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities continued Stage 2 decomposition – by a significant in crease in credit risk trigger UK mortgages RoI mortgages Credit cards Other Total 2021 £m % £m % £m % £m % £m % Personal trigger (1) PD movement 2,707 24.6 83 14.9 560 60.1 1,008 51.8 4,358 30.2 PD persistence 3,103 28.2 21 3.8 270 28.9 771 39.6 4,165 28.9 Adverse credit bureau recorded with credi t reference agency 3,657 33.3 — — 60 6.4 73 3.7 3,790 26.3 Forbearance support provided 178 1.6 6 1.1 2 0.2 28 1.4 214 1.5 Customers in collections 82 0.8 33 6.0 3 0.3 15 0.8 133 0.9 Collective SICR and other reasons (2) 1,197 10.9 409 74.0 38 4.1 46 2.4 1,690 11.7 Days past due >30 66 0.6 1 0.2 — — 6 0.3 73 0.5 10,990 100 553 100 933 100 1,947 100 14,423 100 2020 Personal trigger (1) PD movement 13,520 48.4 751 45.0 911 66.2 2,310 67.8 17,492 51.0 PD persistence 9,977 35.8 46 2.8 350 25.5 968 28.4 11,341 33.0 Adverse credit bureau recorded with credi t reference agency 2,936 10.5 — — 51 3.7 46 1.4 3,033 8.8 Forbearance support provided 138 0.5 7 0.4 1 0.1 9 0.3 155 0.5 Customers in collections 131 0.5 30 1.8 2 0.1 14 0.4 177 0.5 Collective SICR and other reasons (2) 1,165 4.2 832 49.9 60 4.4 55 1.6 2,112 6.1 Days past due >30 36 0.1 2 0.1 — — 4 0.1 42 0.1 27,903 100 1,668 100 1,375 100 3,406 100 34,352 100 For the notes to this table refer to the following pa ge.  The improved economic outlook, including a more optimistic forecast for unemployment, resulted in dec reased account level IFRS 9 PDs. Consequently, compared to 2020, a smaller proportion of accounts e xhibited significant PD deterioration at 31 December 20 21.  Since the 2020 year end, large populations of Sta ge 2 were migrated into Stage 1 reflecting continued reductions in PDs as a result of the improved economic outlook alongside stable portfolio performance during the year.  However, a subset of customer s who had accessed payment holiday support, and where thei r risk profile was identified as relatively high risk, were collectively migrated into Stage 2. In Retail Banking (primarily mo rtgages), approximately £0.8 billion of exposures were colle ctively migrated from Stage 1 into Stage 2. T he effect of collective migrations on unsecured lending was much more li mited. PD movement made up a smalle r proportion of Stage 2 for UK mortgages than at the 2020 ye ar end, supporting the use of the collective SICR migration approach desc ribed above. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 241 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities continued Stage 2 decomposition – by a significant in crease in credit risk trigger continued Property Corporate Financial institutions Sovereign Total 2021 £m % £m % £m % £m % £m % Wholesale trigger (1) PD movement 942 30.3 10,553 67.7 595 81.3 84 69.4 12,174 62.2 PD persistence 139 4.5 553 3.5 6 0.8 1 0.8 699 3.6 Risk of Credit Loss 962 31.0 2,626 16.8 71 9.7 34 28.1 3,693 18.9 Forbearance support provided 101 3.3 489 3.1 6 0.8 — — 596 3.0 Customers in collections 27 0.9 88 0.6 1 0.1 — — 116 0.6 Collective SICR and other reasons (2) 762 24.6 1,189 7.6 35 4.8 2 1.7 1,988 10.2 Days past due >30 168 5.4 106 0.7 18 2.5 — — 292 1.5 3,101 100 15,604 100 732 100 121 100 19,558 100 2020 Wholesale trigger (1) PD movement 11,849 91.1 23,403 84.3 3,183 87.9 97 47.6 38,532 86.6 PD persistence 16 2 1.2 624 2.3 7 0.2 — — 793 1.8 Risk of Credit Loss 394 3.0 2,106 7.6 66 1.8 39 19.1 2,605 5.8 Forbearance support provided 73 0.6 133 0.5 27 0.7 — — 233 0.5 Customers in collections 30 0.2 115 0.4 1 — — — 146 0.3 Collective SICR and other reasons (2) 462 3.5 1,262 4.6 231 6.4 68 33.3 2,023 4.5 Days past due >30 51 0.4 73 0.3 109 3.0 — — 233 0.5 13,021 100 27,716 100 3,624 100 204 100 44,565 100 (1) The table is prepared on a hierarchical basis from top to bottom, for example, accounts with PD deterioration may also trigger backstop(s) but are only reported under PD deterioration. (2) Includes customers where a PD assessment cannot be undertaken due to missing PDs.  PD deterioration continued to be the primary trigge r of migration of exposures from St age 1 into Stage 2. As the economic outlook improved during 202 1, there was a reduction in cases triggered into Stage 2 exposure.  Moving exposures on to the Risk of Credit Loss framework remained an important backstop indicator of a SICR. The exposures classified under the Stage 2 Risk of Credit Loss framework trigger increased ove r the period as less exposures were captured under the PD deterioration Stage 2 trigger.  PD persistence related to the bu siness banking portfolio only. Stage 3 vintage analysis The table below shows estimat ed vintage analysis of the material Stage 3 portfolios. 2021 2020 Retail Banking Ulster Ban k RoI Retail Banking Ulster Bank RoI mortgages mortgages Wholesale mortgages mortgages Wholesale Stage 3 loans (£bn) 1.2 0.6 2.1 1.3 1.1 2.9 Vintage (time in default): <1 year 26% 11% 19% 25% 6% 46% 1 - 3 years 30% 15% 20% 32% 18% 16% 3-5 years 13% 8% 7% 11% 23% 7% 5-10 years 17% 40% 54% 22% 36% 31% >10 years 14% 26% 10% 17% — 100% 100% 100% 100% 100% 100%  Retail Banking and Ulster Ba nk RoI mortgages – The proportion of the Stage 3 defaulted population whic h have been in default for over five years refle cted NatWest Group’s support for customers in financi al difficulty. When customers continue to engage constructive ly with NatWest Group, making regular payments, NatWest G roup continues to support them.  Wholesale – The reduction in the proportion of loans in Stage 3 for less than one year was m ainly due to lower flows into default during 2021 with customers suppor ted by government support schemes and a positive econo mic recovery trajectory. Exposures which we re in Stage 3 for in excess of five years, were mainly related to customers being in a protracted formal insolvency process or subject to litigation or a complaints proce ss. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 242 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities continued Asset quality (audited) The table below shows asset quality b ands of gross loans and ECL, by stage, for the Personal portfolio. Gross loans ECL provisions ECL provisions covera ge Stage 1 Stage 2 St age 3 T otal Stage 1 Stage 2 St age 3 Total Stage 1 Stage 2 St age 3 Total 2021 £m £m £m £ m £m £m £m £m % % % % UK mortgages AQ1-AQ4 93,956 3,157 — 97,113 8 40 — 48 0.01 1.27 — 0.05 AQ5-AQ8 81,160 7,325 — 88,485 17 103 — 120 0.02 1.41 — 0.14 AQ9 290 508 — 798 — 14 — 14 — 2.76 — 1.75 AQ10 — — 1,451 1,451 — — 269 269 — — 18.54 18.54 175,406 10,990 1,451 187,847 25 157 269 451 0.01 1.43 18.54 0.24 RoI mortgages AQ1-AQ4 3,669 226 — 3,895 5 5 — 10 0.14 2.21 — 0.26 AQ5-AQ8 1,335 176 — 1,511 2 6 — 8 0.15 3.41 — 0.53 AQ9 8 151 — 159 — 6 — 6 — 3.97 — 3.77 AQ10 — — 599 599 — — 293 293 — — 48.91 48.91 5,012 553 599 6,164 7 17 293 317 0.14 3.07 48.91 5.14 Credit cards AQ1-AQ4 44 1 — 45 1 — — 1 2.27 — — 2.22 AQ5-AQ8 2,874 894 — 3,768 58 130 — 188 2.02 14.54 — 4.99 AQ9 6 38 — 44 — 11 — 11 — 28.95 — 25.00 AQ10 — — 90 90 — — 60 60 — — 66.67 66.67 2,924 933 90 3,947 59 141 60 260 2.02 15.11 66.67 6.59 Other personal AQ1-AQ4 831 88 — 919 6 19 — 25 0.72 21.59 — 2.72 AQ5 - AQ8 5,950 1,723 — 7,673 51 243 — 294 0.86 14.10 — 3.83 AQ9 52 136 — 188 1 37 — 38 1.92 27.21 — 20.21 AQ10 — — 642 642 — — 557 557 — — 86.76 86.76 6,833 1,947 642 9,422 58 299 557 914 0.85 15.36 86.76 9.70 Total personal AQ1-AQ4 98,500 3,472 — 101,972 20 64 — 84 0.02 1.84 — 0.08 AQ5-AQ8 91,319 10,118 — 101,437 128 482 — 610 0.14 4.76 — 0.60 AQ9 356 833 — 1,189 1 68 — 69 0.28 8.16 — 5.80 AQ10 — — 2,782 2,782 — — 1,179 1,179 — — 42.38 42.38 190,175 14,423 2,782 207,380 149 614 1,179 1,942 0.08 4.26 42.38 0.94 Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 243 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities continued Asset quality (audited) Gross loans ECL provisions ECL provisions coverage Stage 1 Stag e 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 T otal 2020 £m £m £m £m £m £m £m £m % % % % UK mortgages AQ1-AQ4 108,869 6,634 — 115,503 10 33 — 43 0.01 0.50 — 0.04 AQ5-AQ8 38,347 20,254 — 58,601 14 146 — 160 0.04 0.72 — 0.27 AQ9 240 1,015 — 1,255 — 49 — 49 — 4.83 — 3.90 AQ10 — — 1,507 1,507 — — 254 254 — — 16.85 16.85 147,456 27,903 1,507 176,866 24 228 254 506 0.02 0.82 16.85 0.29 RoI mortgages AQ1-AQ4 8,247 777 — 9,024 20 38 — 58 0.24 4.89 — 0.64 AQ5-AQ8 2,677 560 — 3,237 7 34 — 41 0.26 6.07 — 1.27 AQ9 7 331 — 338 — 19 — 19 — 5.74 — 5.62 AQ10 — — 1,051 1,051 — — 381 381 — — 36.25 36.25 10,931 1,668 1,051 13,650 27 91 381 499 0.25 5.46 36.25 3.66 Credit cards AQ1-AQ4 23 4 — 27 1 2 — 3 4.35 50.00 — 11.11 AQ5-AQ8 2,384 1,329 — 3,713 52 208 — 260 2.18 15.65 — 7.00 AQ9 4 42 — 46 — 15 — 15 — 35.71 — 32.61 AQ10 — — 109 109 — — 76 76 — — 69.72 69.72 2,411 1,375 109 3,895 53 225 76 354 2.20 16.36 69.72 9.09 Other personal AQ1-AQ4 1,234 59 — 1,293 8 9 — 17 0.65 15.25 — 1.31 AQ5 - AQ8 4,461 3,020 — 7,481 58 336 — 394 1.30 11.13 — 5.27 AQ9 55 327 — 382 1 107 — 108 1.82 32.72 — 28.27 AQ10 — — 621 621 — — 517 517 — — 83.25 83.25 5,750 3,406 621 9,777 67 452 517 1,036 1.17 13.27 83.25 10.60 Total personal AQ1-AQ4 118,373 7,474 — 125,847 39 82 — 121 0.03 1.10 — 0.10 AQ5-AQ8 47,869 25,163 — 73,032 131 724 — 855 0.27 2.88 — 1.17 AQ9 306 1,715 — 2,021 1 190 — 191 0.33 11.08 — 9.45 AQ10 — — 3,288 3,288 — — 1,228 1,228 — — 37.35 37.35 166,548 34,352 3,288 204,188 171 996 1,228 2,395 0.10 2.90 37.35 1.17  In the Personal portfolio, the majority of e xposures were in AQ4 and AQ5 within the mortg age portfolios. Overall, personal asset quality improved slightly wi th migration in assets from AQ4 to AQ5 in mortgages off set by migration from AQ9 into better quality ba nds. As expected, mortgage exposures had a higher proportion in A Q1-AQ4 than unsecured borrowing.  As noted previously, significant migration from S tage 2 into Stage 1 across all AQ bands was observed , as IFRS PDs reduced.  In other personal, the relatively high level of exposu res in AQ10 reflected that impaired as sets can be held on the balance sheet, with commensurate ECL p rovision, for up to six years after default. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 244 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities continued Asset quality (audited) The table below shows asset quality b ands of gross loans and ECL, by stage, for the Wholesale portfolio. Gross loans ECL provisions ECL provisions covera ge Stage 1 Stage 2 Stage 3 Total Stage 1 St age 2 Stage 3 Total Stage 1 St age 2 Stage 3 Total 2021 £m £m £m £m £ m £m £m £m % % % % Property AQ1-AQ4 13,529 223 — 13,752 3 7 — 10 0.02 3.14 — 0.07 AQ5 - AQ8 15,126 2,742 — 17,868 21 94 — 115 0.14 3.43 — 0.64 AQ9 24 136 — 160 — 10 — 10 — 7.35 — 6.25 AQ10 — — 742 742 — — 239 239 — — 32.21 32.21 28,679 3,101 742 32,522 24 111 239 374 0.08 3.58 32.21 1.15 Corporate AQ1-AQ4 18,378 1,027 — 19,405 8 48 — 56 0.04 4.67 — 0.29 AQ5-AQ8 35,351 13,922 — 49,273 88 621 — 709 0.25 4.46 — 1.44 AQ9 74 655 — 729 — 44 — 44 — 6.72 — 6.04 AQ10 — — 1,444 1,444 — — 602 602 — — 41.69 41.69 53,803 15,604 1,444 70,851 96 713 602 1,411 0.18 4.57 41.69 1.99 Financial institutions AQ1-AQ4 50,121 63 — 50,184 7 1 — 8 0.01 1.59 — 0.02 AQ5-AQ8 2,138 667 — 2,805 7 38 — 45 0.33 5.70 — 1.60 AQ9 4 2 — 6 — — — — — — — — AQ10 — — 46 46 — — 4 4 — — 8.70 8.70 52,263 732 46 53,041 14 39 4 57 0.03 5.33 8.70 0.11 Sovereign AQ1-AQ4 5,787 35 — 5,822 19 1 — 20 0.33 2.86 — 0.34 AQ5-AQ8 117 86 — 203 — — — — — — — — AQ9 — — — — — — — — — — — — AQ10 — — 8 8 — — 2 2 — — 25.00 25.00 5,904 121 8 6,033 19 1 2 22 0.32 0.83 25.00 0.36 Total AQ1 - AQ4 87,815 1,348 — 89,163 37 57 — 94 0.04 4.23 — 0.11 AQ5-AQ8 52,732 17,417 — 70,149 116 753 — 869 0.22 4.32 — 1.24 AQ9 102 793 — 895 — 54 — 54 — 6.81 — 6.03 AQ10 — — 2,240 2,240 — — 847 847 — — 37.81 37.81 140,649 19,558 2,240 162,447 153 864 847 1,864 0.11 4.42 37.81 1.15 2020 Property AQ1-AQ4 12,694 2,079 — 14,773 20 40 — 60 0.16 1.92 — 0.41 AQ5-AQ8 10,785 10,780 — 21,565 103 450 — 553 0.96 4.17 — 2.56 AQ9 254 162 — 416 — 17 — 17 — 10.49 — 4.09 AQ10 — — 1,322 1,322 — — 545 545 — — 41.23 41.23 23,733 13,021 1,322 38,076 123 507 545 1,175 0.52 3.89 41.23 3.09 Corporate AQ1-AQ4 17,757 2,726 — 20,483 20 51 — 71 0.11 1.87 — 0.35 AQ5-AQ8 29,405 24,430 — 53,835 167 1,374 — 1,541 0.57 5.62 — 2.86 AQ9 928 560 — 1,488 1 62 — 63 0.11 11.07 — 4.23 AQ10 — — 1,727 1,727 — — 803 803 — — 46.50 46.50 48,090 27,716 1,727 77,533 188 1,487 803 2,478 0.39 5.37 46.50 3.20 Financial institutions AQ1-AQ4 42,222 1,985 — 44,207 13 13 — 26 0.03 0.65 — 0.06 AQ5-AQ8 1,776 1,453 — 3,229 10 39 — 49 0.56 2.68 — 1.52 AQ9 4 186 — 190 — 38 — 38 — 20.43 — 20.00 AQ10 — — 17 17 — — 8 8 — — 47.06 47.06 44,002 3,624 17 47,643 23 90 8 121 0.05 2.48 47.06 0.25 Sovereign AQ1-AQ4 4,731 106 — 4,837 14 1 — 15 0.30 0.94 — 0.31 AQ5 - AQ8 17 98 — 115 — — — — — — — — AQ9 3 — — 3 — — — — — — — — AQ10 — — 4 4 — — 2 2 — — 50.00 50.00 4,751 204 4 4,959 14 1 2 17 0.29 0.49 50.00 0.34 Total AQ1-AQ4 77,404 6,896 — 84,300 67 105 — 172 0.09 1.52 — 0.20 AQ5 - AQ8 41,983 36,761 — 78,744 280 1,863 — 2,143 0.67 5.07 — 2.72 AQ9 1,189 908 — 2,097 1 117 — 118 0.08 12.89 — 5.63 AQ10 — — 3,070 3,070 — — 1,358 1,358 — — 44.23 44.23 120,576 44,565 3,070 168,211 348 2,085 1,358 3,791 0.29 4.68 44.23 2.25 Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 245 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Banking activities continued Asset quality (audited)  Across the Wholesale portfolio, the asset quality band distribution differed, reflective of the underlying qu ality of counterparties within each seg ment.  Asset quality improvement was observed across most segments as the economy recovered from the effects of COVID-19.  The reduction in AQ10 exposur e in property was largely due to a portfolio sale of commercial real est ate.  Within the Wholesale portfolio, customer credit grades we re reassessed as and when a request for financing was m ade, a scheduled customer credit revie w was undertaken or a material event specific to that customer occur red.  ECL provisions coverage showed the expected trend with increased coverage in the poor er asset quality bands, and also by stage.  The low provision coverage for Stage 3 l oans in financial institutions for 2021 reflected the secu red nature of one exposure classified AQ10. Credit risk – Trading activities This section details the credit risk profile of NatWest Grou p’s trading activities. Securities financing transactions and collateral (audited) The table below shows securiti es funding transactions in NatWest Markets and Treasu ry. Balance sheet captions include ba lances held at all classifications under IFRS 9. Reverse Repos Repos Total Of which can be offset Outside nett ing arrangements Total Of which can be offset Outside nett ing arrangements 2021 £m £ m £m £m £m £m Gross 78,909 78,259 650 73,858 7 2,712 1,146 IFRS offset (32,016) (32,016) — (32,016) (32,016) — Carrying value 46,893 46,243 650 41,842 4 0,696 1,146 Master netting arrangements (900) (900) — (900) (900) — Securities collateral (45,271) (45,271) — (39,794) (39,794) — Potential for offset not recognised under IFRS (46,171) (46,171) — (40,694) (40,694) — Net 722 72 650 1,148 2 1, 146 2020 Gross 80,388 80,025 363 66,493 64,793 1,700 IFRS offset (35,820) (35,820) — (35,820) ( 35,820) — Carrying value 44,568 44,205 363 30,673 28,973 1,700 Master netting arrangements (929) ( 929) — (929) (929) — Securities collateral (43,204) (43,204) — (28,044) ( 28,044) — Potential for offset not recognised under IFRS (44,133) (44,133) — (28,973) ( 28,973) — Net 435 72 363 1,700 — 1,700 Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 246 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Trading activities contin ued Derivatives (audited) The table below shows derivatives by type of contract. The master netting agreements and c ollateral shown do not result in a net presentation on the balance she et under IFRS. A significant proportion (more than 90% ) of the derivatives relate to trading activities in NatWest Markets. The table also includes he dging derivatives in Treasury. 2021 2020 Notional GBP USD Euro Other Total Assets Liabilities Notional A ssets Liabilities £bn £bn £bn £bn £bn £m £m £bn £m £m Gross exposure 114,100 109,403 177,330 172,245 IFRS offset (7,961) (8,568) (10,807) (11,540) Carrying value 3,512 3,270 4,092 1,226 12,100 106,139 100,835 14,047 166,523 160,705 Of which: Interest rate (1) 3,191 1,878 3,536 314 8,919 67,458 61,206 10,703 114,115 105,214 Exchange rate 319 1,388 548 912 3,167 38,517 39,286 3,328 52,239 55,107 Credit 2 4 8 — 14 154 343 15 161 376 Equity and commodity — — — — — 10 — 1 8 8 Carrying value 12,100 106,139 100,835 14,047 166,523 160,705 Counterparty mark-to-market netting (85,006) (85,006) (137,086) (137,086) Cash collateral (15,035) (9,909) (19,608) (15,034) Securities collateral (2,428) (2,913) (5,053) (4,921) Net exposure 3,670 3,007 4,776 3,664 Banks (2) 393 413 206 557 Other financial institutions (3) 1,490 1,584 1,436 1,931 Corporate (4) 1,716 938 2,985 1,082 Government (5) 71 72 149 94 Net exposure 3,670 3,007 4,776 3,664 UK 1,990 1,122 2,914 1,627 Europe 714 1,028 1,091 1,118 US 645 653 470 644 RoW 321 204 301 275 Net exposure 3,670 3,007 4,776 3,664 Asset quality of uncollateralised derivative assets AQ1-AQ4 2,939 3,464 AQ5-AQ8 674 1,283 AQ9-AQ10 57 29 Net exposure 3,670 4,776 (1) The notional amount of interest rate derivat ives includes £6,173 billion (2020 – £7,390 billion) in respect of contracts cleared through central clearing counterparties. (2) Transactions with certain counter parties with whom NatWest Group has netting arrangements but collateral is not posted on a daily basis; certain transactions with spe cific terms that may not fall within netting and collateral arrangements; der ivative positions in certain jurisdictions for example China where the collateral agreements are not deemed to be legally e nforceable. (3) Includes transactions with secur itisation vehicles and funds where collateral posting is contingent on NatWest Group’s external rating. (4) Mainly large corporates with whom NatWest Group may have netting arrangements in place, but operational capability does not support collateral posting. (5) Sovereigns and supranation al entities with no collateral arrangements, collateral arrangements that are not considered enforceable, or one-way collateral agreements in their favour. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 247 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Trading activities contin ued Derivatives: settlement basis and central coun terparties (audited) The table below shows the third party de rivative notional and fair value by trading and set tlement method. Notional Traded over th e counter Asset Liability Traded on Settled Not settled Traded on Traded Trade d on Traded recognised by centra l b y central recognised over the recognised over the exchanges counterpa rties co unterparties Total exchanges counter exchanges counter 2021 £bn £bn £bn £bn £m £m £m £m Interest rate 723 6,173 2,023 8,919 — 67,458 — 61,206 Exchange rate 2 — 3,165 3,167 — 38,517 — 39,286 Credit — — 14 14 — 154 — 343 Equity and commodity — — — — — 10 — — Total 725 6,173 5,202 12,100 — 106,139 — 100,835 2020 Interest rate 1,032 7,390 2,281 10,703 — 114,115 — 105,214 Exchange rate 2 — 3,326 3,328 — 52,239 — 55,107 Credit — — 15 15 — 161 — 376 Equity and commodity — — 1 1 — 8 — 8 Total 1,034 7,390 5,623 14,047 — 166,523 — 160,705 Debt securities (audited) The table below shows debt securities held at manda tory fair value through profit or loss by i ssuer as well as ratings based on the lowest of Standard & Poor’s, Moody’s and Fi tch. A significant proportion (more than 95%) of t hese positions are trading securities in NatWest Markets. Central and local g overnment Financial institutions UK US Other Corporate Total 2021 £m £m £m £ m £ m £m AAA — — 2,011 838 — 2,849 AA to AA+ — 3,329 3,145 1,401 62 7,937 A to AA- 6,919 — 1,950 308 57 9,234 BBB- to A- — — 3,792 346 517 4,655 Non-investment grade — — 31 163 82 276 Unrated — — — 3 3 6 Total 6,919 3,329 10,929 3,059 721 24,957 Short positions (9,790) (56) (12,907) (2,074) (137) (24,964) 2020 AAA — — 3,114 1,113 — 4,227 AA to AA+ — 5,149 3,651 576 49 9,425 A to AA- 4,184 — 1,358 272 81 5,895 BBB- to A- — — 8,277 444 656 9,377 Non-investment grade — — 36 127 53 216 Unrated — — — 150 5 155 Total 4,184 5,149 16,436 2,682 844 29,295 Short positions (5,704) ( 1,123) (18,135) ( 1,761) (56) (26,779) Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 248 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Credit risk – Cross border exposure Cross border exposures compri se both banking and trading activities, including reverse repurchase agreements. Exposures comprise loans and advances, including fin ance leases and instalment credit receivables, and other monetary assets, such as de bt securities. The geographical br eakdown is based on the country of domicile of the borrower or guarantor of ultimate risk. Cross border exposures include non-local cur rency claims of overseas offices on local residents but exclude exposures to local residents in local currencies. The table shows cross border exp osures greater than 0.5% of NatWest Gr oup’s total assets. Short Net of short Government Banks Other Total positions positions 2021 £m £m £m £ m £m £m Western Europe 17,206 6,968 17,177 41,351 13,603 27,748 Of which: France 5,391 1,258 3,825 10,474 2,919 7,555 Germany 3,164 3,640 1,835 8,639 3,111 5,528 Italy 3,040 210 797 4,047 3,449 598 United States 10,345 3,548 8,539 22,432 1,862 20,570 2020 Western Europe 23,651 9,232 21,091 53,974 18,756 35,218 Of which: France 5,098 1,574 6,270 12,942 2,465 10,477 Germany 4,913 4,020 2,343 11,276 3,833 7,443 Italy 4,985 319 791 6,095 3,583 2,512 Spain 2,980 731 1,120 4,831 3,773 1,058 United States 12,430 4,316 7,186 23,932 1,239 22,693 Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 249 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Capital, liquidity and fundin g risk NatWest Group continually ensures a comprehensi ve approach is taken to the management of capital, liquidity an d funding, underpinned by frameworks, ris k appetite and policies, to manage and mitigate capital, liquidity and fundi ng risks. The framework ensures the tools and capability a re in place to facilitate the management and mitigation of risk ensu ring NatWest Group operates within its regul atory requirements and risk appetite. Definitions (audited) Regulatory capital consists of r eserves and instruments issued that are available, have a degree of permanency and are capable of absorbing losses. A number of strict con ditions set by regulators must be satisfied to be eligible as capital. Capital adequacy risk is the risk that there is or will be insufficient capital and other loss-absorbing debt instru ments to operate effectively including me eting minimum regulatory requirements, operating within B oard approved risk appetite and supporting its strategic goals. Liquidity consists of assets that can be readily con verted to cash within a short timeframe at a reliable value. Liqui dity risk is the risk of being unable to me et financial obligations as and when they fall due. Funding consists of on-balance shee t liabilities that are used to provide cash to finance assets. Funding risk is the risk of not maintaining a diversified, stable and cost-effe ctive funding base. Liquidity and funding risks arise in a nu mber of ways, including through the maturity transformation role that banks perform. The risks are dependent on factors such as:  Maturity profile;  Composition of sources and uses of funding;  The quality and size of the liquidity portfolio;  Wholesale market conditions; a nd  Depositor and investor behaviour. Sources of risk (audited) Capital The eligibility of instruments and financial resou rces as regulatory capital is laid down by applic able regulation. Capital is categorised under two tiers ( Tier 1 and Tier 2) according to the ability to absorb losses, degree of permanency a nd the ranking of absorbing losses on either a going or gone conce rn basis. There are three broad categories of ca pital across these two tiers:  CET1 capital - CET1 capital must be perpetual and capable of unrestricted and immediate use to cover risks or losses as soon as these occur. This includes ordinary sh ares issued and retained earnings.  Additional Tier 1 (AT1) capital - T his is the second type of loss absorbing capital and must be capable of abso rbing losses on a going concern basis. The se instruments are either written down or converted into CET1 c apital when the CET1 ratio falls below a pre-specifi ed level.  Tier 2 capital - Tier 2 capital is supplementary c apital and provides loss absorption on a gone concern basis. Tie r 2 capital absorbs losses after Tier 1 capital. It typically consists of subordinated debt se curities with a minimum maturity of five years at the point of issu ance. Minimum requirement for own funds and eligible liabilities (MREL) In addition to capital, other spec ific loss-absorbing instruments, including senior notes issued by NatWest G roup, may be used to cover certain gone concern c apital requirements, which is referred to as MREL. Gone concern refers to the si tuation in which resources must be available to enable an o rderly resolution, in the event that the Bank of Englan d (BoE) deems that NatWest Group has failed or is likely to fail. Liquidity NatWest Group maintains a prudent app roach to the definition of liquidity resources. NatWest Group m anages its liquidity to ensure it is always available whe n and where required, taking into account regulatory, legal and othe r constraints. Following ring-fencing legislation, liquidity is no longe r considered fungible across NatWest Group. Principal liquidity por tfolios are maintained in the UK Domestic Liquidity Sub-Group (UK DoLSub) (primarily in NatWest B ank Plc), UBIDAC, NatWest Markets Plc, RBS International L imited and NWM N.V.. Some disclosures in this section where relevant are presented, on a consolidated basis, for NatWest Group, the UK DoLSub and on a solo basis for NatWest Markets Plc. Liquidity resources are divided into primary and secon dary liquidity as follows:  Primary liquid assets include cash and bal ances at central banks, Treasury bills and other high quality govern ment and supranational securities.  Secondary liquid assets are elig ible as collateral for local central bank liquidity facilities. T hese assets include own- issued securitisations or whole loans tha t are retained on balance sheet and pre-positione d with a central bank so that they may be converted into additional sources of liquidity at very short notice. Funding NatWest Group maintains a dive rsified set of funding sources, including customer deposits, wholes ale deposits and term debt issuance. NatWest Group also retains access to central b ank funding facilities. For further details on capital constituents an d the regulatory framework covering capital, liquidity and fu nding requirements, please refer to the NatWest Group Pillar 3 Report 2021 Capital, liquidity and funding section. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 250 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Capital, liquidity and fundin g risk continued Capital management Capital management ensures that there is suffici ent capital and other loss-absorbing instrumen ts to operate effectively including meeting minimum regulatory requi rements, operating within Board-approved risk appe tite, maintaining its credit rating and supporting its strategic goals. Capital management is critical in suppo rting the businesses and is enacted through an end-to-end framework ac ross businesses and legal entities. Capital is managed within the o rganisation at the following levels; NatWest Group consolidated, NW H Group sub consolidated, NatWest Marke ts Plc, NatWest Markets N.V. and RBS International Limited. The banking subsidiaries within NWH Group are governed by t he same principles, processes and management as NatWest Group. Note that although the aforementioned entities are reg ulated in line with Basel III principles, local implementation of the framewo rk differs across geographies. Capital planning is integrated into NatWest G roup’s wider annual budgeting process and is asse ssed and updated at least monthly. Regular returns are submitted to the PRA which include a two-year rolling forecast view. Other elemen ts of capital management, including risk appetite and stress testing, are set out on pages 192 and 193 . Produce capital plans Capital plans are produced for N atWest Group, its key operating entities and its business es over a five year planning horizon under expected an d stress conditions. Stressed capi tal plans are produced to support internal stress testing in the ICAAP for regulatory purposes. Shorter term forecasts are deve loped frequently in response to actual performance, changes in internal and external business e nvironment and to manage risks and opportunitie s. Assess capital adequacy Capital plans are developed to maintain capital of sufficient quantity and quality to support NatWest Group’s business, its subsidiaries and strategic plans over the planning horizon within approved risk appetite, as determined via stress testing, and minimum regulatory requireme nts. Capital resources and capital re quirements are assessed across a defined planning horizon. Impact assessment captures input from ac ross NatWest Group including from businesse s. Inform capital actions Capital planning informs potent ial capital actions including buy backs, redemptions, dividen ds and new issuance to external invest ors or via internal transactions. Decisions on capital actions will be influence d by strategic and regulatory requir ements, risk appetite, costs and prevailing market conditions. As part of capital planning, Nat West Group will monitor its portfolio of external capital securities and assess the optimal blend a nd most cost effective means of financing. Capital planning is one of the tools that NatWest Group uses to monitor and manage capital ris k on a going and gone concern basis, including the risk of exce ssive leverage. Liquidity risk management NatWest Group manages its liq uidity risk taking into account regulatory, legal and other cons traints to ensure sufficient liquidity is available where required to cover li quidity stresses. The principal levels at which liq uidity risk is managed are:  NatWest Group  NatWest Holdings Group  UK DoLSub  UBIDAC  NatWest Markets Plc  NatWest Markets Securities Inc.  RBS International Limited  NWM N.V. The UK DoLSub is PRA regulated and comprises NatWe st Group’s four licensed deposit-taking U K banks: National Westminster Bank Plc (NWB Plc), The Royal Bank of Sc otland plc (RBS plc), Coutts & Company and Ulster Bank Limited. On 3 May 2021, the Ulster Bank Limited business transferred to National Westminster Bank Plc. Ulster Bank Limited was removed from the UK DoLSub ef fective 1 January 2022. The planned removal of the Ulster B ank Limited license remains subject to regulatory applicatio ns and approvals. NatWest Group categorises its liquidity po rtfolio, including its locally managed liquidity portfolios, into pri mary and secondary liquid assets. The size of the liqu idity portfolios are determined by referencing NatWest Group’s liquidity risk appe tite. NatWest Group retains a prudent approach to setting the co mposition of the liquidity portfolios, which is s ubject to internal policies applicable to all entities and limits over quali ty of counterparty, maturity mix and currency mix. RBS International Limited, NWM N.V. and UBIDAC hold locally managed portfolios that comply with local regulations that may differ from PRA rules. The liquidity value of the portfolio is deter mined by taking current market prices and applying a discount o r haircut, to give a liquidity value that represe nts the amount of cash that can be generated by the asset. Funding risk management NatWest Group manages funding risk through a comprehensive framework which measures and monito rs the funding risk on the balance sheet including quantitative and qualit ative analysis of the behavioural aspects of its asse ts and liabilities as well as the funding concentration. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 251 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Capital, liquidity and fundin g risk continued Key points CET1 ratio (CRR end - point) The CET1 ratio de creased 30 basis points over the period, d ue to a £2.9 billio n decrease in CET1 and a £13.3 bill ion decrease in RWAs. The CET1 decrease of c.£2.9 billion is ma inly driven by:  the directed buy back a n d associa ted pension contributio n of £1.2 b illion;  the on-market share b uy back progra mmes of £1.5 bil lion (two £750 milli on programmes);  foreseeable divide nds and associat ed pension contributio ns of £1.2 billion;  a £1.1 billion decreas e in the IFRS 9 transitional adjustme nt; and  other reserve moveme nts.  These reductions were offset by the £3.0 billion attributab le profit in the period. Loss - absorbing capital Loss absorbing capit al decreased by £1.5 billion to £62.4 billion primarily due to a £2.9 billion decrease i n CET1 (explained above), new issua nce of £3.2 bil lion Senior debt, AT1 issuances of £0.9 billion, and Tier 2 iss uances of £1.6 billion. These we re offset by the redemption of a $2. 65 billion A T1 instrument and c.£2.0 billion red emption of Tier 2 instruments, foreign exchange movements and Tier 2 regulatory amortisati on. RWA T otal RWAs decrea sed by £13.3 billion or 7.8 % to £157.0 billio n mainly reflecting:  a reduction in credit risk RWA s of £9.8 billion due t o repayments a nd expired facilities in Commercia l Banking and additional decreas es within Ul ster Bank RoI due to repayments and facility maturiti es.  M arket ris k RWAs decreased by £1.4 billion drive n by the transitio n from LIBOR to alternative risk-free rates.  Coun terpa rty credit risk RWAs d ecreased by £1.2 billion as a result of lower exposures in NatWest Markets and the strengt h ening of Sterling ag ainst the euro over the period.  Operational risk RWAs reduced by £0.9 bi llion following the a nnual recalculatio n in Q1 2021. UK leverage The UK leverage rati o decreased by c.60 basis points drive n by a £ 4.0 billion decrease in Tier 1 capital. Liquidity portfolio The liquidity portfolio increased by £24.1 billion to £286.4 billion, with primary liquid ity increasing by £38.2 bi llion to £208.6 b illion. The increase in primary liquid ity is driven by customer surplus and drawdown fr om the Term Fundi ng Scheme wit h additional incentives for S MEs (TFSME). The reduction in secondary liq uidity is due to a reduction in the pre- positioned c ollateral at the Bank of England. Liquidity coverage ratio The Liquidity Coverage Ratio (LCR) increased to 172 % during the y ear driven by an increase in the liquid ity portfolio offset by a lower level of i ncreased net outf lows. The increased liquidit y portfolio was primarily driven by significa nt growth in custome r deposits in NatWe st Holdings which outst ripped growth in c ustomer lending d uring the year. NSFR The net stable fu nding ratio (NSFR ) was 157% compared t o 151% in prior year. The increase is mainly d ue to deposits gro wth. 2021 157% 2021 18.2% 2020 18.5% 2020 165% 2021 172% 2021 £157.0bn 2020 £170.3bn 2020 151% 2020 £63.9bn 2021 £62.4bn 2021 5.8% 2020 6.4% 2020 £262.3bn 2021 £286.4bn Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 252 Financial statements Strategic report Governance Risk and capital management Additional information Financial revie w Financial statements Strategic report Governance Risk and capital management Additional information Financial review Capital, liquidity and fundin g risk continued Minimum requirements Maximum Distributable Amount (MDA) and Minimum Capital Requirements NatWest Group is subject to minimum c apital requirements relative to RWAs. The table below s ummarises the minimum capital requirements (the sum of Pillar 1 and Pillar 2A), and the additional capital buffe rs which are held in excess of the regul atory minimum requirements and are us able in stress. Where the CET1 ratio falls below the sum of the minimu m capital and the combined buffer requirement, there is a subseque nt automatic restriction on the amount avail able to service discretionary payments (inclu ding AT1 coupons), known as the M DA. Note that different capital requireme nts apply to individual legal entities or sub-groups an d the table shown does not reflect any incremental PRA buffer requirements, which a re not disclosable. The current capital position pro vides significant headroom above both our mini mum requirements and our MDA threshold requirements. Type CET1 Total T ier 1 Tota l capital Pillar 1 requirements 4.5% 6.0% 8.0% Pillar 2A requirements 2.0% 2.7% 3.6% Minimum Capital Requirements 6.5% 8.7% 11.6% Capital conservation buffer 2.5% 2.5% 2.5% Countercyclical capital buffer (1) — — — MDA threshold (2) 9.0% n/ a n/a Subtotal 9.0% 11.2% 14.1% Capital ratios at 31 December 202 1 18.2% 20.7% 24.1% Headroom (3) 9.2% 9.5% 10.0% (1) In response to COVID -19, many countries reduced their CCyB rates. In December 2021, the Financial Policy Committee announced an increase in the UK CCyB rate from 0% to 1%. This rate will come into effect from December 2022 in line with the 12 month implementation period. The CBI continues to mai ntain the rate at 0% with an announcement of a gradual increase of the CCyB expected in 2022. (2) Pillar 2A requirements for NatWest Group are currently set on a nominal capital basis. From 2022 , all firms will be set Pilla r 2A as a variable amount with the exception of some fixed add -ons. (3) The headroom does not reflect excess distributable capital and may vary over time. Leverage ratios The table below summarises the minimum ratios of capital to leverage exposure unde r the binding PRA UK leverage f ramework applicable for NatWest Group. Type CET1 T otal Tier 1 Minimum ratio 2.4375% 3.2500% Countercyclical leverage ratio buffe r (1) — — Total 2.4375% 3.2500% (1) The countercyclical leverage ratio buffer is set at 35% of NatWest Group’s CCyB. As noted above the UK CCyB will increase fro m 0% to 1% effective from December 2022. Foreign exposures may be subject to different CCyB rates depending on the rate set in thos e jurisdictions. (2) Following the publication of the new UK leverage f ramework on 8 October 2021, certain NatWest Group legal entities that are n ot currently in scope of the minimum leverage ratio capital requirements will be expected to manage th eir lev erage ratio at the same level as firms in scope from 1 January 2022 and will be subject to the minimum requirement from 1 January 2023. Liquidity and funding ratios The table below summarises the minimum requirements for key liquidity and funding me trics, under the relevant legislative framework. Type Liquidity coverage ratio (LCR) 100% Net stable funding ratio (NSFR) (1) — (1) Net stable funding ratio (NSFR) reported in line with CRR2 regulations finalised in June 2019. Following the publication of PS 22/21 on 14 October 2021, a binding NSFR minimum requirement of 100% will be effective from January 2022 . Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 253 Financial statements Strategic report Governance Risk and capital management Additional information Financial revie w Financial statements Strategic report Governance Risk and capital management Additional information Financial review Capital, liquidity and fundin g risk continued Measurement Capital, risk-weighted assets and leverage: Key metrics The table below sets out the key capital and lever age ratios. Refer to Note 26 to the consolidated financial st atements for a more detailed breakdown of regulatory capital. 2021 2020 End-point PRA t ransitional End-point PRA transitional CRR basis (1) basis CRR basis (1) basis £m £m £m £m CET1 28,596 28,596 31,447 31,447 Tier1 32,471 33,042 36,430 37,260 Total 37,873 38,748 41,685 43,733 RWAs £m £m £m £m Credit risk 120,116 120,116 129,914 129,914 Counterparty credit risk 7,907 7,907 9,104 9,104 Market risk 7,917 7,917 9,362 9,362 Operational risk 21,031 21,031 21,930 21,930 Total RWAs 156,971 156,971 170,310 170,310 Capital adequacy ratios % % % % CET1 18.2 18.2 18.5 18.5 Tier 1 20.7 21.0 21.4 21.9 Total 24.1 24.7 24.5 25.7 Leverage ratios £m £m £m £m Tier 1 capital 32,471 33,042 36,430 37,260 UK Average Tier 1 capital (2) 33,233 33,804 36,397 37,231 UK Average leverage exposure (2) 568,802 568,802 576,906 576,906 UK Average leverage ratio (%) (2) 5.8% 5.9% 6.3% 6.5% UK leverage ratio (%) (3) 5.8% 5.9% 6.4% 6.5% (1) CRR as implemented by the Prudential Regulation Authority in the UK. End-point CRR basis includes an IFRS 9 transitional uplift to capital of £0.6 billion (31 December 2020 - £1 .7 billion). Excluding this adjustment, the CET1 ratio would b e 17.8% (31 December 2020 – 17.5%). The amended article for the prudential treatment of software assets was implemented in December 2020. Excluding this a djustment the CET1 ratio at 31 December 2021 would be 18.0% (31 December 2020 – 18.2%). (2) Based on the daily averag e of on-balance sheet items and three month-end average of off-balance sheet items. (3) Presented on CRR end-point Tier 1 cap ital (inclu ding IFRS 9 transit ional adjustment). The UK leverage ratio excludes central bank claims from the leverage exposure where deposits held are denominated in the same currency and of contractual maturity that is equal or longer than that of the central bank claims. Excluding an IFRS 9 transitional adjustment, the UK leverage ratio would be 5.7% (31 December 2020 – 6.1%). The amended article for the prudential treatment of software assets was implemented in December 2020. Excluding this adjustment, the UK leverage ratio at 31 December 2021 would be 5.7% (31 December 2020 – 6.3%). On 1 January 2022 the CET1 ratio was 15.9% including the impact of RWA inflation, 200 basis points, the removal of the soft ware development cost capital benefit, 20 basis poin ts, and the tapering of IFRS 9 transitional relief of 10 basis points. RWAs increa sed by £18.8 billion, including £14.8 billion associated with mortgage risk weight changes. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 254 Financial statements Strategic report Governance Risk and capital management Additional information Financial revie w Financial statements Strategic report Governance Risk and capital management Additional information Financial review Capital, liquidity and fundin g risk continued Capital flow statement The table below analyses the movement in CRR CET1 , AT1 and Tier 2 capital for the year. CET1 AT1 Tier 2 Total £m £m £m £m At 1 January 2021 31,447 4,983 5,255 41,685 Attributable profit for the period 2,950 2,950 Ordinary interim dividend paid (348) (348) Directed buy back and associate d dividend linked contribution (1,231) (1, 231) On-market ordinary share buy back programme (1,500) (1, 500) Foreseeable ordinary dividends (846) (846) Foreseeable pension contributions (365) (365) Foreign exchange reserve (403) (403) FVOCI reserve (91) (91) Own credit 22 22 Share capital and reserve movements in respect of employee share schemes 87 87 Goodwill and intangibles deduction (130) (130) Deferred tax assets (1) (1) Prudential valuation adjustments 12 12 New issues of capital instruments — 933 1,635 2,568 Redemption of capital instruments 150 (2,041) (1,580) (3,471) Net dated subordinated debt in struments — 20 20 Foreign exchange movements — 15 15 Adjustment under IFRS 9 transitional arrangements (1,126) (1, 126) Other movements (31) 57 26 At 31 December 2021 28,596 3,875 5,402 37,873  The CET1 decrease of c.£2.9 billion is mainly driven by the directed buy back and associated dividend linked contribution of £1.2 billion, the on-market share buy back programmes of £1.5 billion, forese eable dividends and associated pension contributions of £1.2 billion, a £1.1 billion decrease in the IFRS 9 transitional adjustmen t and other reserve movements. These reductions were offset by the £3.0 billion attributable profit in the period.  At H1 2021, an on-market ordinary share buy back programme of £750 million was announced resulting in a foreseeable charge to capital, of which £675 million has been executed by 31 December 202 1. The outstanding £75 million remains as a foreseeable charge together with £750 million recognised in Q4 2021 for an additional on-ma rket ordinary share buy back programme.  AT1 reflects the £400 million 4.5% Reset Perpetual Subordinated Contingent Conve rtible Notes issued in March 2021 and $750 million 4.600 % Reset Perpetual Subordinated Contingent Convertible notes in June 20 21. It also reflects a $2.7 billion redemption of 8.625% Perpetual Subordinated Contingent Convertible Additional notes in Au gust 2021.  The Tier 2 movement is primarily due to the redemption of own debt of £1.5 billion in Marc h 2021, a £1.0 billion issuance of subordinated Tier 2 notes in May 2021 and a €750 million issuance of subord inated Tier 2 notes in September 2021. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 255 Financial statements Strategic report Governance Risk and capital management Additional information Financial revie w Financial statements Strategic report Governance Risk and capital management Additional information Financial review Capital, liquidity and fundin g risk continued Risk-weighted assets The table below analyses the movement in RWAs duri ng the year, by key drivers. Counterparty Credit risk credit risk Market risk Operational risk Total £bn £bn £bn £bn £bn At 1 January 2021 129.9 9.1 9.4 21.9 170.3 Foreign exchange movement (1.1) (0.2) — — (1.3) Business movements (4.9) (0.9) 1.5 (0.9) (5.2) Risk parameter changes (1) (2.2) (0.1) — — (2.3) Methodology changes 0.1 — 0.3 — 0.4 Model updates (0.5) — (3.3) — (3.8) Other movements (2) (0.9) — — — (0.9) Acquisitions and disposals (3) (0.2) — — — (0.2) At 31 December 2021 120.2 7.9 7.9 21.0 157.0 The table below analyses the movement in RWAs by se gment during the year. Go - forward group Total Central excluding Retail Private Commercial RBS NatWest items Ulster Ulster Banking Banking Banking International Markets & other Bank RoI Bank RoI Total Total RWAs £bn £bn £bn £ bn £bn £bn £bn £bn £bn At 1 January 2021 36.7 10.9 75.1 7.5 26.9 1.4 158.5 11.8 170.3 Foreign exchange movement — — (0.3) — (0.4) — (0.7) (0.6) (1.3) Business movements 0.4 0.4 ( 6.0) 0.1 0.8 0.4 (3.9) (1.3) (5.2) Risk parameter changes (1) (0.4) — (1.2) (0.1) — — (1.7) (0.6) (2.3) Methodology changes — — 0.1 — 0.3 — 0.4 — 0.4 Model updates — — (0.5) — (3.3) — (3.8) — (3.8) Other movements (2) — — (0.8) — (0.1) — (0.9) — (0.9) Acquisitions and disposals (3) — — — — — — — (0.2) (0.2) At 31 December 2021 36.7 11.3 66.4 7.5 24.2 1.8 147.9 9.1 157.0 Credit risk 29.4 9.9 58.0 6.5 6.4 1.8 112.0 8.2 120.2 Counterparty credit risk 0.2 0.1 0.3 — 7.3 — 7.9 — 7.9 Market risk 0.1 — 0.1 — 7.7 — 7.9 — 7.9 Operational risk 7.0 1.3 8.0 1.0 2.8 — 20.1 0.9 21.0 Total RWAs 36.7 11.3 66.4 7.5 24.2 1.8 147.9 9.1 157.0 (1) Risk parameter changes relate t o changes in credit quality metrics of customers and counterparties (such as probability of default and loss given default) as well as internal ratings based model changes relating to counterpa rty credit risk. (2) The movements in other include the following: (a) R WA benefit of £0.8 billion as a result of the CRR COVID-19 amendment for Infrastructure Supporting Factor. (b) A sset transfers from NatWest Markets to Commercial. (3) The movement in acquisitions & disposals refl ected a portf olio sale of non-performing loans in Ulster Bank RoI. Total RWAs decreased to £157.0 billion during the period due to the following:  Credit risk RWAs decreased by £ 9.8 billion due to repayments and expired facilitie s in Commercial Banking and additional decreases within Ulster Bank RoI due to repayments and facility maturities . Operational risk RWAs decreased by £0.9 billion follow ing the annual recalculation in Q1 2021.  Counterparty credit risk RWAs reduced by £1 .2 billion, mainly reflecting reduced IMM e xposures in NatWest Markets.  Market risk RWAs decreased by £1 .4 billion primarily driven by a decrease in modelled market risk reflectin g a reduction in tenor basis risk in sterling flow rates, related to the transition from LIBOR to alternative risk-free r ates. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 256 Financial statements Strategic report Governance Risk and capital management Additional information Financial revie w Financial statements Strategic report Governance Risk and capital management Additional information Financial review Capital, liquidity and fundin g risk continued Leverage exposure 2021 2020 £m £m Cash and balances at central banks 177,757 124,489 Trading assets 59,158 68,990 Derivatives 106,139 166,523 Financial assets 412,817 422,647 Other assets 17,106 16,842 Assets of disposal groups 9,015 — Total assets 781,992 799,491 Derivatives - netting and variation margin (110,204) (172,658) - potential future exposu res 35,035 38,171 Securities financing transactions gross up 1,397 1,179 Undrawn commitments (1) 44,240 45,853 Regulatory deductions and other adjustmen ts (8,980) (8,943) Claims on central banks (174,148) (122,252) Exclusion of bounce back loans (7,474) (8,283) UK leverage exposure (2) 561,858 572,558 (1) Leverage exposure includes a commitment treated as external for the purposes of the regulatory consolidation, which is treated as internal within the weighted undrawn commitments table below. (2) The UK leverage ratio excludes cent ral bank claims from the leverage exposure where deposits held are denominated in the same currency and of contractual maturity that is equal or longer than that of the central bank claims. Liquidity key metrics The table below sets out the key liquidity and rel ated metrics monitored by NatWest Group. 2021 2020 NatWest Group UK DoLSub NatWest Group UK DoLSub Liquidity coverage ratio (1) 172% 169% 165% 152% Stressed outflow coverage (2) 194% 195% 183% 168% Net stable funding ratio (3) 157% 151% 151% 144% (1) The published LCR excludes Pillar 2 add-ons. NatW est Group calculates the LCR using its own interpretations of the EU LCR Delegated Act, which may change over time and may not be fully comparable with those of other financial institutions. (2) NatWest Group’s stressed outflow coverage (SOC) is an internal measure calculated by reference to liquid assets as a percentage of net stressed contractual and behavioural outflows over three months under the worst of t hree severe stress scenarios of a market-wide stress, an idiosyncratic stress and a combination of both as per ILAAP. This assessment is performed in accordance with PRA guidance. (3) Following the publication of PS 22 /21 on 14 October 2021, a binding NSFR minimum requirement of 100% will be effective from January 2022. Weighted undrawn commitments The table below provides a breakdown of weigh ted undrawn commitments. 2021 2020 £bn £bn Unconditionally cancellable cre dit cards 1.8 1.8 Other unconditionally cancellable items 3.1 3.2 Unconditionally cancellable items (1) 4.9 5.0 Undrawn commitments <1 year which m ay not be cancelled 1.7 1.9 Other off-balance sheet items with 20% credit c onversion factor (CCF) 0.3 0.4 Items with a 20% CCF 2.0 2.3 Revolving credit risk facilities 27.5 28.4 Term loans 3.3 3.6 Mortgages — — Other undrawn commitments >1 year which may not be cancelled & of f-balance sheet 1.1 1.2 Items with a 50% CCF 31.9 33.2 Items with a 100% CCF 5.3 5.4 Total 44.1 45.9 (1) Based on a 10% CCF. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 257 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Capital, liquidity and fundin g risk continued Loss-absorbing capital The following table illustrates the c omponents of estimated loss-absorbing capital (LAC) i n NatWest Group plc and operatin g subsidiaries and includes external issuances only. The t able is prepared on a transitional basis, including the benefit of regul atory capital instruments issued from operating c ompanies, to the extent they meet MREL c riteria. The roll-off profile relating to s enior debt and subordinated debt instru ments is set out on page 259. 2021 2020 Balance Balan ce Par sheet Regulatory LAC Par sheet Regulatory LAC value (1) value value (2) value (3) value value value value £bn £bn £bn £bn £bn £bn £bn £bn CET1 capital (4) 28.6 28.6 28.6 28.6 31.4 31.4 31.4 31.4 Tier 1 capital: end-point CRR compli ant AT1 of which: NatWest Group plc (holdco) 3.9 3.9 3.9 3.9 5.0 5.0 5.0 5.0 of which: NatWest Group plc operating operating subsidiaries (opcos) — — — — — — — — 3.9 3.9 3.9 3.9 5.0 5.0 5.0 5.0 Tier 1 capital: end-point CRR non compliant of which: holdco 0.6 0.6 0.5 0.5 0.7 0.7 0.7 0.5 of which: opcos 0.1 0.1 — — 0.1 0.1 0.1 0.1 0.7 0.7 0.5 0.5 0.8 0.8 0.8 0.6 Tier 2 capital: end-point CRR compli ant of which: holdco 7.1 7.1 4.9 6.0 6.9 7.2 4.8 5.7 of which: opcos 0.3 0.3 — — 0.4 0.4 0.1 0.1 7.4 7.4 4.9 6.0 7.3 7.6 4.9 5.8 Tier 2 capital: end-point CRR non compliant of which: holdco — — — — 0.1 0.1 0.1 0.1 of which: opcos 0.6 0.9 0.3 0.1 1.6 1.9 1.1 1.0 0.6 0.9 0.3 0.1 1.7 2.0 1.2 1.1 Senior unsecured debt securities of which: holdco 22.8 23.4 — 22.8 19.6 20.9 — 19.6 of which: opcos 22.7 22.6 — — 20.9 21.5 — — 45.5 46.0 — 22.8 40.5 42.4 — 19.6 Tier 2 capital Other regulatory adjustments — — 0.5 0.5 — — 0.4 0.4 — — 0.5 0.5 — — 0.4 0.4 Total 86.7 87.5 38.7 62.4 86.7 89.2 43.7 63.9 RWAs 157.0 170.3 UK leverage exposure 561.9 572.6 LAC as a ratio of RWAs 39.8% 37.5% LAC as a ratio of UK leverage e xposure 11.1% 11.2% (1) Par value reflects the nominal value of securities issued. (2) Regulatory capital instruments issued from operating companies are included in the transitional LAC calculation; to the extent they meet the current MREL criteria. (3) LAC value reflects NatWest Group’s interpretation of the Bank of England’s approach to setting a minimum requirement for own funds and eligible liabilities (MREL), published in June 2018. MREL policy and requirements remain subject to further potential development, as such NatWest Group’s estimated position remains subject to potential change. Liabilities excluded from LAC include instruments with less than one yea r remaining to maturity, structured debt, operating company senior debt, and other instruments that do not meet the MREL criteria. The LAC calculation includes T ier 1 and Tier 2 securities before the application of any regulatory caps or adjustments. (4) Corresponding shareholders’ equity was £41.8 billion (2020 - £43.9 billion). (5) Regulatory amounts reported for AT1, Tier 1 an d Tier 2 instruments are before grandfathering restrictions imposed by CRR. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 258 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Capital, liquidity and fundin g risk continued Loss-absorbing capital The following table illustrates the c omponents of the stock of outstanding issuance in N atWest Group and its operating subsidiaries including external and Internal issuances . NatWest NatWest NWM RBS NatWest Holdings Markets Sec urities International Group plc Limited NWB Plc RBS plc U BIDAC NWM Plc N.V. Inc. Limited £bn £bn £bn £bn £bn £bn £bn £bn £bn Tier 1 (inclusive of AT1) Ext ernally issu ed 4.5 — 0.1 — — — — — — Tier 1 (inclusive of AT1) Internally issued — 3.7 2.4 1.0 — 0.9 0.2 — 0.3 4.5 3.7 2.5 1.0 — 0.9 0.2 — 0.3 Tier 2 Externally issued 7.1 — 0.1 — 0.1 0.4 0.5 — — Tier 2 Internally issued — 4.6 3.1 1.4 0.4 1.5 0.1 0.3 — 7.1 4.6 3.2 1.4 0.5 1.9 0.6 0.3 — Senior unsecured Externally issued 23.4 — — — — — — — — Senior unsecured I nternally issued — 11.3 5.7 0.4 0.5 3.9 — — — 23.4 11.3 5.7 0.4 0.5 3.9 — — — Total outstanding issuance 35.0 19.6 11.4 2.8 1.0 6.7 0.8 0.3 0.3 (1) The balances are the IFRS balance sheet ca rrying amounts, which may differ from the amount which the instrument contributes to regulatory capital. Regulatory balan ces exclude, for example, issuance costs and fair value movements, wh ile dated capital is required to be amortised on a straight-line basis over the final five years of maturity. (2) Balance sheet amounts reported for AT1 , Tier 1 and Tier 2 instruments are before grandfathering restrictions imposed by CRR. (3) Internal issuance for NWB Plc, RBS plc and UBI DAC repres ents AT1, Tier 2 or Senior unsecured issuance to NatWest Holdings Limited and for NWM N.V. and NWM SI to NWM Plc. (4) Senior unsecured debt does not include CP, CD and short term/medium term notes issued from NatWest Group operating subsidiaries. (5) Tier 1 (inclusive of AT1) does not include CET1 numbers. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 259 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Capital, liquidity and fundin g risk continued Roll-off profile The following table illustrates the roll-off p rofile and weighted average spreads of NatWest Group’s major wholesale fundi ng programmes. As at and for year ended Roll - off profile Senior debt roll-off profile (1) 31 December 2021 H1 2022 H2 2022 2023 2024 2025 & 2026 2027 & later NatWest Group plc - amount (£m) 23,424 — 7 6,814 1,956 6,086 8,561 - weighted average rate spread (bps) 181 — 224 224 164 178 153 NWM Plc - amount (£m) 17,360 3,978 2,959 2,359 2,909 4,469 686 - weighted average rate spread (bps) 77 38 58 107 88 92 133 NatWest Bank Plc - amount (£m) 3,399 3,248 151 — — — — - weighted average rate spread (bps) 1 1 (2) — — — — NWM N.V. - amount (£m) 1,109 576 533 — — — — - weighted average rate spread (bps) 13 15 11 — — — — NWM S.I. - amount (£m) 225 — 4 — 81 75 65 - weighted average rate spread (bps) 130 — 64 — 98 137 168 RBSI - amount (£m) 460 383 77 — — — — - weighted average rate spread (bps) 89 84 103 — — — — Securitisation - amount (£m) 867 — — — — 289 578 - weighted average rate spread (bps) 5 — — — — 10 3 Covered bonds - amount (£m) 2,887 — — 751 2,136 — — - weighted average rate spread (bps) 129 — — 44 160 — — Total notes issued - amount (£m) 49,731 8,185 3,731 9,924 7,082 10,919 9,890 Weighted average rate spread (bps) 121 24 51 182 130 137 143 Subordinated debt instruments roll-off profile (2) NatWest Group plc (£m) 7,094 — 981 1,429 1,525 1,953 1,206 NWM Plc (£m) 417 275 — 119 — 21 2 NatWest Bank Plc (£m) 87 — 87 — — — — NWM N.V. (£m) 548 — — 104 — — 444 UBIDAC (£m) 73 — — — — — 73 Total (£m) 8,219 275 1,068 1,652 1,525 1,974 1,725 (1) Based on final contractual instrument maturity. (2) Based on first call date of instrument, however this does not indicate NatWest Group’s strategy on capital and funding management. The tab le above does not include debt accounted Tier 1 instruments although those inst ruments form part of the total subordinated debt balance. (3) The weighted average spread reflects the average n et funding cost to NatWest Group and is calculated on an indicative basis. (4) The roll-off table is based on sterling-eq uivalent balance sheet values. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 260 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Capital, liquidity and fundin g risk continued Liquidity portfolio (audited) The table below shows the liquidity po rtfolio by product, with primary liquidity aligned to internal stressed outflow coverage and regulatory LCR categorisation. Secondary liquidi ty comprises assets eligible for discount at central banks, which do not for m part of the liquid asset portfolio for LCR or stress ed outflow purposes. Liquidity va lue 2021 2020 NatWest Group (1) NWH Group (2) UK DoL Sub (3) NatWest Group NWH Group UK DoL Sub £m £m £m £m £m £m Cash and balances at central banks (4) 174,328 140,562 136,154 115,820 86,575 86,575 AAA to AA- rated governments 31,073 21,710 21,123 50,901 37,086 35,875 A+ and lower rated governments 25 — — 79 — — Government guaranteed issuers, public sector entities and government sponsored entities 307 295 174 272 272 141 International organisations and multil ateral development banks 2,720 1,807 1,466 3,140 2,579 2,154 LCR level 1 bonds 34,125 23,812 22,763 54,392 39,937 38,170 LCR level 1 assets 208,453 164,374 158,917 170,212 126,512 124,745 LCR level 2 assets 117 — — 124 — — Non-LCR eligible assets — — — — — — Primary liquidity 208,570 164,374 158,917 170,336 126,512 124,745 Secondary liquidity (5) 77,849 77,660 76,573 91,985 91,761 88,774 Total liquidity value 286,419 242,034 235,490 262,321 218,273 213,519 (1) NatWest Group includes the UK Domestic L iquidity Sub-Group (UK DoLSub), NatWest Markets Plc and other significant operating subsidiaries that hold liquidity portfolios. These include The Royal Bank of Scotland International L imited, NWM N.V. and Ulster Bank Ireland DAC who hold managed portfolios that comply with local regulations that may differ from PRA rules. (2) NWH Group comprises UK DoLSub and Ulster Bank Ireland DAC who hold managed portfolios that comply with local regulations that may differ from PRA rules. (3) UK DoLSub comprises NatWest Group’s f our licensed deposit-taking UK banks within the ring-fenced bank: NWB Plc, RBS plc, Coutts & Company and Ulster Bank Limited. Ulster Bank Limited was removed from the UK DoLSub effective 1 January 2022. (4) Following a change in methodology in our internal stressed outflow coverage metric, cash placed at Central Bank of Ireland within UBIDAC is now reported in the liquidity portfolio. (5) Comprises assets eligible for discounting at the Ban k of England and other central banks. (6) NatWest Markets Plc liquidity portfolio is reported in th e NatWest Markets Plc Annual Report and Accounts. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 261 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Capital, liquidity and fundin g risk continued Funding sources (audited) The table below shows the carrying values of t he principal funding sources based on contract ual maturity. Balance sheet captions include balances held at all clas sifications under IFRS 9. 2021 2020 Short-term Long-t erm Short-term Long-term less than more t han less than more than 1 year 1 year Total 1 year 1 year Total £m £m £m £m £m £m Bank Deposits Repos 7,912 — 7,912 6,470 — 6,470 Other bank deposits (1) 5,803 12,564 18,367 5,845 8,291 14,136 13,715 12,564 26,279 12,315 8,291 20,606 Customer Deposits Repos 14,541 — 14,541 5,167 — 5,167 Non-bank financial institutions 57,885 67 57,952 53,475 147 53,622 Personal 230,525 829 231,354 208,046 1,183 209,229 Corporate 175,850 113 175,963 163,595 126 163,721 478,801 1,009 479,810 430,283 1,456 431,739 Trading liabilities (2) Repos (3) 19,389 — 19,389 19,036 — 19,036 Derivatives collateral 17,718 — 17,718 23,229 — 23,229 Other bank and customer deposits 849 704 1,553 819 985 1,804 Debt securities in issue - medium term notes 178 796 974 527 881 1,408 38,134 1,500 39,634 43,611 1,866 45,477 Other financial liabilities Customer deposits 568 — 568 616 180 796 Debt securities in issue: Commercial paper and certificates of deposi t 9,038 115 9, 153 7,086 168 7,254 Medium term notes 6,401 29,451 35,852 4,648 29,078 33,726 Covered bonds 53 2,833 2,886 53 2,967 3,020 Securitisation — 867 867 — 1,015 1,015 16,060 33,266 49,326 12,403 33,408 45,811 Subordinated liabilities 1,375 7,054 8,429 365 9,597 9,962 Total funding 548,085 55,393 603,478 498,977 54,618 553,595 Of which: available in resolutio n (4) 29,624 28,823 (1) Includes £12.0 billion (2020 – £5.0 billion) relating to Term Fund ing Scheme with additional incentives for Small and Medium-sized Enterprises participation and nil (2020 – £2.8 billion) relating to NatWest Group’s participation in central bank financing operations under the European Central Bank’s targeted long-term financing operations. (2) Excludes short positions of £25 .0 billion (2020 – £26.8 billion). (3) Comprises central & other bank repos of £0.8 billion (2020 – £1.0 billion), other financial institution repos of £17.0 billion (2020 – £16.0 billion) and other corporate repos of £1.6 billion (2020 – £2.0 billion). (4) Eligible liabilities (as d efined in the Banking Act 2009 as amended from time to time) that meet the eligibility criteria set out in the regulations, rules, policies, guidelines, or statements of the Bank of England including the Statement of Policy published b y the Bank of England in June 2018. The balance consists of £23.4 billion (2020 – £20.9 billion) under debt securities in issue (senior MREL) and £6.2 billion (2020 – £7.9 b illion) under subordinated liabilities. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 262 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Capital, liquidity and fundin g risk continued Contractual maturity (audited) This table shows the residual maturity of financial instrum ent s, based on contractual date of m aturity of NatWest Group’s banking activities, including hedging d erivatives. Tra ding activities, comprising mandatory fair value through profit or loss (MFVTPL) assets and held-for-trading (HFT) liabilities have been excluded from the maturity analysis due t o their short-term natur e and are shown in total in the table below. Banking activities Less than 1 1-3 3-6 6 months 3-5 More than Trading month months mont hs - 1 year Subtotal 1-3 years years 5 years Total activities Total 2021 £m £m £m £m £m £m £m £m £m £m £m Cash and balances 177,757 — — — 177,757 — — — 177,757 — 177,757 at central banks Trading assets — — — — — — — — — 59,158 59,158 Derivatives 4 8 5 13 30 10 2 2 44 106,095 106,139 Settlement balances 2,141 — — — 2,141 — — — 2,141 — 2,141 Loans to banks - amortised cost 5,584 220 1,615 6 7,425 20 — 237 7,682 — 7,682 Loans to customers - amortised cost (1) 45,553 23,071 16,517 22,238 107,379 53,767 36,481 165,053 362,680 — 362,680 Personal 4,565 2,416 3,386 6,443 16,810 23,446 21,437 145,453 207,146 — 207,146 Corporate 28,527 10,116 5,106 7,218 50,967 23,881 13,876 18,853 107,577 — 107,577 Non-bank financial institutions 12,461 10,539 8,025 8,577 39,602 6,440 1,168 747 47,957 — 47,957 Other financial assets 2,502 1,705 1,573 5,439 11,219 9,251 7,558 17,800 45,828 317 46,145 Total financial assets 233,541 25,004 19,710 27,696 305,951 63,048 44,041 183,092 596,132 165,570 761,702 2020 Total financial assets 167,371 20,237 21,478 26,907 235,993 74,266 52,380 192,431 555,070 235,860 790,930 2021 Bank deposits excluding repos 4,930 454 285 134 5,803 564 12,000 — 18,367 — 18,367 Bank repos 6,251 1,661 — — 7,912 — — — 7,912 — 7,912 Customer repos 3,532 11,009 — — 14,541 — — — 14,541 — 14,541 Customer deposits excluding repos 445,811 12,944 3,200 2,305 464,260 918 69 22 465,269 — 465,269 Personal 225,623 1,664 1,822 1,416 230,525 829 — — 231,354 — 231,354 Corporate 168,090 5,908 1,160 692 175,850 36 55 22 175,963 — 175,963 Non - bank financial institutions 52,098 5,372 218 197 57,885 53 14 — 57,952 — 57,952 Settlement balances 2,068 — — — 2,068 — — — 2,068 — 2,068 Trading liabilities — — — — — — — — — 64,598 64,598 Derivatives 1 1 1 10 13 92 20 (5) 120 100,715 100,835 Other financial liabilities 1,602 5,547 5,020 3,891 16,060 15,840 9,533 7,893 49,326 — 49,326 CPs and CDs 1,523 2,864 2,266 2,385 9,038 105 10 — 9,153 — 9,153 Medium term notes 28 2,683 2,352 1,338 6,401 12,902 9,234 7,315 35,852 — 35,852 Covered bonds 50 — 3 — 53 2,833 — — 2,886 — 2,886 Securitisations — — — — — — 289 578 867 — 867 Customer deposits DFV 1 — 399 168 568 — — — 568 — 568 Subordinated liabilities — 37 272 1,066 1,375 3,165 1,959 1,930 8,429 — 8,429 Notes in circulation 3,047 — — — 3,047 — — — 3,047 — 3,047 Lease liabilities 26 49 72 91 238 220 165 640 1,263 — 1,263 Total financial liabilities 467,268 31,702 8,850 7,497 515,317 20,799 23,746 10,480 570,342 165,313 735,655 2020 Total financial liabilities 428,632 17,297 10,730 7,106 463,765 23,319 19,708 11,354 518,146 232,831 750,977 (1) Loans to customers excludes £3.7 billion (2020 – £6.0 billion) of impairment provisions. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 263 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Capital, liquidity and fundin g risk continued Senior notes and subordinated liabilities - residual ma turity profile by instrument type (audited) The table below shows NatWest Group’s de bt securities in issue and subordinated liabilities by r esidual maturity. Trading liabilities Other finan cial liabilities Debt securities in iss ue Debt securities Commercial in issue paper Covered Subordinated Total notes MTNs and CDs MTNs bonds Securitisation liabilities Total in issue 2021 £m £m £m £m £m £m £m £m Less than 1 year 178 9,038 6,401 53 — 1,375 16,867 17,045 1-3 years 335 105 12,902 2,833 — 3,165 19,005 19,340 3-5 years 112 10 9,234 — 289 1,959 11,492 11,604 More than 5 years 349 — 7,315 — 578 1,930 9,823 10,172 Total 974 9,153 35,852 2,886 867 8,429 57,187 58,161 2020 Less than 1 year 527 7,086 4,648 53 — 365 12,152 12,679 1-3 years 169 165 13,349 749 — 3,854 18,117 18,286 3-5 years 240 3 8,538 2,218 296 3,349 14,404 14,644 More than 5 years 472 — 7,191 — 719 2,394 10,304 10,776 Total 1,408 7,254 33,726 3,020 1,015 9,962 54,977 56,385 The table below shows the curr ency breakdown. GBP USD EUR Other Total 2021 £m £m £m £m £m Commercial paper and CDs 2,692 2,743 3,718 — 9,153 MTNs 2,471 19,032 13,718 1,605 36,826 Covered bonds 1,820 — 1,066 — 2,886 Securitisation 867 — — — 867 Subordinated liabilities 2,234 4,825 1,370 — 8,429 Total 10,084 26,600 19,872 1,605 58,161 2020 total 8,933 25,051 19,917 2,484 56,385 Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 264 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Capital, liquidity and fundin g risk continued Funding gap: maturity and segment analysis The contractual maturity of balance she et assets and liabilities reflects the maturity transformation role banks perform, lending long-term but mainly obtaining f unding through short-term liabilities such as custo mer deposits. In practice, the behavioural p rofiles of many liabilities show greater stability and longer maturity than the contractual maturity. This is particularly true of many types of retail and corporate deposits which, despi te being repayable on demand or at sho rt notice, have demonstrated very stabl e characteristics even in periods of acute st ress. In its analysis to assess and manage asset and liabili ty maturity gaps, NatWest Group deter mines the expected customer behaviour through qualitative and quantitative techniques. These incorporate observed cus tomer behaviours over long periods of time. This analysis is subject to governance through NatWest Group ALCo Tec hnical committee down to a segment level. The net behaviou ral funding surplus/(gap) and contractual matu rity analysis is set out below. Contractual mat urity Behavioural maturity Loans to customers Customer accounts Net surplus/(gap) Net surplus/(gap) Less than 1 year 1- 5 years Greater than 5 years Tota l Less than 1 year 1- 5 years Greater than 5 years Tota l Less than 1 year 1-5 years Greater than 5 years T otal Less than 1 year 1- 5 years Greater than 5 years Tota l 2021 £bn £bn £bn £bn £bn £bn £bn £bn £ bn £ bn £bn £bn £b n £bn £bn £bn Retail Banking 12 39 131 182 188 1 — 189 176 (38) (131) 7 (7) 18 (4) 7 Private Banking 3 6 9 18 39 — — 39 36 (6) (9) 21 (1) 9 13 21 Commercial Banking 50 33 18 101 178 — — 178 128 (33) (18) 77 4 79 (6) 77 RBS International 7 6 3 16 38 — — 38 31 (6) (3) 22 5 6 11 22 NatWest Markets 12 4 1 17 13 1 — 14 1 (3) (1) (3) 1 (4) — (3) Central items & other 2 — — 2 1 — — 1 (1) — — (1) (1) — — (1) Total excluding Ulster Bank RoI 86 88 162 336 457 2 — 459 371 (86) (162) 123 1 108 14 123 Ulster Bank RoI 1 2 4 7 18 — — 18 17 (2) (4) 11 10 1 — 11 Total 87 90 166 343 475 2 — 477 388 (88) (166) 134 11 109 14 134 2020 £bn £bn £bn £bn £bn £bn £bn £bn £ bn £ bn £bn £bn £b n £bn £bn £bn Total 75 104 169 348 438 2 — 440 363 (102) (169) 92 22 58 12 92 (1) Loans to customers and customer a ccounts inclu de trad ing assets and trading liabilities respectively and excludes reverse repos and repos.  The net customer funding surplus has increase d by £42 billion during 2021 to £134 billion drive n by a £37 billion growth in deposits and a £5 billion decline in lo ans to customers.  Customer deposits and loans to cu stomers are broadly matched from a behavioural perspective.  The net funding surplus in 2021 is mainly concen trated in the longer dated buckets, reflecting stable characte ristics of customer deposits. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 265 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Capital, liquidity and fundin g risk continued Encumbrance (audited) NatWest Group evaluates the extent to which assets c an be financed in a secured form (encumbrance), but certai n asset types lend themselves more readily to encu mbrance. The typical characteristics that support encumbrance are a n ability to pledge those assets to another counterparty o r entity through operation of law without necessarily requiring prior notifica tion, homogeneity, predictable and measurable cash flo ws, and a consistent and uniform underwriting and collectio n process. Retail assets including residential mortgages, credit c ard receivables and personal loans display many of t hese features. NatWest Group categorises its asse ts into four broad groups, those that are:  Already encumbered and used to support funding cu rrently in place through own-asset securitisations, co vered bonds and securities repurchase agreements.  Pre-positioned with central banks as part of fundi ng schemes and those encumbered under such sche mes.  Ring-fenced to meet regulatory requirements, where NatWest Group has in place an operational continuity in resolution (OCIR) investment mandate wherein the PRA requires critical service providers to hold seg regated liquidity buffers covering at least 50% of their annual fixed overheads.  Not currently encumbered. In this c ategory, NatWest Group has in place an enablement programme which see ks to identify assets capable of being e ncumbered and to identify the actions to facilitate such encumbrance w hilst not affecting customer relationships or servicing. Programmes to manage the use of asse ts to actively support funding are established within UK DoLSub, UBI DAC and NatWest Markets Plc. Balance sheet encumbrance The table shows the retained encumbrance asse ts of NatWest Group. Encumbered as a res ult of transactions with Unencumbered a ssets not counterparties Collateral pre-positioned other than central banks Pre-positioned ring-fenced with central banks Covered SFT, & en cumbered to meet debts & derivatives a ssets held regulatory Readily Other Cannot securitisa- and similar Total at cent ral requirement available available be used tions (1) (2,3) (4) ba nks (5) (6) (7) (8) (9) Total Total (10) 2021 £bn £bn £bn £bn £ bn £b n £bn £ bn £bn £bn Cash and balances at central banks - 5.1 5.1 - - 172.7 - - 172.7 177.8 Trading assets - 36.7 36.7 - - 0.8 0.9 20.8 22.5 59.2 Derivatives - - - - - - - 106.1 106.1 106.1 Settlement balances - - - - - - - 2.1 2.1 2.1 Loans to banks - amortised cost - 0.1 0.1 - - 6.7 0.6 0.3 7.6 7.7 Loans to customers - amortised cost 11.8 1.8 13.6 122.4 - 58.1 116.5 48.4 223.0 359.0 - residential mortagages - UK 8.3 - 8.3 119.7 - 44.4 14.2 - 58.6 186.6 - Rol 1.2 - 1.2 2.7 - 2.0 - - 2.0 5.9 - credit cards - - - - - 3.5 0.4 - 3.9 3.9 - personal loans - - - - - 5.1 2.4 1.4 8.9 8.9 - other 2.3 1.8 4.1 - - 3.1 99.5 47.0 149.6 153.7 Other financial assets - 15.4 15.4 - 2.0 27.7 0.4 0.6 28.7 46.1 Intangible assets - - - - - - - 6.7 6.7 6.7 Other assets - - - - - - 1.9 6.4 8.3 8.3 Assets of disposal groups 0.1 - 0.1 3.8 - 1.9 3.2 - 5.1 9.0 Total assets 11.9 59.1 71.0 126.2 2.0 267.9 123.5 191.4 582.8 782.0 2020 Total assets 14.8 70.8 85.6 134.0 2.2 203.7 123.1 250.9 577.7 799.5 (1) Covered debts and securitisations include securitisations, conduits, covered bonds and s ecured notes. (2) Repos and other secured deposits, cash, coin and nostro balance held with the Bank of England as collateral against deposits and notes in circulation are included here rather than within those positioned at the central bank as they are part of normal banki ng operations. Securities financing transactions (SFT) include collateral given to secure d erivative liabilities. (3) Derivative cash collateral of £12.0 billion (2020 - £18.8 billion) has been included in the encumbered assets basis the regulatory requir ement. (4) Total assets encumbered as a result of transactions with counterparties oth er than central banks are those that have been ple dged to provide security and are therefore not available to secure funding or to meet other collatera l needs. (5) Assets pre - positioned at the central banks include loans provided as security as part of funding s chemes and those encumbered under such schemes. (6) Ring - fenced to meet regulatory requirement includes assets ring fenced to meet operational continuity in resolution (OCIR) investment mandate. (7) Readily available for encumbrance: including assets that have been enabled for use with centra l banks but not pre - positioned; cash and high quality debt securities that form part of NatWest Group’s liquidity por tfolio and unencumbered debt securities. (8) Other assets that are capable of being encumbered are th ose assets on the balance sheet that are available for funding and co llateral purposes but are not readily realisable in their current form. These assets include loans that could b e pre -positioned with central banks but have not been subject to internal and external documentation review and diligence work. (9) Cannot be used includes: (a) Derivatives, reverse repurchase agreements and trading related settlement balances. (b) Non - financial assets such as intangibles, prepayments and deferred tax. (c) Loans that cannot be pre - positioned with central banks based on criteria set by the central banks, including those relating to date of origination and level of documentation. (d) Non - recourse invoice financing balances and certain shipping loans whose terms and structure prohibit their use as collateral. (10) In accordance with market practice, NatWest Group employs securities recognised on the balance sheet, and securities received under reverse repo transactions as collateral for repos. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 266 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional informatio n Financial review Market risk (audited) NatWest Group is exposed to n on-traded market risk through its banking activities and to traded m arket risk through its trading activities. Non-traded and traded m arket risk exposures are managed and discussed separately. The non -traded market risk section begins below. The traded market risk se ction begins on page 274. Pension-re lated activities also give rise to market risk. Refer to page 278 for more info rmation on risk related to pensions. Non-traded market risk Definition (audited) Non-traded market risk is the risk to the value of assets or liabilities outside the trading book, or the risk to income, that arises from changes in market prices suc h as interest rates, foreign exchange rates and eq uity prices, or from changes in managed rates. Sources of risk (audited) The key sources of non-traded market risk are interest rate risk, credit spread risk, foreign exchange risk, equity risk and accounting volatility risk. For detailed qualitative and quantitative info rmation on each of these risk types, refer to the separate sub-se ctions following the VaR table below. Key developments in 2021  As inflationary pressures increas ed in 2021, market expectations regarding the future path of interest rates changed. The five-year sterling overnight index in terest rate swap rate rose from -0.01% at 31 December 2020 to 1.05% at 31 December 2021. The corres ponding ten-year rate rose from 0.16% to 0.95%. At 31 December 2021 ma rket rates implied several increases in the UK base rate from 0.25%; at 31 December 2020 the y had implied potential cuts to the rate from 0.1%.  The sensitivity of net interest earnings to a 25 basis p oint upward shift in the market-implied yie ld curve was a cumulative £1,183 million over three years at 31 December 2021, down from £1,455 million at 31 December 202 0. The decrease partly reflected the higher impact of cent ral bank policy rates in the market-implied curve at 31 Dece mber 2021.  NatWest Group’s structural hedge of equity and deposits provides some protection again st volatility in interest rates. Notably, the product structural hedge notional, which captures deposits in the Retail and Comme rcial Banking franchises, increased from £169 billion at 31 Dece mber 2020 to £206 billion at 31 December 2021 as more b alances were included in the hedging prog ramme. This increase mainly reflected the significant growth in custo mer deposits during the pandemic.  Although swap rates began to rise in H2 2021, the yield on the structural hedge fell from 1.0 6% to 0.75%. This mainly resulted from maturing of swaps and increased hedging. Increased volumes are initially hedged at sho rter dates to ensure an evenly amortising risk profile. The reducti on in fixed yield also, in part, reflects the transition f rom LIBOR to the SONIA benchmark. New hedges are indexed against SONIA, which is a risk-free ben chmark and therefore has a lower outright coupon.  Sterling strengthened against the euro, to 1.19 a t 31 December 2021 compared to 1.11 at 31 December 2020. It weakened slightly against the US dollar, to 1.35 at 31 December 2021 compared to 1.37 at 31 December 2020. Structural foreign currency exposures decreased, in s terling equivalent terms, over the year, mainly driven by increased hedging of NatWest Holdings’ investment in UBI DAC. Governance (audited) Responsibility for identifying, measuring, monito ring and controlling market risk arising from non-tradi ng activities lies with the relevant business. Oversight is provided by the independent Risk function. Risk positions are reported regularly to the Executive Risk Committee and the Board Risk C ommittee, as well as to the Asset & Liability Management Committee. Non-t raded market risk policy sets out the governance and risk management framework. Risk appetite NatWest Group’s qualitative appetite is set out in t he non- traded market risk appetite statement. Its quantitative appetite is expresse d in terms of value-at-risk (VaR), stressed value-at-risk (SVaR), sensiti vity and stress limits, and earnings-at-risk limits. The limits are reviewed to reflect changes i n risk appetite, business plans, portfolio composition and the market and economic environments. To ensure approved limi ts are not breached and that NatWest Group remains wi thin its risk appetite, triggers have been set and are actively managed. For further information on risk appetite and risk cont rols, refer to pages 192 and 193. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 267 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Non-traded market risk continued Risk measurement (audited) Non-traded internal VaR (1-day 99%) The following table shows one-day inte rnal banking book value-at-risk (VaR) at a 9 9% confidence level, split by risk type. Va R values for each year are calculated based on one-d ay values for each of the 12 month-en d reporting dates. NatWest Group’s VaR metrics a re explained on page 269. Each of the key risk types are discussed in greater detail in thei r individual sub-sections following this table. 2021 2020 Average Maximum Minimum Period end Average Maximum Minimum Period end £m £m £m £m £m £m £m £m Interest rate 10.2 13.7 6.4 8.6 14.1 17.7 8.0 12.3 Credit spread 102.9 113.5 92.4 100.9 103.2 121.1 63.7 111.5 Structural foreign exchange rat e 11.4 13.2 9.2 12.0 10.8 14.7 9.1 8.9 Equity 12.4 14.6 11.1 14.3 28.5 35.4 24.9 11.6 Pipeline risk (1) 0.5 1.2 0.3 1.2 0.5 0.7 0.3 0.3 Diversification (2) (12.9) (35.6) (18.9) 4.2 Total 124.5 147.1 101.4 101.4 138.2 159.9 70.8 148.8 (1) Pipeline risk is the risk of loss arising from persona l customers owning an option to draw down a loan – typically a mortgage – at a committed rate, where interest rate changes may result in greater or fewer customers than anticipated ta king up the committed offer. (2) NatWest Group benefits from diversification across various financial instrument types, currencies and markets. The extent of the diversification benefit depends on the correlation between the assets and risk factors in the portfolio at a part icular time. The diversification factor is the sum of the VaR on individual risk types less the total portfolio VaR.  On an average basis, non-traded VaR was broadly stable over 2021. Period-end VaR refle cts the completion of the transition from LIBOR to risk-free benchmarks.  The decrease in equity VaR, on an average basis, reflects the disposal of SABB in 2020. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 268 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial revie w Financial statements Strategic report Governance Risk and capital management Additional information Financial review Non-traded market risk continued Interest rate risk Non-traded interest rate risk (NT IRR) arises from the provision to customers of a range of banking p roducts with differing interest rate characteristics. Whe n aggregated, these products form portfolios of assets and lia bilities with varying degrees of sensitivity to changes in market interest rates. Mismatches can give rise to volatility in net intere st income as interest rates vary. NTIRR comprises the following three primary risk types:  Gap risk: arises from the timing of rate changes in non- trading book instruments. The extent of gap risk depen ds on whether changes to the term structu re of interest rates occur consistently across the yie ld curve (parallel risk) or differentially by period (non-parallel risk).  Basis risk: captures the impact of relative chan ges in interest rates for financial instruments that have simila r tenors but are priced using different interest rate indices, or on the same interest rate indice s but with different tenors.  Option risk: arises from option derivative p ositions or from optional elements embedded in asse ts, liabilities and/or off- balance sheet items, where NatWes t Group or its customer can alter the level and timing of their cash flows. Optio n risk also includes pipeline risk. To manage exposures within its risk appetite, N atWest Group aggregates interest rate positions and hedges its residual exposure, primarily with interest rate sw aps. Structural hedging aims to red uce gap risk and the sensitivity of earnings to interest rate shocks. It also provides s ome protection against prolonged p eriods of falling rates. Structural hedging is explained in greater detail belo w, followed by information on how NatWest Group measures NTIRR f rom both an economic value-based and an earnings-based pe rspective. Structural hedging NatWest Group has a significant pool of stable, non and low interest-bearing liabilities, princip ally comprising equity and money transmission accounts. These balances are usually hedged , either by investing directly in long er-term fixed-rate assets (such as fixed-rate mortgages or UK government gilts) o r by using interest rate swaps, which are gen erally booked as cash flow hedges of floating-rate assets, in order to provide a consis tent and predictable revenue stream. After hedging the net interest rate exposu re externally, NatWest Group allocates income to e quity or products in structural hedges by reference to the relevant interest rate swa p curve. Over time, this approach has provided a basis fo r stable income attribution to products and interest rate returns. The program me aims to track a time series of medium-t erm swap rates, but the yield will be affected by changes in product volumes and NatWest Group’s capital compositi on. The table below shows the total income and tot al yield, incremental income relative to short-term cash rates, and the period -end and average notional balances allocated to e quity and products in respect of the s tructural hedges managed by NatWest Group. 2021 2020 Incremental Total Period end Average Total Increment al T otal Period end Average Total income income notional notional y ield income income notional notiona l yield £m £m £bn £bn % £m £m £bn £bn % Equity structural hedging 426 448 21 22 2.05 478 580 23 24 2.43 Product structural hedging 744 861 161 145 0.59 543 958 125 115 0.83 Other structural hedges 139 115 24 23 0.51 119 150 21 20 0.73 Total 1,309 1, 424 206 190 0.75 1,140 1,688 169 159 1.06 Equity structural hedges refer to income alloca ted primarily to equity and reserves. At 31 D ecember 2021, the equity structural hedge notional was allocated between NWH Group and NWM Plc in a ratio of app roximately 80/20 respectively. Product structural hedges refer to income alloc ated to customer products by NWH Group Tre asury, mainly current accounts and customer deposits in Commercial Banking an d UK Retail Banking. Other structural hedges refe r to hedges managed by UBIDAC, Private Banking, Ulster Bank Limited and RBS In ternational. Hedges associated with Uls ter Bank Limited were moved from other structural hedges to product hedges in H1 202 1 as Ulster Bank Limited products migrated to NatWest B ank Plc. At 31 December 2021, approximately 93% by notional of total structural hedges were s terling-denominated. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 269 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial revie w Financial statements Strategic report Governance Risk and capital management Additional information Financial review Non-traded market risk continued The following table presents th e incremental income associated with product s tructural hedges at segment level. 2021 2020 £m £ m Retail Banking 346 251 Commercial Banking 398 292 Total 744 543  The increase in hedge notional, on a period-e nd basis, mainly resulted from increased hedging of Person al and Commercial deposits. This refle cted the increase in underlying customer deposit ba lances.  The five-year sterling swap rate rose to 1.05% at t he end of December 2021 from -0.01% at the end of December 2020. The ten-year sterling swap rate also rose, fr om 0.16% to 0.95%. Despite the swap rate rises , the yield of the structural hedge fell. This was partly due to the ful l-year impact of hedges booked in 202 0 and the impact of hedging balance growth, where new hedges may be booked initially at shorter maturities than five o r ten years and therefore attract a lower coupon than the five or ten-year swap rate.  During 2021, sterling-denominated structural hedges were migrated from LIBOR to a SONIA index. US dolla r- denominated structural hedges were migrated from L IBOR to a SOFR index. Because SONIA and SOFR are risk-free benchmarks, as maturing hedges are replaced the yield going forward will increasingly reflec t the lack of risk premium. Euro-denominated hedges remain inde xed against EURIBOR. NTIRR can be measured using value-based or e arnings-based approaches. Value-based a pproaches measure the change in value of the balance sheet assets and liabilities including all cash flows. Earnings-based approache s measure the potential impact on the income statement of changes in interest r ates over a defined horizon, generally one to three years. NatWest Group uses VaR as its value-base d approach and sensitivity of net interest earnings as its earnings-based approach. These two approaches provide complementary views of t he impact of interest rate risk on the balance sheet at a point in time. T he scenarios employed in the net interest earni ngs sensitivity approach may incorporate assumptions about how NatWest Group and its customers will respond to a change in the level of interest rates. In cont rast, the VaR approach measures the se nsitivity of the balance sheet at a point in time. Capturing all cas h flows, VaR also highlights the impact of du ration and repricing risks beyond the one-to-three-year period shown in earnings sensiti vity calculations. Value-at-risk VaR is a statistical estimate of the potential ch ange in the market value of a portfolio ( and, thus, the impact on the income statement) over a specified time horizon at a given confidence level. NatWest Group’s standard VaR metrics – which assume a time horizon of one trading day an d a confidence level of 99% – are based on interest rate repricing gaps at the reporting date. Daily rate moves are modelled usi ng observations from the last 500 business days. These incorporate customer p roducts plus associated funding and hedging t ransactions as well as non-financial assets and liabilities. Behaviour al assumptions are applied as appropriate. The non-traded interest rate risk VaR metrics for NatWest Group’s retail and commercial b anking activities are included in the banking book VaR table presented earlie r in this section. The VaR captures the risk resu lting from mismatches in the reprici ng dates of assets and liabilities. It also includes any mismatch be tween the maturity profile of external hedges and N atWest Group’s target maturity profile for the hedge. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 270 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Non-traded market risk continued Sensitivity of net interest earnings Net interest earnings are sensitive to ch anges in the level of interest rates, mainly because ma turing structural hedges are replaced at higher or lower rate s and changes to coupons on managed rate customer products do not always matc h changes in market rates of interest or central bank policy rates. Earnings sensitivity is derived from a market-implied fo rward rate curve, which will incorporate expected changes in central bank policy rates such as the Bank of England b ase rate. A simple scenario is shown that p rojects forward earnings based on the 31 December 2021 balance shee t, which is assumed to remain constant. An earnings projection is derived from the market-implied curve, which is then subject to interest rate shocks. The difference between the ma rket-implied projection and the shock gives an indication of underlying sensitivi ty to interest rate movements. Reported sensitivities should not be conside red a forecast of future performance in these rate scenarios. Actions that could reduce interest earnings sensitivity include ch anges in pricing strategies on customer loans and deposi ts as well as hedging. Management action may also be taken to stabilise total income also taking into account non-interest income. Three-year 25-basis-point sensitivity table The table below shows the sensitivity of net interes t earnings – for both structural hedges and managed rate accounts – on a one, two and three-year forwa rd-looking basis to an upward or downward interest rate shift of 2 5 basis points. In the upward rate scenario, yie ld curves were assumed to move in parallel, at both year-ends. The downward rate scenario at both year-en ds allows interest rates to fall to negative rates. +25 basis points upward shift -25 basis points down ward shift Year 1 Year 2 (1) Year 3 (1) Year 1 Year 2 (1) Y ear 3 (1) 2021 £m £m £m £m £m £m Structural hedges 43 144 235 (43) (144) (235) Managed margin 282 220 2 55 (255) (209) (187) Other 4 (5) Total 329 364 4 90 (303) (353) (422) 2020 Structural hedges 37 118 199 (37) (118) (199) Managed margin 319 380 387 (258) (285) ( 292) Other 15 (20) Total 371 498 586 (315) (403) ( 491) (1) The projections for Year 2 and Year 3 consider only th e main drivers of earnings sensitivity, namely structural hedging and m argin management. (2) The assumption of a constant balance sheet means that UBIDAC balances are held constant. UBIDAC contributes a relatively small proportion of NatWest Group’s overall earnings sensitivity. For example, UBIDAC contributes app roximately 6% to NatWest Group’s overall sensitivity to an upward 25-basis-point rate shift over three years.  The increase in structural hedge sensitivity at 31 December 2021 reflects the increase in the hedge notional since 31 December 2020.  The reduction in managed mar gin sensitivity in the upward and downward 25-basis-point rate shifts as well as in the upward 100-basis-point shift partly reflects the higher level of interest rates at 31 December 20 21 compared to 31 December 2020. In the market-implied projecti on, the UK base rate is projected to rise se veral times from 0.25% over the three years from 31 December 2021 . The UK base rate had been projected to fall below 0.1 % over the three years from 31 December 2020. When interest rates are higher, the pricing response to further une xpected shifts in rates differs from the response when rates are ve ry low or negative. One-year 25 and 100-basis-point sensitivity table The following table analyses the one-y ear scenarios by currency and, in addition, shows the i m pact over one year of a 100- basis- point upward shift in all interest rates . 2021 2020 Shifts in yield curve Shifts in yield curve +25 - 25 +100 +25 - 25 +100 basis points basis points basis points basis points basis points basis points £m £m £m £m £m £m Euro 20 (3) 129 7 (6) 99 Sterling 267 (264) 969 336 (287) 1,109 US dollar 40 (33) 143 26 (22) 102 Other 2 (3) 1 0 2 — 7 Total 329 (303) 1,251 371 (315) 1,317 Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 271 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Non-traded market risk continued Sensitivity of fair value through other comprehensive income (FVOCI) and cash flow hedging reserves to interest rate movements NatWest Group holds most of the bonds in its liquidi ty portfolio at fair value. Valuation change s that are not hedged (or not in effective hedge accounting relationships) a re recognised in FVOCI reserves. Interest rate swaps are used to implement the s tructural hedging programme and also hedgin g of some personal and commercial lending portfolios, primarily fixed-rate mortgages. Generally, these swaps are booked in hedge accounting relationships. Ch anges in the valuation of swaps that are in eff ective cash flow hedge accounting relationships a re recognised in cash flow hedge reserves. The table below shows the sensitivity of FVOCI reserves and cash flow hedge reserves to a parallel shift in all rates. In this analysis, interest rates have not been floored at zero. Cash f low hedges are assumed to be fully ef fective and interest rate hedges of bonds in the liquidity portfolio are also assumed t o be subject to fully effective hedge accounting. He dge accounting ineffectiveness would result in some deviation from the results below, with some gains or losses recog nised in P&L instead of reserves. Hedge ineffectiveness P&L is monitored, and the effec tiveness of cash flow and fair value hedge rela tionships is regularly tested in accordance with IFRS requirements. Note tha t a movement in the FVOCI reserve would have an impact on CET1 capital but a movement in the cash flow hedge reserve woul d not be expected to do so. Volatility in both re serves affects tangible net asset value. 2021 2020 +25 basis points - 25 basis points +100 basis points - 100 basis points +25 basis points - 25 basis points +100 basis points - 100 basis points £m £m £m £m £m £m £m £m FVOCI reserves (46) 45 (187) 174 (50) 48 (207) 181 Cash flow hedge reserves (210) 2 14 (82 0) 877 (108) 109 (421) 447 Total (256) 2 59 (1,007) 1, 051 (158) 157 (628) 628  The main driver of the increase in NatWes t Group’s cash flow hedge reserve sensitivity w as the increase in interest rate swaps that form part of the structural hedge. T he increase in the hedge was driven by higher cus tomer deposits during the COVID -19 pandemic. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 272 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional informati on Financial review Non-traded market risk continued Credit spread risk Credit spread risk arises from the potential adverse economic impact of a change in the spread betwee n bond yields and swap rates, where the bond portfolios are accounted at fair value through equity. NatWest Group’s bond portfolios primarily co mprise high-quality securities maintained as a liquidity buffer to e nsure it can continue to meet its obligations in the event that access to wholesale funding markets is re stricted. Additionally, other high- quality bond portfolios are held for collater al purposes and to support payment systems. Credit spread risk is monitored daily through sens itivities and VaR measures. The dealing aut horities in place for the bond portfolios further mitigate the risk by imposing const raints by duration, asset class and credit rating. Exposures a nd limit utilisations are reported to senior managemen t on a daily basis. Foreign exchange risk Non-traded foreign exchange risk arises from three mai n sources:  Structural foreign exchange rat e risk – arises from the capital deployed in foreign subsidiaries, branches and join t arrangements and related currency funding where it differs from sterling.  Non-trading book foreign exchange rate risk – arises from customer transactions and profits and losses that are in a currency other than the functional currency.  Forecast earnings or costs in foreign cu rrencies – NatWest Group assesses its potential exposure to forecast f oreign currency income and expenses. N atWest Group hedges forward some forecast expenses. The most material non-traded open currency positio ns are the structural foreign exchange exposures a rising from investments in foreign subsidiaries, branches and associ ates and their related currency funding. These exposures are assessed and managed to predefined risk appetite levels under delegated authority agreed by the CFO with suppor t from the Asset & Liability Management Committe e. NatWest Group seeks to limit the potential volatility impact on its CET1 ratio f rom exchange rate movements by maintaining a structural open cur rency position. Gains or losses arising from the retransla tion of net investments in overseas operati ons are recognised in equity reserves and reduce the sensitivity of capi tal ratios to foreign exchange rate movements primarily arising from the retranslation of non-sterling denominated RWAs. Sensitivity is minimised where, for a given currency, the r atio of the structural open position to RW As equals the CET1 ratio. The sensitivity of this ratio to exchange rates is mo nitored monthly and reported to the Ass et & Liability Management Committee at least quarterly. Foreign exc hange exposures arising from customer transactions are sol d down by businesses on a regular basis in line with NatWest G roup policy. Foreign exchange risk (audited) The table below shows structural foreign cu rrency exposures. Structural foreign R esidual currency Structural Net investment s Net exposures foreign in foreign investment pre-economic Economic currency operations hedges hedges hedges (1) exposures 2021 £m £m £m £m £m US dollar 1,275 (260) 1,015 (1,015) — Euro 6,222 (2,6 69) 3,553 — 3,553 Other non-sterling 990 (421) 569 — 569 Total 8,487 (3,3 50) 5,137 (1,015) 4,122 2020 US dollar 1,299 (3) 1,296 (1,296) — Euro 6,485 (829) 5,656 — 5,656 Other non-sterling 1,077 (350) 727 — 727 Total 8,861 (1,182) 7,679 (1,296) 6,383 (1) Economic hedges of US dollar net invest ments in foreign operations represent US dollar equity securities that do not qualify as net investment hedg es for accounting purposes. They provide an offset to structural foreign exchange exposures to the extent that there are net assets in overseas operations available.  The decrease in net investments in foreign operations was partly driven by sterling strengthening against t he euro.  The increase in the sterling value of ne t investment hedges was mainly driven by increased hedging of Nat West Holdings’ investment in UBIDAC.  During the year, NatWest Group also inc reased net investment hedging in US dollar and other n on-sterling currencies to reduce the potential impact on RWAs of changes to its regulatory foreign exchange he dging permission.  Changes in foreign currency exchange rates aff ect equity in proportion to structural foreign currency exposure. Fo r example, a 5% strengthening or weakening in fo reign currencies against sterling would result in a gain o r loss of £0.3 billion in equity respectivel y. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 273 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additiona l information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Non-traded market risk continued Equity risk (audited) Non-traded equity risk is the potential variation in inco me and reserves arising from changes i n equity valuations. Equity exposures may arise through strategic acquisitions, venture c apital investments and restructuring a rrangements. Investments, acquisitions or dis posals of a strategic nature are refe rred to the Acquisitions & Disposals Committee. Once a pproved by the CFO with support from the Acquisitions & Disp osals Committee for execution, such tra nsactions are referred for approval to the Board, the Executive Committee, the Chief Execu tive, the Chief Financial Officer or as otherwise requi red. Decisions to acquire or hold equity positions in the non-trading book tha t are not of a strategic nature, such as customer restructu rings, are taken by authorised persons with delega ted authority. Equity positions are carried at fair value on the balance sheet based on market prices whe re available. If market prices are not available, fair value is based on appropriate valuation tech niques or management estimates. The table below shows the balance sheet ca rrying value of equity positions in the banking book. 2021 2020 £m £m Exchange-traded equity 16 14 Private equity 160 160 Other 66 78 242 252 The exposures may take the form of (i) equity shares listed on a recognised exchange, (ii) priv ate equity shares defined as un listed equity shares with no observab le market parameters or (iii) other unlisted equi ty shares. 2021 2020 £m £m Net realised gains arising from disposals 8 (248) Unrealised gains included in Tier 1 or Tier 2 c apital 88 82 (1) Includes gains or losses on FVOCI instruments on ly.  The losses on disposals in 2020 mainly reflected the disposal of SABB. Accounting volatility risk Accounting volatility risk arises when an e xposure is accounted for at amortised cost but econo mically hedged by a derivative that is accounted for at fair value. Although this is no t an economic risk, the difference in accounting be tween the exposure and the hedge creates volatility in t he income statement. Accounting volatility can be mitigated throug h hedge accounting. However, residual volatility will remain in cases where accounting rules mean that hedge accounting is no t an option, or where there is some hedge ineffe ctiveness. Accounting volatility risk is reported to the Ass et & Liability Management Committee monthly and c apitalised as part of the Internal Capital Adequacy Assess ment Process (ICAAP). Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 274 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Traded market risk Definition (audited) Traded market risk is the risk arising from ch anges in fair value on positions, assets, liabilities or commitmen ts in trading portfolios as a result of fluctuations in market prices. Sources of risk (audited) Traded market risk mainly aris es from NatWest Group’s trading activities. These activities provide a range of fin ancing, risk management and investment se rvices to clients − including corporations and financial instit utions − around the world. From a market risk perspective, activities are focused on rates; currencies; and traded credit. NatWest G roup undertakes transactions in financial instruments includi ng debt securities, as well as securities financing and deriva tives. All material traded market risk resi des in NatWest Markets. The key categories are interest rate risk, credit spre ad risk and foreign currency price risk. Trading activities may also give rise to coun terparty credit risk. For further detail refer to the C redit risk section. Key developments in 2021  The UK, US and eurozone economies rebounded st rongly in 2021 following the rollout of COVID-19 v accines. However, inflation rose in H2 2021, in part due to global supply disruptions. This led to further market volatili ty, particularly in Rates, due to significant shifts in inflation expectations.  Traded VaR remained within appetite, with an average- basis year-on-year reduction d riven by de-risking activity in line with the strategic focus on RWA reduc tion. Governance (audited) Market risk policy statements set out the gove rnance and risk management framework. Responsibility for identifying, measuring, monitoring and controlling market risk arising from trading activities lies with the re levant trading business. The Market Risk function independently advises on, monitors and challenges the risk-taking activi ties undertaken by the trading business ensuring these are within the co nstraints of the market risk framework, policies, and risk appetite statements and measures. Risk appetite NatWest Group’s qualitative appetite for traded m arket risk is set out in the traded market risk appetite statemen t. Quantitative appetite is expressed in terms of exposu re limits. The limits at NatWest Group level comprise value- at-risk (VaR) and stressed value-at-risk (SVaR). More details o n these are provided on the following pages. For each trading business, a document known as a dealing authority compiles details of all applicable limits an d trading restrictions. The desk-level mandates comprise qualitative limits related to the product types wit hin the scope of each desk, as well as quantitative metrics spec ific to the desk’s market risk exposures. These additional limits and metrics ai m to control various risk dimensions such as exposure size, aged in ventory, currency and tenor. The limits are reviewed to reflect changes i n risk appetite, business plans, portfolio composition and the market and economic environments and rec alibrated to ensure that they remain aligned to NatWest Group RWA targets. Limi t reviews focus on optimising the alignment between t raded market risk exposure and capital usage. To ensure approved limits are not breached an d that NatWest Group remains within its risk appetite, tri ggers have been set such that if exposures exceed a specified le vel, action plans are developed by the relevant business and the Ma rket Risk function and implemented. For more detail on risk appetite and risk controls, refer to pages 19 2 and 193. Monitoring and mitigation Traded market risk is identified and asse ssed by gathering, analysing, monitoring and reporting market risk info rmation at desk, business, franchise and NatWest G roup-wide levels. Industry expertise, continued sy stem developments and techniques such as stress testing are also used to en hance the effectiveness of the identification and assessment of all material market risks. Traded market risk exposures are monitored ag ainst limits and analysed daily. A daily report summarising the position of exposures against limits at desk, business, f ranchise and NatWest Group levels is provided to senior managemen t and market risk managers across the function. Limit reporting is supplemented with regulatory capital a nd stress testing information as well as ad-hoc re porting. A risk review of trading busines ses is undertaken weekly with senior risk and front office staff. This includes a review of profit and loss drivers, notable position concentrations and other positions of concern. Business profit and loss performance is monitored automatically through loss trigge rs which, if breached, require a remedial action plan to be agreed between the Market Risk function and the business. The loss triggers are se t using both a fall-from-peak approach and an absolu te loss level. In addition, regular updates on traded market risk positions a re provided to the Executive Risk Committee and Board Risk Committee. Measurement NatWest Group uses VaR, SVaR and the incremen tal risk charge to measure traded marke t risk. Risks that are not adequately captured by VaR or SVaR are captu red by the Risks Not In VaR (RNIV) framework to ensure that Nat West Group is adequately capitalised for market risk. In additio n, stress testing is used to identify any vulnerabilities and poten tial losses. The key inputs into these measurement met hods are market data and risk factor sensitivities. Sensitivities ref er to the changes in trade or portfolio value that result f rom small changes in market parameters that are subject t o the market risk limit framework. Revaluatio n ladders are used in place of sensitivities to capture the impact of la rge moves in risk factors or the joint impact of two risk factors. These methods have been designed to c apture correlation effects and allow NatWest Group to form an aggregated view of its traded market risk across risk types, markets and business lines while also taking into account the ch aracteristics of each risk type. Value-at-risk For internal risk management purposes, VaR assu mes a time horizon of one trading day and a confidence level of 99%. The internal VaR model – which captures all tradin g book positions including those products approved by the regulator – is based on a historical simulation, utilising m arket data from the previous 500 days on an equ ally-weighted basis. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 275 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Traded market risk continued The model also captures the potential imp act of interest rate risk; credit spread risk; foreign currency price risk; equi ty price risk; and commodity price risk. When simulating potential move ments in such risk factors, a combination of absolute, relativ e and rescaled returns is used. The performance and adequacy of the VaR model are tested regularly through the following processes:  Back-testing: Internal and regul atory back-testing is conducted on a daily basis. (Information on inter nal back- testing is provided in this section. Information on regulatory back-testing appears in the Pillar 3 Report).  Ongoing model validation: VaR model performance is assessed both regularly, and on an ad-hoc basis, if market conditions or portfolio profile change sig nificantly.  Model Risk Management revie w: As part of the model lifecycle, all risk models (including the VaR model) are independently reviewed to ensure the model is still fit for purpose given current market conditions and po rtfolio profile. For further detail on the independent model validation carried out by Model Risk Management refer to page 284. More information relating to pricing a nd market risk models is presented in the Pillar 3 Repor t. One-day 99% traded internal VaR Traded VaR (1-day 99%) (audited) The table below shows one-day 9 9% internal VaR for NatWest Group’s trading portfolios, spli t by exposure type. 2021 2020 Average Maximum Minimum Period end Average Maximum Minimum Period end £m £m £m £m £m £m £m £m Interest rate 10.4 25.3 4.5 8.9 8.7 20.2 4.8 6.3 Credit spread 11.3 13.4 9.4 10.7 15.3 27.2 8.7 10.3 Currency 3.4 9.4 1.7 2.2 4.2 8.4 2.1 3.0 Equity 0.4 0.8 — 0.2 0.6 2.0 0.2 0.7 Commodity 0.1 0.5 — — 0.1 0.6 — 0.2 Diversification (1) (12.3) (10.5) (12.8) (10.3) Total 13.3 23.9 9.3 11.5 16.1 25.7 10.1 10.2 (1) Nat West Group benefits from diversification across various financial instrument types, currencies and market s. The extent of the diversification benefit depends on the correlation between the assets and risk factors in the portfolio at a part icular time. The diversification factor is the sum of the VaR on individual risk types less the total portfolio VaR.  Traded VaR increased in the first half of 2021 reflecting a rise in tenor basis risk in sterling flow trading. This related to the transition from LIBOR to alterna tive risk-free rates.  A regulator-approved update to the VaR mo del was applied in the second half of the year, to address the i mpact of this transition.  On an average basis, traded VaR decreased in 202 1 compared to 2020. This was driven by de-risking ac tivity in line with the strategic focus on RWA reduc tion. 0 5 10 15 20 25 30 Jan Feb M ar Apr May J un Jul Aug Sep Oct Nov Dec £m Total Trading Va R I nterest Ra te VaR Credit VaR FX VaR Equity VaR Commodity VaR Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 276 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Traded market risk VaR back-testing The main approach employed to asses s the VaR model’s ongoing performance is back-testing, which coun ts the number of days when a loss exceeds the c orresponding daily VaR estimate, measured at a 99% c onfidence level. Two types of profit and loss (P&L) are used in back-testi ng comparisons: Actual P&L and Hy pothetical P&L. For more details on the back-testing approach, refer to the Pillar 3 Report. The table below shows internal back-tes ting exceptions in the major NatWest Ma rkets businesses for the 250-business-day p eriod to 31 December 2021. Internal back-tes ting compares one-day 99% traded internal VaR wi th Actual and Hypothetical (Hypo) P&L. Back - testing exceptions Actual Hypo Rates 1 2 Currencies 1 1 Credit — — xVA — —  The exceptions in the Rates bu siness were mainly driven by market moves in sterling, euro and US doll ar rates.  The exceptions in the Currenci es business were mainly driven by market moves related to the Turkish li ra. Stressed VaR (SVaR) As with VaR, the SVaR methodology produces e stimates of the potential change in the market value of a portfolio, o ver a specified time horizon, at a given confide nce level. SVaR is a VaR-based measure using histo rical data from a one-year period of stress ed market conditions. A simulation of 99% VaR is run on the current portfolio for each 250-day period from 20 05 to the current VaR date, moving forward one day at a time. The SVaR is the wo rst VaR outcome of the simulated results. This is in contrast with VaR, which is based on a rolling 500-day historical data se t. A time horizon of ten trading days is assu med with a confidence level of 99%. The internal traded SVaR mode l captures all trading book positions. 2021 2020 Average Maximum Minimum Period end Average Maximum Minimum Period end £m £m £m £m £m £m £m £m Total internal traded SVaR 95 175 46 66 97 196 59 87  Traded SVaR increased in the first half of 2 021, reflecting a rise in tenor basis risk in sterling flow trading. This related to the transition from LIBOR to alterna tive risk-free rates.  Traded SVaR subsequently decreased in the second half of the year following changes to the treatment of tenor basis risk in the VaR model. Risks Not In VaR (RNIVs) The RNIV framework is used to identify and quantify m arket risks that are not fully captured by the intern al VaR and SVaR models. RNIV calculations form an integral part of ongoin g model and data improvement efforts to capture all marke t risks in scope for model approval in VaR and SVaR. For further qualitative and quantitative disclos ures on RNIVs, refer to the Market risk section of the Pillar 3 Repo rt. Stress testing For information on stress testing, refer to pa ge 193. Incremental risk charge (IRC) The IRC model quantifies the impact of r ating migration and default events on the market value of instruments with embedded credit risk (in particular, bonds and c redit default swaps) held in the trading book . It further captures basis risk between different instruments, ma turities and reference entities. For further qualitative and quan titative disclosures on the IRC, refer to the Market risk s ection of the Pillar 3 Report. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 277 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Market risk – linkage to balance sheet The table below analyses NatWest Group’s b alance sheet by non-trading and trading busines s. 2021 2020 Non-trading Trading Non-trading T rading Total business business Total business business £bn £bn £bn £b n £bn £bn Primary market risk factor Assets Cash and balances at central banks 177.8 177.8 — 124.5 124.5 — Interest rate Trading assets 59.2 0.7 58.5 69.0 0.3 68.7 Reverse repos 20.7 — 20.7 19.4 — 19.4 Interest rate Securities 25.0 — 25.0 29.2 — 29.2 interest rate, credit spreads, equity Other 13.5 0.7 12.8 20.4 0.3 20.1 Interest rate Derivatives 106.1 1.6 104.5 166.5 2.3 164.2 Interest rate, credit spreads, equity Settlement balances 2.1 0.2 1.9 2.3 0.1 2.2 Settlement Loans to banks 7.7 7.6 0.1 7.0 6.9 0.1 Interest rate Loans to customers 359.0 358.9 0.1 360.5 360.4 0.1 Interest rate Other financial assets 46.1 46.1 — 55.1 55.1 — Interest rate, credit spreads, equity Intangible assets 6.7 6.7 — 6.7 6.7 — Interest rate, credit spreads, equity Other assets 8.3 8.3 — 7.9 7.9 — Assets of disposal groups 9.0 9.0 — — — — Total assets 782.0 616.9 165.1 799.5 564.2 235.3 Liabilities Bank deposits 26.3 26.3 — 20.6 20.6 — Interest rate Customer deposits 479.8 479.8 — 431.7 431.7 — Interest rate Settlement balances 2.1 — 2.1 5.5 3.3 2.2 Settlement Trading liabilities 64.6 0.1 64.5 72.3 — 72.3 Repos 19.4 — 19.4 19.0 — 19.0 Interest rate Short positions 25.0 — 25.0 26.8 — 26.8 Interest rate, credit spreads Other 20.2 0.1 20.1 26.5 — 26.5 Interest rate Derivatives 100.8 3.6 97.2 160.7 5.2 155.5 Interest rate, credit spreads Other financial liabilities 49.3 48.9 0.4 45.8 45.1 0.7 Interest rate Subordinated liabilities 8.4 8.4 — 10.0 10.0 — Interest rate Notes in circulation 3.0 3.0 — 2.7 2.7 — Interest rate Other liabilities 5.9 5.9 — 6.4 6.4 — Total liabilities 740.2 576.0 164.2 755.7 525.0 230.7 (1) Non-trading businesses a re entities that primarily have exp osures that are not classified as trading book. For these exposures, with the exception of pension-related activities, the main measurement methods are sensitivity analysis of net interest income, internal non-traded VaR and fair value calculations. For more information refer to the non-traded market risk section. (2) Trading businesses are entities that primarily have exposures that are classified as trading book under regulatory rules. For these exposures, the main methods used by NatWest Group to measure market risk are detailed in the traded market risk section. (3) Foreign exchange risk affects all non-sterling den ominated exposures on the balance sheet across trading and non-trading businesses, and therefore has not been listed in the above tables. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 278 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Pension risk Definition Pension risk is the risk to NatWes t Group caused by its contractual or other liabilities to, or with respect to, a pension scheme (whether established for its e mployees or those of a related company or otherwise). It is also the risk that NatWest Group will make payments or other contributions to , or with respect to, a pension scheme because of a moral obligation or because NatWest Group conside rs that it needs to do so for some other reason. Sources of risk NatWest Group has exposure to pension risk through its defined benefit schemes worldwide. The Main sectio n of The NatWest Group Pension Fund (t he Main section) is the largest source of pension risk with £52.0 billion of assets and £42.0 billion of liabilities at 31 December 202 1 (2020 – £51.3 billion of assets and £43.9 billion of liabilities). Refe r to Note 5 to the consolidated financial statements, for fur ther details on NatWest Group’s pension oblig ations, including sensitivities to the main risk factors. Pension scheme liabilities vary with changes in l ong-term interest rates and inflation as we ll as with pensionable salaries, the longevity of scheme members and legisl ation. Pension scheme assets vary with changes in interest rates, inflation expectations, credit spreads, exchange rates, a nd equity and property prices. NatWest Group is exposed to the risk that the schemes’ assets, together with future returns and addi tional future contributions, are estimated to be insuff icient to meet liabilities as they fall due. In such circumstances, N atWest Group could be obliged (or might choose) to make additional contributions to the schemes or be required to hold additional capital to mitigate this risk. Key developments in 2021  There were no material changes to NatWest Group’s exposure to pension risk during the year, and the ove rall position of the main defined be nefit schemes that NatWest Group sponsors has improved.  The triennial actuarial valuation for the Main secti on, with an effective date of 31 Decembe r 2020, was completed on 14 December 2021. As the Main sec tion was in surplus at this date, no deficit repair contributions we re required, although there was a small incre ase in the level of contributions in relation to ongoing accrual of be nefits.  In line with the Memorandum of Understanding signed with the Trustee of the Main section in April 2018, a £500 million lump sum contribution was paid into the M ain section, following the share buyback in 2 021.  NatWest Group has exposure to a number of defined benefit pension schemes in the Republic of I reland. Following the announcement to commence a ph ased withdrawal from the Republic of Ireland, an agreement was reached with each of the schemes’ Trustees , on a timeframe for discussions on the future support arrangements for the schemes on completion of the phased withdrawal, with all parties sharing the objective of having new support arrangements in place by the end of 202 2.  Following the changes to Ulster B ank Limited, it no longer participates in any of NatWest Group’s defined benef it pension schemes. In particular, NatWest Bank Plc assumed responsibility as Principal Employer and the only participating employer in The Uls ter Bank Pension Scheme in Northern Ireland. This will not affect Na tWest Group’s overall exposure to the Scheme.  As part of the transition of framework c omponents to align to the requirements of the NatWes t Group enterprise-wide risk management framework, an updated pension risk policy and risk appetite statement were develo ped in 2021. Governance Chaired by the Chief Financial O fficer, the Group Asset & Liability Management Committe e is a key component of NatWest Group’s approach to managing pension risk. I t considers the pension impact of the capital plan fo r NatWest Group and reviews performance of NatWest Group’s material pension funds and other issues material to NatWest Group’s pension strategy. It also consid ers investment strategy proposals from the Trustee of the Main sectio n. For further information on governance , refer to page 190. Risk appetite NatWest Group maintains an in dependent view of the risk inherent in its pension funds. NatWest G roup has an annually reviewed pension risk appetite statement incorporating defined metrics against which risk is me asured. Policies and standards are in place to provide for mal controls for pension risk reporting, modelling, governance and s tress testing. A pension risk policy, which sits wi thin the NatWest Group enterprise-wide risk management framework, is also in place and is subject to associate d framework controls. Monitoring and measurement Pension risk is monitored by the Executive Risk Co mmittee and the Board Risk Committee by way of the monthly Risk Management Report. NatWest Group also undertakes stress tests on i ts material defined benefit pension schemes each year. These tests are also used to satisfy the requests of regulatory bodies such as the Bank of England. The stress testing framework inclu des pension risk capital calculations for the purposes of the Internal Capital Adequacy Assessment Process as well as additional stress tests for a number of internal management pu rposes. The results of the stress tests and their consequential impact on Na tWest Group’s balance sheet, income statement and ca pital position are incorporated into the overall NatWest G roup stress test results. NatWest Bank Plc (a subsidiary of NatWest G roup) is the principal employer of the Main section and could be required to fund any deficit that arises. Mitigation Following risk mitigation measures taken by the Trustee in recent years, the Main section is now well protec ted against interest rate and inflation risks and is being run on a low investment risk basis with relatively s mall equity risk exposure. The Main section also uses derivatives to manage the allocation of the portfolio to diffe rent asset classes and to manage risk within asset classes. The potential impact of climate change is one of the factors considered in managing the asse ts of the Main section. The Trustee monitors the risk to its investments fro m changes in the global economy and invests, where return justifies t he risk, in sectors that reduce the world’s reliance on fossil f uels, or that may otherwise promote environmental benefits. Further details regarding the Main section Trustee ’s approach to managing climate change risk can be fou nd in its Responsible Ownership Policy and its net zero commitment. The Trustee h as reported in line with the Task Force on Climate-related Financi al Disclosures in its Annual Report and Accoun ts. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 279 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Compliance & conduct risk Definition Compliance risk is the risk that the behaviour of NatWest Group towards customers fails to comply with laws, regulations, rules, standards and codes of conduc t. Such a failure may lead to breaches of regulatory requirements, organisa tional standards or customer expectations and could result in legal o r regulatory sanctions, material financial loss or reputation al damage. Conduct risk is the risk that the c onduct of NatWest Group and its subsidiaries and its staff towards custome rs – or in the markets in which it operates – leads to unfair or in appropriate customer outcomes and results in reputational damage, financial loss or both. Sources of risk Compliance and conduct risks exist ac ross all stages of NatWest Group’s relationships with its custome rs and arise from a variety of activities inclu ding product design, marketing and sales, complaint handling, staff training, and handling of confidential inside information. As set out in Note 27 to the consolidated financial statements, mem bers of NatWest Group are party to legal proceedings and are subject to in vestigation and other regulatory action in the UK, the U S and other jurisdictions. Key developments in 2021  A new Ring-Fencing Hub was se t up to provide an aggregated view of ring-fencing compliance a nd risk management. Oversight of the work to co mplete NatWest Group’s attestation of compliance was also a ke y focus.  Risk appetite statements and measures were updated with an enhanced focus to provide better visibility of key risks across NatWest Group.  Delivered a digital platform to facilitate risk-based rules mapping to regulatory obligations. This will e nable more efficient management of regulatory compli ance matters and support intelligent risk taking.  Continued collaboration across NatWest Group to deliver good customer outcomes with a focus on enhancing forbearance strategies.  There was ongoing monitoring and mitigation of ele vated conduct risks resulting from the phased withdrawal f rom the Republic of Ireland including data-dri ven risk profile reporting.  Oversight and management of major compliance programmes including work to upgrade NatWest Group’s internal ratings based approach for credit risk in order to build better outcomes for customers.  Provided strategic oversight and advice to NatWest G roup’s LIBOR transition programme. Governance NatWest Group defines appropriate standards of co mpliance and conduct and ensures adherence to those stand ards through its risk management framework. Relevant co mpliance and conduct matters are escalated through Executive Ris k Committee and Board Risk Committee. Risk appetite Risk appetite for compliance an d conduct risks is set at Board level. Risk appetite statements articulate the levels of risk t hat legal entities, businesses and fu nctions work within when pursuing their strategic objectives and business plans. A range of controls is operated to ensur e the business delivers good customer outcomes and is conducted in accordance with legal and regulatory requirements. A suite of policies addressing compliance and conduct risks set appropri ate standards across NatWest Group. Examples of the se include the Complaints Management Policy, Client Assets & Money Policy, and Product Lifecycle Policy as well as policies relating to cus tomers in vulnerable situations, cross-border activities and market abuse. Continuous monitoring and targeted assur ance is carried out as appropriate. Monitoring and measurement Compliance and conduct risks are measured and managed through continuous assessment and repo rting to NatWest Group’s senior risk committees and at Board level. The compliance and conduct risk framewo rk facilitates the consistent monitoring and measurement of co mpliance with laws and regulations and the de livery of consistently good customer outcomes. The first line of defence is responsible for effective risk identification, reporting and monitoring, with oversight, challenge and review by the second line . Compliance and conduct risk management is also integrated into NatWest Group’s strategic planning cycle. Mitigation Activity to mitigate the most-material compliance and conduct risks is carried out across NatWe st Group with specific areas of focus in the customer-facing business es and legal entities. Examples of mitigation include consideration of customer needs in business and product planni ng, targeted training, complaints management, as well as independent monitoring activity. Internal policies help support a strong custo mer focus across NatWest Group. Independent as sessments of compliance with applicable regulations are also carried out at a leg al entity level. Financial crime risk Definition Financial crime risk is presented by cri minal activity in the form of money laundering, terrorist financing, b ribery and corruption, sanctions and tax evasion, as well as fr aud risk management. Sources of risk Financial crime risk may be prese nted if NatWest Group’s customers, employees or third parties under take or facilitate financial crime, or if NatWest Group’s pro ducts or services are used to facilitate such crime. Fi nancial crime risk is an inherent risk across all lines of business. Key developments in 2021  While work continues to enhance the control environment relating to financial crime risk, operational weakne sses between 2012 and 2016 resulted in the inadequate monitoring of a UK incorporated cus tomer. NatWest Group co-operated fully with the regulator’s investiga tion into this case and, in October 2021, NWB Plc pleaded guil ty to three breaches of the Money Laundering Regulations 200 7.  Significant investment continued to be made to suppor t delivery of the multi-year transformation plan across financial crime risk management.  Enhancements were made to technology and dat a analytics to improve the effectiveness of sys tems used to monitor customers and transactions.  A new financial crime and fraud goal was introduced fo r NatWest Group’s most senior 1 50 employees to further embed financial crime risk managemen t culture, behaviours, and accountabilities. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 280 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial crime risk continued Governance The Financial Crime Executive Steering G roup, which is jointly chaired by the Chief Risk Officer and t he Chief Administrative Officer, is the core governance committee for financial crime (excluding fraud). It oversees f inancial crime risk management, operational performance, and transfo rmation matters including decision-making and escalations to Executive Risk Committee, Board Risk Committee and NatWest Group Executive Committee. Risk appetite There is no appetite to operate in an environmen t where systems and controls do not enable the identifica tion, assessment, monitoring, management and mitigation of financial crime risk. NatWest Group’s sys tems and controls must be comprehensive and proportion ate to the nature, scale and complexity of its businesse s. There is no tolerance to systematically or repeatedly breach relevant financial c rime regulations and laws. NatWest Group operates a framework of preven tative and detective controls designed to mitigate the risk that it could facilitate financial crime. These cont rols are supported by a suite of policies, procedures and guidance to ensu re they operate effectively. Monitoring and measurement Financial crime risks are identifi ed and reported through continuous risk management and regular repo rting to NatWest Group’s senior risk committees and the NatWest Group Board. Quantitative and qualitative data is reviewed and assessed to measure whether financial crime risk is within risk appetite. Mitigation Through the financial crime framework, releva nt policies, systems, processes and controls are used to miti gate and manage financial crime risk. This includes the use of dedicated screening and monitoring syste ms and controls to identify people, organisations, transactions and behaviours that may require further investigation or other actio ns. Centralised expertise is available to detect and disrupt threa ts to NatWest Group and its customers. Intelligence is s hared with law enforcement, regulators and government bodies to s trengthen national and international defences against those who would misuse the financial system for criminal motives. Climate risk Definition Climate risk is the threat of fina ncial loss or adverse non- financial impacts associated with clim ate change and the political, economic and environmental respo nses to it. Sources of risk Physical risks may arise from cl imate and weather-related events such as heatwaves, droughts, floo ds, storms and sea level rises. They can potentially result in fin ancial losses, impairing asset values and the creditworthiness of bo rrowers. NatWest Group could be exposed to physical risks di rectly by the effects on its property portfolio and, indirectly, by t he impacts on the wider economy as well as on the property and business interests of its customers. Transition risks may arise from the proce ss of adjustment towards a low-carbon economy. Changes in policy , technology and sentiment could prompt reasses sment of customers’ financial risk and may lead to falls in the v alue of a large range of assets. NatWest Group could be e xposed to transition risks directly through the costs of adaptation wi thin economic sectors and markets as well as supply chain disrup tion leading to financial impacts on it and its customers. Poten tial indirect effects include the erosion of NatWest G roup’s competitiveness, profitability, or reputation damage. Key developments in 2021  A principles-based climate risk policy was approved by the Board Risk Committee and intr oduced in April 2021.  In December 2021, the Board a pproved a number of first- generation quantitative climate risk appetite measures. These will enable reporting of clima te risk appetite and link business-as-usual risk management to NatWest Group’s strategic goals and priorities.  NatWest Group participated in the B ank of England’s Climate Biennial Exploratory Sc enario (CBES) exercise. In doing so, NatWest Group’s capabilities rega rding climate scenario analysis were strengthened in 20 21 with increased coverage across the balance shee t.  A new Climate Centre of Excellence was established to provide strategic horizon scanning, guidance and specialis t climate expertise across NatWest Group.  Wholesale credit risk: qualitative assessment of climate risk was made mandatory for the majority of the Wholes ale portfolio. This was supported by enhancements to Transaction Acceptance Standards (TA S) criteria, with the inclusion of sector-specific climate conside rations for the heightened risk sectors and ge neric climate considerations for all other TAS documents.  Personal credit risk: operational measures we re developed. These will help to monitor the pe rformance of the Personal mortgage portfolio. Governance The Board is responsible for monitoring and oversee ing climate-related risk within NatWes t Group’s overall business strategy and risk appetite. The poten tial impact, likelihood and preparedness of climate-related risk is reported regul arly to the Board Risk Committee and the B oard. The Chief Risk Off icer shar es accountability with the CEO under the Senior Managers and Certification Regime for identifying and managing the financial risks a rising from climate change. This includes ensuring th at the financial risks from climate change are adequately reflected in risk management frameworks, and that NatWest Group ca n identify, measure, monitor, manage, and report on its exposure to these risks. The Climate Change Executive Steering Group is responsible for overseeing the direction of and progress against NatWest Group’s climate-related commitments. During 20 21, the Executive Steering Group focused on overseeing the Group Climate Change Programme (G CCP), which was tasked with continuing to deliver both NatWe st Group’s climate strategy and the climate-related mandatory ch ange agenda. The GCCP will close and transition activity into business- as-usual operations across NatWest Group’s f ranchises and functions. The Executive Steering Group will continue to supervise strategic implementation and d elivery, supported by the Climate Centre of Excellence. Risk appetite NatWest Group’s ambition is to be a leading b ank in the UK in helping to address climate change. The climate ambition is underpinned by activity to reduce the climate impact of financing activity by at least 50% by 203 0 and to do what is necessary to achieve alignment with the 2015 Paris Agreement. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 281 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Climate risk continued Work continued in 2021 to integrate climate- related risk into the risk management framework, includin g the development of appropriate risk appetite metrics. In Decembe r 2021, the NatWest Group Board approved the adoption of th ree first- generation climate risk appetite measures into the e nterprise- wide risk management framework, for integration i nto business-as-usual risk management. Combined with franchise specific operational limi ts, this suite of metrics will enable reporting of c limate risk appetite to senior risk management forums and li nks risk management to NatWest Group’s strategic goals and prio rities. Monitoring and measurement NatWest Group has focused on developing the ca pabilities to use scenario analysis to identify the most material climate risks and opportunities for its customers, seeki ng to harness insights to inform risk management practices and maximise the opportunities arising from a transition to a low ca rbon economy. Scenario analysis allows NatWest Group to test a range of possible future climate pathwa ys and understand the nature and magnitude of the risks they present. The purpose of scenario analysis is not to forec ast the future but to understand and prepare to manage risks that could a rise. In 2021, activity was dominated by the Bank of En gland’s CBES exercise. In accordance with B ank of England guidance, NatWest Group used three scenarios as the foundation fo r its analysis. These were broadly consistent with scen arios published by the Network of Ce ntral Banks and Supervisors for Greening the Financial System: No Additional Action: no new policy action takes pl ace to reduce greenhouse gas emissions. T his leads to more than 3°C of warming and severe physical risks. The f requency and severity of extreme weather ev ents such as flooding and tropical cyclones increases, and there are chronic c hanges in labour and land productivity. Early Action: global temperature increases are limited to 1.5°C by 2100 as a result of stringent c limate policies and innovation starting in 2021. Carbon prices increase steadily between 2021- 2050, which drives significant d ecarbonisation. Coal use falls by 98% between 2021 and 2050, and the sh are of low-carbon energy in the global energy mix increases fro m 17% to 73% over the same period. Global CO 2 emissions reach net zero around 2050. Late Action: strong climate policie s successfully limit warming to 1.8°C by 2100, but decisive policy action is delaye d until 2031. Carbon prices increase rapidly betwe en 2031-2050. Global greenhouse gas emissions fall by 80 % between 2030 and 2050 leading to a higher level of transition risk during the period. In 2021 for the CBES, NatWest Group applied t hese three climate scenarios to quantify climate risk ac ross its balance sheet, including the full portfolio of wholesale custo mers and its entire UK commercial real estate and residenti al (retail) mortgage portfolio. To ensure that climate risk is fa ctored into the capital planning and budgeting process, NatWes t Group is leveraging the CBES scenarios and analytics to supp ort the business-as-usual scenario analysis processes, for example the base case is consistent with the Early Action CB ES scenario. In addition, climate risks consistent with th e Late Action CBES scenario have been integrated into one of the Internal Capital Adequacy Assessment Process scenarios. NatWest Group regularly considers existin g and emerging regulatory requirements related to climate chan ge. It continues to participate in several industry-wide initiatives to develop consistent risk measurement methodologies. Nat West Group is a founding signatory of the Uni ted Nations Environment Programme Finance Initiative Principles for Res ponsible Banking, which aims to promote s ustainable finance around the globe. In addition, NatWest Group is also represented o n the Climate Financial Risk Forum es tablished by the PRA and FCA to shape the financial service indus try’s response to the challenges posed by climate risk. Operational risk Definition Operational risk is the risk of los s resulting from inadequate or failed internal processes, people and systems, o r external events. It arises from day-to-da y operations and is relevant to every aspect of the business. Sources of risk Operational risk may arise from a failure to manage operations, systems, transactions and assets appropriately. T his can take the form of human error, an inability to deliver cha nge adequately or on time, the non-availability of technology services, or the loss of customer data. Systems failu re, theft of NatWest Group property, information loss and the impact of natural, or man-made, disasters – as well as the threa t of cyber attacks – are sources of operational risk. Operational risk can also arise from a failure to acc ount for changes in law or regulations or to take appropriate measures to protect assets. Key developments in 2021  Aligned to the implementation of the enterprise-wi de risk management framework, a new operational risk policy was approved in April 2021. T he new policy sets out the qualitative expectations, guidanc e and standards that stipulate the nature and extent of permissible risk-taking for operational risk.  Operational risk appetite was enhanced usin g a quantitative modelling approach to determine a meaningful quan titative expression of the maximum level of operation al risk NatWest Group is willing to accept.  Oversight of NatWest Group’s transformatio n agenda – particularly in relation to the se cond-order impacts of COVID-19 – remained a significant area of focus with activity being closely monitored and managed to protect key regulatory deliveries.  There was also a continued focus on oper ational resilience to ensure planning, controls and operational activities remained robust and appropriate, with conti nuing attention on the potential operational risks arising fro m changes in working practices.  The security threat and the pote ntial for cyber-attacks on NatWest Group and its supply chain continue t o be closely monitored. During 2021, there was further investmen t in NatWest Group’s defences in response to the e volving threat. There was also continui ng focus on assuring the security of the supply chain.  There was sustained focus on r educing the risks associated with data use, particularly in terms of assuring data quality. This was aligned to the NatWest Group data strategy, designed to identify and imple ment enhancements to the effective use of data across NatWest Group. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 282 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Operational risk continued Governance The risk governance arrangements in place fo r operational risk are aligned to the requirements set out in the Boa rd approved enterprise-wide risk management fr amework and are consistent with achieving safety , soundness and sustainable risk outcomes. Aligned to this, a strong operational risk mana gement oversight function is vital to support Nat West Group’s ambitions to serve its customers better. Improved management of operational risk against defined appetite is vital for stability and reputational integrity. Risk appetite Operational risk appetite supports effec tive management of all operational risks. It expresses the level and types of operational risk NatWest Group is willing to accept to achieve its strategic objectives and business plans. N atWest Group’s operational risk appetite statement encompasses the full range of operational risks faced by its legal entities, businesse s and functions. Mitigation The Control Environment Certification (CEC) pr ocess is a half- yearly self-assessment by the CEOs of NatWes t Group’s principal businesses, functions and legal entities. It provides a consistent and comparable view on the adequ acy and effectiveness of the internal control environ ment. CEC covers material risks and the underlying key con trols, including financial, operational and compliance con trols, as well as supporting risk management frameworks. The CEC outcomes, including forward-looking assessments fo r the next two half-yearly cycles and progress on control en vironment improvements, are reported to Group Audit Com mittee and Board Risk Committee. They are also shared with external auditors. The CEC process helps to ensure compliance with the NatWest Group Policy Framework, Sarbanes-O xley 404 requirements concerning internal control over financial reporting (as referenced in the Compliance report on page 181 ), and certain requirements of the UK Corporate Govern ance Code. Risks are mitigated by applying ke y preventative and detective controls, an integral step in the risk assessment methodology which determines residual risk e xposure. Control owners are accountable for the design, exe cution, performance and maintenance of key controls. Ke y controls are regularly assessed for adequacy and tested for eff ectiveness. The results are monitored and, where a material change in performance is identified, the associated risk is re-evalu ated. Monitoring and measurement Risk and control assessments are use d across all business areas and support functions to identify and assess material operational and conduct risks and key controls. All risks and controls are mapped to NatWest Group’s Risk Directory. Risk assessments are refreshed at least annually t o ensure they remain relevant and capture a ny emerging risks and also ensure risks are reassessed. The process is designed to conf irm that risks are effectively managed in line with risk appet ite. Controls are tested at the appropriate frequency to verify that they remain fit-for-purpose and operate effectively to reduce identified risks. NatWest Group uses the standardised app roach to calculate its Pillar 1 operational risk capital requirement. This is b ased on multiplying three years’ average historical g ross income by coefficients set by the regulator based on business line. As part of the wider Internal Capital Ade quacy Assessment Process an operational risk economic capital model is use d to assess Pillar 2A, which is a risk-sensitive add-on to Pillar 1. The model uses historical loss data (internal and external) and forward-looki ng scenario analysis to provide a risk-se nsitive view of NatWest Group’s Pillar 2A capital require ment. Scenario analysis is used to asse ss how severe but plausible operational risks will affect Nat West Group. It provides a forward-looking basis for evaluating and man aging operational risk exposures. Refer to the Capital, liquidity and fu nding risk section for operational risk capital requirement figures. Operational resilience NatWest Group manages and monitors oper ational resilience through its risk and control asse ssment methodology. This is underpinned by setting and monitoring risk indic ators and performance metrics for key busi ness services. Progress continues on the response to regulator expectations o n operational resilience, with invol vement in a number of industry-wide operational resilie nce forums. This enables a more holistic view of the operati onal resilience risk profile and the pace of ongoing innovation and change, bot h internally and externally. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 283 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Operational risk continued Event and loss data management The operational risk event and l oss data management process ensures NatWest Group captures and records operational risk financial and non-financial events that meet defined c riteria. Loss data is used for regulatory and indust ry reporting and is included in capital modelling w hen calculating economic capital for operational risk. The most s erious events are escalated in a simple, standardised process to all senior management, by way of an Early Event Escalation Proce ss. All financial impacts and recove ries associated with an operational risk event are repo rted against the date they were recorded in NatWest Group’s fi nancial accounts. A single event can result in multiple losses (or recoveries) that may t ake time to crystallise. Losses and recove ries with a financial accounting date in 2021 may relate to events that occur red, or were identified in, prior years. NatWest Group purchase s insurance against specific losses and to comply wi th statutory or contractual requirements. Percentage and value of events At 31 December 2021, events aligned to the clients, pr oducts and business practices event category accoun ted for 80% of NatWest Group’s operational risk losse s, which reflected a significant increase on 2020. In 202 0, several large provision releases were recorded (that is, previously reco rded provisions were released back to cashflow as they we re no longer required). The value of these outweighed the p rovisions taken for other conduct-related matte rs, hence a negative movement was recorded in the clients, pro ducts and business practices category. Value of events Volume of ev ents (1) £m Proportion Proportion 2021 2020 2021 2020 2021 2020 Fraud 74 85 17% 82% 87% 81% Clients, products and business practices 341 (68) 80% (66%) 3% 7% Execution, delivery and process manage ment 8 15 2% 15% 7% 8% Employment practices and workplace safety 2 2 — 2% 2% 2% Technology and infrastructure failures 3 70 1% 68% 1% 2% Disasters and public safety — (1) — (1%) — — 428 103 100% 100% 100% 100% (1) Based on the volume and value of ev ents (the proportion and cost of operational risk events to NatWest Group) where the associated loss is more than or equal to £10,000. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 284 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Model risk Definition Model risk is the potential for adverse consequences a rising from inaccurate financial assessments o r decisions made as a result of incorrect or misused model ou tputs and reports. NatWest Group defines a model as a quantitative method, system, or approach that applie s statistical, economic, financial, accounting, mathematical or data science theories, techniques and assumptions to process input data into quantitative estimates. Sources of risk NatWest Group uses a variety of models in the course of its business activities. Examples include the use of model ou tputs to support customer decisionin g, measuring and assessing risk exposures (including credit, market, and climate risk), as well as calculating regulatory capital and liquidity requirements. Model applications may give ris e to different risks depending on the franchise in which they are us ed. Model risk is therefore assessed separately for each fr anchise in addition to the overall assessment made for NatWest Group. Key developments in 2021  Improvements to models were made in 2021 resultin g in a significant reduction of out-of-a ppetite models across NatWest Group. Enhancements to models will continue in 2022 to bring NatWest Group back wit hin model risk appetite.  Embedding and enhancement of the Model Risk frameworks. Governance A governance framework is in place to ensure policies and processes relating to models ar e appropriate and effective. Two roles are key to this – Model Risk O wners and Model Risk Officers. Model Risk Owners ar e responsible for model approval and ongoing performance monitoring. Model Ris k Officers, in the second line, are responsible f or oversight, including ensuring that models are independently valida ted prior to use and on an ongoing basis aligned to the model’s risk rati ng. Model risk matters are escalated to senio r management in several ways. These include model risk oversight com mittees, as well as the relevant business and func tion model management committees. The Group Model Risk Ove rsight Committee provides a direct escalation route to the Group Executive Risk Committee and, where applicable , onwards to the Group Board Risk Committe e. Risk appetite Model risk appetite is set in order to limit the level of model risk that NatWest Group is willing to accept in the cou rse of its business activities. It is approved by relevant Executive Risk Committees. Business areas are responsible for monitoring performance against appetite and remediating models ou tside appetite. Risk controls Policies and procedures related to the develop ment, validation, approval, implementation and use and ongoing monitoring of models are in place to ensure adequate co ntrol across the lifecycle of an individual model. Validation of material models is conducted by an i ndependent risk function comprised of skilled, well-informed subjec t matter experts. This is completed for new models o r amendments to existing models and as part of an ongoing perio dic programme to assess model performance. The frequency of periodic validation is aligned to the risk rating of the model. T he independent validation focuses on a variety of mo del features, including modelling approach, the nature of the assumptions used, the model’s predictive ability and c omplexity, the data used in the model, its implementation and its compliance wi th regulation. Risk monitoring and measuremen t The level of risk relating to an individual model is asse ssed through a model risk rating. A quantitative approach is used to determine the risk rating of each model, based on the model’s materiality and validation rating. This appro ach provides the basis for model risk appetite me asures and enables model risk to be robustly monitored and managed across Na tWest Group. Ongoing performance monitoring is conduc ted by the first line and overseen by the second line to ensure parameter estimates and model constructs remain fit for purpose , model assumptions remain valid and that models are bein g used consistently with their intended purpose. This allows ti mely action to be taken to remediate poor mo del performance and/or any control gaps or weaknesse s. Risk mitigation By their nature – as approximations of reality – model risk is inherent in the use of models. It is managed by refining or redeveloping models where appropriate – eit her due to changes in market conditions, busine ss assumptions or processes – and by applying adjustments to model outputs (either quantitative or based on expert opinion). Enhancements may also be made to the proces s within which the model output is used in order to furthe r limit risk levels. Reputational risk Definition Reputational Risk is defined as the risk of dam age to stakeholder trust due to negative consequence s arising from internal actions or external events. Sources of risk Reputational risks originate fro m internal actions and external events. The three primary drivers of reputation al risk have been identified as: failure in inte rnal execution; a conflict between NatWest Group’s values and the public agend a; and contagion (when NatWest Group’s reputati on is damaged by failures in the wider financial sector). Key developments in 2021  Reputation risk registers were introduced at NatWest Group level in order to enhance monit oring of the most material reputational risks.  An updated reputational risk appetite state ment was introduced with a specific focus on public trust.  The correlation between reputational risk and cli mate change issues remained a significant area of f ocus during 2021. Enhancements were made to the Environment al, Social & Ethical risk management framework to mitigate reputational risk arising from exposure to carbon-intensive sectors and to support the trans ition to a lower carbon economy. Risk and capital m anageme nt continued NatWest Group A nnual Repor t and Accou nts 2021 285 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review Reputational risk continued Governance A reputational risk policy supports reputational risk management across NatWest Group. Reputational risk committees review relevant issue s at an individual business or entity level, while the Reputational Risk Commi ttee – which has delegated authority from the Execu tive Risk Committee – opines on cases, issues, sectors and themes t hat represent a material reputational risk. The Board Risk Committee oversees the identification and reporting of reputational risk. The Sustainable Banking Committee has a specific focus on environmental, social and ethical issue s. Risk appetite NatWest Group manages and articulates its appetite f or reputational risk through a qualitative repu tational risk appetite statement and quantitative measures. Na tWest Group seeks to identify, measure and manage risk exposures arising from internal actions and external events. This is designed to ensure that stakeholder trust is retained. Howeve r, reputational risk is inherent in NatWest Group’s operating environment and public trust is a specific factor in setting reputa tional risk appetite. Monitoring and measurement Relevant internal and external facto rs are monitored through regular reporting to the reputational risk committees at business or entity level and escalated, whe re appropriate, to the Reputational Risk Committee, B oard Risk Committee or the Sustainable Banking Committee . Mitigation Standards of conduct are in place across NatWest Group requiring strict adherence to p olicies, procedures and ways of working to ensure business is transacted in a way that meets – or exceeds – stakeholder expectations. External events that could caus e reputational damage are identified and mitigated through NatWest Group’s top and emerging risks process as well as through the N atWest Group and franchise-level risk registers . NatWest Group has in recent y ears been the subject of investigations and reviews by a number of regulators and governmental authorities, some of which have resulted in past fines, settlements and public censure. Refer to the Litig ation and regulatory matters section of Note 27 to the consolidated financial statements for details of material matters currently affecting NatWest Group. NatWest Group A nnual Repor t and Accou nts 2021 286 286 Financial statements 287 Independent auditor’s report 300 Consolidated income statement 301 Consolidated statement of comprehensive income 302 Consolidated balance sheet 303 Consolidated statement of changes in equity 305 Consolidated cash flow statement 307 Accounting policies 313 Notes on the consolidated accounts 313 Net interest income 314 Non-interest income 315 Operating expenses 318 Segmental analysis 322 Pensions 327 Auditor’s remuneration 327 Tax 331 Discontinued operations and assets and liabilities of disposal groups 332 Earnings per share 332 Financial instruments - classification 337 Financial instruments - valuation 346 Financial instruments - maturity analysis 348 Trading assets and liabilities 349 Derivatives 355 Loan impairment provisions 356 Other financial assets 357 Intangible assets 358 Other assets 358 Other financial liabilities 359 Subordinated liabilities 360 Other liabilities 361 Share capital and other equity 363 Leases 365 Structured entities 366 Asset transfers 367 Capital resources 368 Memorandum items 374 Analysis of the net investment in business interests and intangible assets 375 Analysis of changes in financing during the year 375 Analysis of cash and cash equivalents 376 Directors’ and key management remuneration 376 Transactions with directors and key management 377 Related parties 377 Post balance sheet events 378 NatWest Group plc financial statements and notes Financial statements Independent auditors’ report to t he members of NatWest Gro up plc NatWest Group A nnual Repor t and Accou nts 2021 287 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Opinion In our opinion:  the financial statements of NatWes t Group plc (the ‘Parent Company’) and its subsidiaries (to gether, the ‘Group’) give a true and fair view of the state of the Grou p’s and of the Parent Company’s aff airs as at 31 December 2021 and of the Group’s prof it for the year then ended;  the Group financial statements have been properly p repared in accordance with UK adopted international accounting standards, International Financial Repo rting Standards (‘IFRS’) as adopted by the European Union and IFRS as issued by the International Accounting Standards Board (‘IA SB’);  the Parent Company financial statements have been p roperly prepared in accordance wit h UK adopted international accounting standards as applied in accord ance with section 408 of the Companies Act 200 6, IFRS as adopted by the EU and as issued by the IASB; and  the financial statements have be en prepared in accordance with the requirements of the Companies Act 2006. We have audited the financial statements (see t able below) of the Parent Company and the Group for the year ended 31 December 2021 which comprise: Group Parent Company  Consolidated balance sheet as at 31 December 2021;  Consolidated income statement f or the year then ended;  Consolidated statement of comprehensive inco me for the year then ended;  Consolidated statement of changes i n equity for the year then ended;  Consolidated cash flow statement for the year then ended;  Accounting policies;  Related Notes 1 to 34 to the fin ancial statements;  Annual Remuneration Report identified as ‘audited’;  Risk and capital management se ction identified as ‘audited’  The Capital Requirements (Country-by-Country Reporting) Regulations report identified as ‘ audited’.  Balance sheet as at 31 Decembe r 2021;  Statement of changes in equity for the yea r then ended;  Cash flow statement for the year then ended; and  Related notes 1 to 12 to the financial s tatements including a summary of critical accounting policies. The financial reporting fr amew ork that has been applied in their pr epa ration is applic able law and UK a dopted interna tional accounting st an dar ds, I FRS as adopted by the European Union and as issue d by the IA SB, and as r egards the P a re nt Compan y financial stat ements, as applied in accor dance with s ection 408 o f the Companies Act 2006. Basis for opinion W e conducted our audi t in accor da nce with Int ernational Stand ards on Auditing (UK) (IS As (UK )) and applicable law . Our responsibilities under those standar ds are f urther described in the Auditor’ s re sponsibilities for the audit of the fin ancial st atements section of our r epo rt. W e believ e that the audit evidenc e w e ha ve obt ained is sufficient and appr opriate to pro vide a basis for our opinion. Independence W e are independent of the Group and P arent Compan y in acc ordance wi th the ethical re quire ments that are r elev ant to our audit of the financial st atements in th e UK, including the FRC’ s Ethic al Standar d as applied to lis ted public inter est entities, and w e hav e fulfilled our other ethic al responsibilities in acc ordanc e with the se requir ement s. The non-audit servic es prohibit ed by the FRC’ s Ethical St andard w ere not pro vided to the Gr oup or the Parent Compan y and we remain independent of the Gro up and the Pare nt Co mpany in c onducting the audit. Independent a uditors’ report to the member s of NatWest Gr oup plc continued NatWest Group A nnual Repor t and Accou nts 2021 288 Financial statements Strate gic report Governance Risk and capital management Additional information Financial review Conclusions r elating to going co ncern In auditing the financial st atements, w e hav e concluded that the dir ectors ’ use of the going conc ern basis of ac counting in the prepar ation of the financial st at ements is appropriat e. Our e valuation of the director s ’ assessment of the Gr oup and P arent Company ’ s ability to con tinue to adopt the going c oncern basis o f accounting included:  In conjunction with our w alkthr ough of the Gr oup ’ s financial close proce ss, w e confir med our underst anding of management ’ s Going Conce rn assessment pr ocess and also engaged with management early t o ensure all ke y factors w ere c on sidere d in their assessment;  W e ev a luated management ’ s going concer n assessment which inclu ded re viewing their ev aluation of l ong-term business and str ategic plans, c ap ital adequac y, liquidity and funding positions. It also assessed the se positions consider ing internal stre ss te sts which included consider ation of principal and emerging ris ks. T he Group ’ s risk pro file and risk management pr actices w ere consider ed including cre dit risk, mark et risk, com pliance and c onduct risk, climate risk and oper at ional risk;  W e ev a luated management ’ s assessment b y considering the Gr oup ’ s ability to continue in oper a tion and meets its liabilities un der differ ent scenarios including the impact of the Group ’ s strategi c plans and the continued ec onomic imp act of C OVID-19. W e used economic specialists in asses sing the macroecon omic assumptions in the f orec ast thr ough benchmarking to insti tutional forec a sts , HM T consensus and peer c omparative ec onomic fore casts. W e also consider ed other commitments of the Gr oup including those in r espect of its subsidiaries ;  Consider ed the r esults of the Bank’ s str ess tes ting and Bank of England 2021 solv ency stress t est, as well as the Gr oup ’ s results in the Bank of England Climate Biennial E xplora tory Sce nario (CBES); and  W e re view ed t he Gr oup ’ s going concer n disclosures include d in the annual report in or der to assess that the disclosur es were appropriate an d in conformi ty with the r eporting standar d s. Based on the w ork w e hav e pe rformed, w e hav e not identified any material unc ertainties r elating to ev ents or conditions that, individually or collectiv ely, may c ast significant doubt on the Gr oup and Par ent Co mpany ’ s ability to continue as a going conce rn ov er the twelv e months from the date when the financial stat ements are authorised f or issue. In relation to the group a nd parent compan y’ s r eporting on how the y hav e applied the UK Co rporate Go vernance C ode, we ha ve nothing material to add or dra w attention to in rela tion to the dir ectors ’ statement in the financial st atements about whether the direct ors consider ed it appro priate to adopt the going concer n basis of acc ounting. Our r esponsibilities and the responsibilities o f the director s with r espect to going conc ern are described in the rele vant sections o f this report. H ow eve r , because not all future ev ents or conditions c a n be predicte d, this state ment is not a guaran tee as to the Group ’ s ability to con tinue as a going conce rn. An ov erview of the s cope of the Par ent Company and Group audits T ailoring the sco pe Our assessment of audi t risk, our ev aluat ion of mater iality and our alloca tion of performance materiality deter mine our audit sc ope for each company within the Gr oup. T aken together , this enables us t o form an opinion on the c on solidated fin ancial state m ents. W e tak e into ac count the size a nd risk pro file of the c omponent and its activities, the or ganisation of the Gr oup and effectiv eness of group-wide c ontrols , changes in the business envir o nment and other f actors such as r ecent i nternal audit res ults when assessing the lev el of w ork to be performed at each component. In assessing the risk o f material misst atement to the Group fin ancial statement s, and to ensur e we had adequate qu antitativ e co verage of significant account s in the financial state ments, o f the fiv e reporting components o f the Group , w e selected four components based on size and risk, which repr esent the principal reporting legal entities within the Gr oup. The scoping f or the curre nt yea r is as follo ws : Component S cope Ke y locations Nat W est Holdings (NWH) Full United Kingdom Nat W est Mark ets (NWM) Full United Kingdom, United S tates , and Netherlands RBS International Specific Channel Islands RBS AA H oldings Specific United Kingdom The t able below illustrates the coverage o btained from the work performed by our audit teams. W e con sidered total a sse ts, total equity and total income to verify we had appropriate overall coverage. Full scope (1) Specific scope (2) Other procedur es (3) T o tal T otal assets 95 % 5% - 10 0% T otal equity 89% 8% 3% 100% T otal income 92% 7% 1% 100% (1) Full scop e: audit procedures on all significant accounts. (2) Spe cific scope: audit procedures on selected accounts. (3) Ot her procedures: considered in analytical procedures. The audit scope o f the specific scope c omponents may not ha ve included testing of all signific ant acc o unts within the co mponents. Ho wev er, the testing will ha ve c ontributed to the tot al co ver a ge o f significant acc ounts tes ted for the o verall Gr oup. As a r esult of the c ontinued impact of the C O VID-19 outbre ak and resulting lock down res t rictions for part of the year in all o f the countries wher e full or specifi c scope audit procedur es ha ve been per formed, we ha ve modified our audit strate gy to allo w for the audit to be performed r emotely at both the Group and component locations . This appr oach was su pported through r emote us er acce ss to the Group ’ s financial s yste ms and the use o f EY softw a re c olla boration platf orms for the secur e and timely deliv ery o f reques ted audit evi dence. Independent a uditors’ report to the member s of NatWest Gr oup plc continued NatWest Group A nnual Repor t and Accou nts 2021 289 Financial statements Strate gic report Governance Risk and capital management Additional information Financial review Inv olvement with co mponen t teams In establishing our o ver all approach to the Gr oup audit, w e determined the type o f wor k that needed to be undertak en at each o f the components b y us, as the p rimary audit engagement team, or by c o mponent auditors fr om other EY global network f irms operating under our instruc tion. The primary audit engagement te am interact ed regul arly with the component audit tea ms wher e appropriat e throughout the course o f t he audit, which included holdi ng planning meetings, maintaining regular c omm unic ations on the status o f the audits, re viewing k ey w orking papers and taking responsibili ty for the sc ope and direction of t he audit process . The primary audit t eam continued to follo w a program me of o versight visits that has been designed to ensur e th at the Senior Sta tutory Auditor , or another Group audit partner , visits all full scope and specific scope loca tions outside the United Kingdo m. During the current y ear’ s audit cy cle, due to continued C OVID-19 restrictions , the visits undert aken b y th e primary audi t team w ere necess arily virtual visits. Thes e visits inv olved video call meetin gs with local management, and discussions on the audit approach wi th the component team and any iss ues arising from their work . The primary team inter acted regularly with the c omponent teams and maint ained a continuous and open dialogue with component teams , as w ell as holding formal closing meetings quart erly, to ensur e that the primary team we re fully awar e of their progress and r esults of their pr ocedur es. T he primary team also r eview ed key w orking pap ers and w ere responsible for the scope and dir ection of the audit process . This , together with the additional procedur es at Group l ev el, gave us appropriate e vidence for our opinion on the Gr o up financial st a tements Climate change There has been increasing inter est from s tak ehold ers as t o ho w climate change will impact c o mpanies. The Gr oup has deter mined that the most signific ant future impacts fr om climate c hange on its operatio ns will be fro m credit risk, oper ational risk, reput ational risk, conduct risk and r egulator y compliance ris k. These are ex plained in the requir ed T ask For ce for Climate re lated Financial Disclosur es in the Strate gic Rep ort, and in the Climate Risk s ection within the Risk and c apital management section, which form part of the “Other information ” . Our proce dures on these di sclosur es consist ed solely of c on sidering whether t hey ar e materially inconsisten t with the financial s tatements or our kno wledge obtained in the course o f the audit or otherwi se appear to be mater ially misstated. As e xpla ined in the Acc o unting P olicy note, the Group mak es use of r easonable and supportable information to mak e acc ounting judgments and estimate s, including the ob serv able effect of t he ph ysic al and transition risk s o f climate change on the curr ent creditw o rthiness of borr owe rs, asset v alues and mark et indica tors , as we ll as their effec t on the Group ’ s competitivenes s and prof itability. Man y of the impacts arising will be longer term in nature , with an inher ent lev el of uncertainty, and hav e limited e ffect on accoun ting judgments and esti mates for the curr ent period under the re quirements of UK adopted int ernational acc ounting standar d s, IFRS as adopted by the European Union and as issued by the IA SB. In the Ac counting P olicy note, e xplanation of the impact of cert ain transition and phy sical risk s w ere pr ovided for the k ey assu mptions and signific ant judgements and estimate s. Our audit effor t in considering climate ch ange was focus ed on ensuring that the effe cts of mat erial climate risk s as disclos ed in the A ccounting P olicy note ha ve been appropr iately re flected in th e asset and liability v aluations and the nature and timing of fut ure cash flo w s. Det ails of our pr ocedures and r esults on e xp ected cr edit loss pro visions and impairment of goodwill are included in our k ey audit matter s below . W e also challenged the Dir ectors ’ considerations of climate ch ange in their assessmen t of going co ncern and viability and associated di sclosur es. Whilst the Group has state d its c ommitment to the aspir ations of the Paris Agr eement to achie ve net zero emissions b y 2050, as state d abov e the impacts arising will be longer term in nature , and there is an inherent le ve l of unce rtainty in determining the full future e conomic impact on their business model, operational plans and cust omers. K ey audit matters Key audit matters are those matters that, in our professional judgment, were of most significa nce in our audit of the financial statements of the current period and include t he most significant assessed risks of mate rial misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audi t strategy, the allocation of resources in the audit; and dire cting the efforts of the engagement team. These matters we re addressed in the context of o ur audit of the financial statements as a whole, and in our opinion thereon, and we do not provide a s eparate opinion on these matte rs. Independent a uditors’ report to the member s of NatWest Gr oup plc continued NatWest Group A nnual Repor t and Accou nts 2021 290 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Risk Our response to the risk Expected Credit L oss Provision s A t 31 December 2 021 the Group report ed total gross loans o f £369.8 billion (2020: £372.4 billion) and £3.8 billion of e x pected cr edit losses (ECL) (2020: £6.2 billion). Management ’ s judgments and estimates ar e especially subjectiv e due to significan t uncertainty associated with the assumption s used. Uncert ainty related with the path to rec o very fr om C OVID-19 a nd the impact of climate change w a s consider ed in our risk assessment. Aspects with incre ased comple xity in respec t of the timing and measurement o f ECL include:  Staging - Allocation of assets to stage 1, 2, or 3 on a timely basi s using criteria in accordance with IFRS 9;  Model estimations - Accounting interpretations, modelling assumptions and data used to build and run the Probability of Defau lt (‘PD’), Loss Given Default (‘LGD’) and Exposure at Default (‘EAD’) models that calculate the ECL;  Economic scenarios - Inputs, assumptions and weightings used to estimate the impact of multi ple economic scenarios particularly those influenced by COVID-19 including any changes to scena rios required through 31 December 2021;  Adjustments - Appropriateness, completeness and valuation of model adjustments which repres ent approximately 26% of total ECL including any COVID-19 specific adjustments due to the ongoing uncertainty which increases the risk of management override; and  Individual provisions - Measurement of individual provisions including the assessment of multiple scenarios considering the impact of COVID-19 on exit strategies, collateral valuations and time to collect. Controls testing - We evaluated the design and operating effectiveness of cont rols across the processes relevant to ECL, includi ng the judgments and estimates noted. These controls, among others, included those over:  the allocation of assets into stage s including management’s monitoring of s tage effectiveness;  model governance including m onitoring and model validation;  data accuracy and completeness;  credit monitoring;  multiple economic scenarios;  the governance and review of post-model adjust ments;  individual provisions; and  production of journal entries and disclosures. In evaluating the governance process , we observed the executive finance and risk committee meetings where the inputs, assu mptions and adjustments to the ECL were discussed and approved, among other p rocedures. Overall assessment - We performed an overall assess ment of the ECL provision levels by stage to determine if they we re reasonable by considering the overall credit quali ty of the Group’s portfolios, risk p rofile, impact of COVID-19, government support measures and climate change on the Group’s custo mers. We also considered the appropriateness of provisions applied to govern ment supported lending such as bounce back loans and CBILs which inc luded assessing the compliance with the eligibility criteria with the involvement of our EY legal specialists. We performed peer benchmarking where available to assess overall staging and provision coverage levels. For a higher risk industry, we also assess ed the ECL against an independently developed methodology estimating unsus tainable debt levels. Based on our assessment of the key judgments we used EY specialists to support the audit team in the areas of economics, model ling and collateral and business valuations. Staging - We evaluated the crite ria used to allocate a financial asset to stage 1, 2 o r 3 in accordance with IFRS 9; this included peer benc hmarking to assess staging levels . We recalculated the assets in stage 1, 2 and 3 to assess if they were allocated to the appropriate stage and performed sensitivity analysis to assess the impact of different criteria on the ECL and also considered the imp act of performing collective staging downgrades to industries and ge ographic regions particularly impacted by cli mate change. To test credit monitoring which drives the probability of def ault estimates used in the staging calculation, we recalculated the risk ratings fo r a sample of performing loans and focused our testing on high risk indus tries. We also assessed the timing of the annual review performed by management on each wholesale loan exposure to evalu ate whether it appropriately conside red risk factors by considering independent publicly available information. Model estimations - We perfor med a risk assessment on all models involved i n the ECL calculation to select a sample of models to test. We involved EY modelling specialists to assist us to test this sample of ECL models by testing the assumptions, inputs and formulae used. This included a combination of assess ing model design and formulae, alternative modelling techniques, recalcula ting the PD, LGD and EAD, and model implementation. We also considered the results of the Group’s internal model validation results. To evaluate data quality, we agreed a sample of ECL calculation data points to sou rce systems, including balance she et date data used to run the models and histo ric loss data to monitor models. We also tested the ECL dat a points from the calculation engine through to the general ledger and disclosures. Independent a uditors’ report to the member s of NatWest Gr oup plc continued NatWest Group A nnual Repor t and Accou nts 2021 291 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Risk Our response to the risk Expected Credit L oss Provision s continued Economic scenarios - We i nvolved EY economic specialists to a ssist us in evaluating the base case and alternative economic scenarios, includi ng evaluating probability weights and considering contrary evidence by compari ng these to other scenarios from a variety of external sources. This asses sment included the latest developments related to COVID-19 at 31 December 2021 . We assessed whether forecasted macroeconomic variables were complete and appropriate, such as GDP, unemployment rate, interest rates and the House Price Inde x. With the support of our modelling specialists we evaluated the correlation and translation of the macroeconomic factors to the ECL. Adjustments - We tested materi al post-model adjustments including those which continued to be applied as a re sult of COVID-19 uncertainty. With our modelling specialists, we assessed the risk of bias and the comple teness of these adjustments by considering the data, judgments , methodology, sensitivities, and governance of these adjustments as well as considering model s hortcomings. Individual provisions - We recalculated and ch allenged the scenarios, assumptions and cash flows for a sample of individual p rovisions including the alternative scenarios and evaluating probability weights assigned, in volving EY valuation specialists whe re appropriate. The sample was based on a nu mber of factors, including higher risk sectors such as commercial re al estate, agriculture, oil and gas, mining, retail, leisu re and aviation, and materiality. We considered the im pact COVID-19 and climate change had on collateral valuations and time to collect as well as w hether planned exit strategies remained viable. Disclosure - We tested the data flows use d to populate the disclosures and assessed the adequacy of disclosures for compliance with the accounting standards and regulatory considerations. Key observations communicated to the Group Audit Committee We are satisfied that provisions f or the impairment of loans were reasonable and recognised i n accordance with IFRS 9. We highlighted the following matters to the Group Audit Co mmittee:  Overall provision levels were reasonable which also considered available peer information and our understan ding of the credit environment;  Our testing of models and mod el assumptions identified some instances of ove r and under estimation. We aggregated these differences and were satisfied that the overall esti mate recorded was reasonable;  The post-model adjustments recorded were within a reasonable range to refle ct risk in the portfolios;  We recalculated the staging of retail and wholesale ex posures in material portfolios and noted no material differences. We also performed sensitivity analysis o n the staging criteria and noted that substan tial changes would be needed to the criteria to result in a material difference;  For individually assessed impairments, in a few instances we reported judgmental differences in respect of the exten t of the impairment identified, however, none of these diffe rences were considered material; and  There is inherent uncertainty in predicting the longer-term impact of COVID-19, govern ment support schemes and climate change on the Group’s borrowers, their abili ty to make payments as they fall due and t he recoverability of loans. The G roup should continue to make use of reasonable and supportable information to co nsider the long and short term i mpacts of these matters on accounting judgments and es timates. Relevant references in the A nnual Report and Accounts Report of the Group Audit Committee Credit Risk section of the Risk a nd capital management section Accounting policies Note 15 to the financial statements Independent a uditors’ report to the member s of NatWest Gr oup plc continued NatWest Group A nnual Repor t and Accou nts 2021 292 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Risk Our response to the risk Impairment of goodwill and, in the Parent Company’s acc ounts, investments in group undertakings. A t 31 December 2 021, the Group had report ed goo dwill of £5.5 billion (2020: £5.6 billion) and parent comp any has r eported inv estment s in gr oup undertaki ngs of £48.8 billion (2020: £46.2 billion). The re cognition and carrying v a lue of goodwill and, in the Paren t Compan y’ s accounts , inv estments in group undertakings ar e based on estimates o f future pr ofitability, which re quire significant management judgment and include the ris k of management bias . Judgments and especially challenging, comple x and subjectiv e assumptions that are difficult to au dit due to the f o rw ard- looking nature and inher ent unce rtainties associated with such assumptio ns include:  Revenue forecasts including the impacts of climate change which are impacted by delivery of the Group’s Strategy;  Cost forecasts given the intention to significantly reduce costs over time;  Macroeconomic and model ass umptions used in the recoverability and valuation assessments (discount rates, growth rates, macroeconomic assumpt ions) including assumptions regarding the economic consequences of COVID -19 and other political development s over an extended period; and  Disclosure adequacy including key assumptions, the sensitivity of changes to these assumptions as well as an explanation of the impairment te sting performed. Controls testing : W e ev aluated the design and oper ating effe ctiv eness of c ontrols ov er the preparation and re view of the forec asts , and the signific ant assumptions (such as discount r ate and long-term gr owth r ate) inputs, c alculations, methodologies and judgments used in the v alue-in-use model. T his included testing c ontrols o ver the selection of macroeconomic assum ptions in addition to controls o ver the pr eparation and r evie w of the r ev enue and cost pr ojections . In evaluating the governance proc esses we reviewed the Board meeting materi als and minutes where forecasts were discus sed and approved, and we observed the committee meetings where the value-in-use model an d outcomes were discussed and approved. Macroec onomic and model assumptions : With the support of our internal economic specialists , we tested whether macroecono mic assumptions, i ncluding the continued impact of C OVID-19 as at 31 Dec em ber 2021 , used in the Group ’ s forec a sts w er e reason able by c omparing these to other scenarios from a variety of external sources. We evaluated how the discou nt rates and long-term growth rates used by management compared to our ranges w hich were developed using peer practice, external market data and calcul ations performed by our valuation specialists. We also assessed changes to valu ation methodology and benchmarked this against industry practice with the assi stance of our valuation specialists. Re venue for ecasts : W e ev a luate d the underlying business str ategies, c omparing to e xpected marke t trends and c onsidering anticipated balance sheet gro w th. W e obtained an underst a nding of t he Group ’ s strategy including their consider ation of the impact of climate change, a nd considere d its e xpected impact on the forec a sts and the e xtent to which decisions had been fact ored into the forec a sts , where appropriate, in accor da nce wi th the rele van t acc ounting standar d s. W e also inspected the findings fr om the r evie w perfor med by management including their o w n sensitivity analy sis of the forec asts. Cos t forec asts : W e tested ho w previous m anagement for ecas ts, including the impact of cost r eduction pr o gra mmes, co mpared to actual r esults to ev aluate the accur acy of the for ecasting pr ocess . W e also teste d the rea sonableness of ke y performance indic ators agains t peers with the help of our v aluation specialists to assess the re asonableness o f the Group ’ s cost forec ast. Sensitivity analysis : W e evaluat ed how management co n sidere d alternativ e assumptions and performed our o wn sensitivity and scenario analy ses on c ertain assumptions such as cost and r ev enue forecast s, disc o unt r ate, long-term gro wth rate an d other k ey per formance indic ators on both the detaile d forec asts and on an ov erall basis. Disclosur e : W e ev alua ted the a dequacy of disclosur es in the financial statemen ts including the appropria teness of assumptions and sensitivities disclo sed. W e tested the data and calcul ations included in the disclosur es. Key observations communicated to the Group Audit Committee W e are sa tisfied that management methodologies, ju dgments and assumptions supporting the c arrying value o f go odw ill and, in the Par ent Compan y’ s accounts , in vestments in gr o up undertak ings, w ere reaso nable and in acc o rdance with IFRS. W e highlighted the follo wing matters to the Gr oup Audit Co mmittee:  There is inherent unc ertainty in pr edicting re v enue and costs o ver the fiv e-year fore cast period, particularly with respect to the impact of CO VID-19, the achiev ement of new str ategic objectiv es, e xecution risk in the planne d cost r eductions , the impact of regulator y and climate change dev elopments, a nd the impact of c ompetition and disruption in banking business models ov er an exte nded period.  W e are sa tisfied with management ’ s conclusion that the goodwill re lated to a legacy mort gage pr oduct reported under the ret ail CGU is i mpaired due to th e decision to wind do wn the book of business . The goodwill in the remaining r etail and commercial C GUs remains r ecov erable as at 31 December 202 1 and management hav e a deq uately disclosed r easonably possible alternative scenarios r elating to t he ke y assumptions that could r esult in an impairment.  Management impaired Nat W est Group ’ s inv estm ent in NWM, in addition they r ecognised a re v ersal in acc umulated impairments in NWH due to the signific ant headr oom as a result of the impro ved ec onomic outlook. The sensitivity analys es we re view ed, and our independent proce dure s supported these assessmen ts.  W e are sa tisfied that the disclosur es appropriat ely r eflect the s ensitivity of the carry ing value o f in ves tments in group undertakings and goodwill to c ertain re asonable alternativ e outc o mes. As there are a numbe r of other possible outc om es and it would be impr acticable to e stimate the effect of all of them, the dir ectors hav e disclosed the uncert ainty that other possible outcomes within t he next financial year c ould requir e a n adjus tment to the c arrying amount of in vestments in group undertakings and goodwill. Relevant references in the A nnual Report and Accounts A ccounting policies Note 1 7 to the Gr oup financial state ments and Not e 9 to the P a re nt Company f inancial state m ents Independent a uditors’ report to the member s of NatWest Gr oup plc continued NatWest Group A nnual Repor t and Accou nts 2021 293 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Risk Our response to the risk Pro v isions for cust om er r edress , litigation and other regulator y matters A t 31 December 2 021, the Group has report ed £1.3 billion (2020: £1.9 billion) of pro v isions for liabilities an d charges , including £0.8 billion (2020: £1 .1 billion) for customer r edres s, litigation and other regulator y matters as det ailed in Not e 21 of the financial st atements . Re gulatory scrutin y and the co ntinued litigious envir o nment giv e rise t o a high lev el of management judgment in determining appro priate pro visions and disclosures for specific cust omer r edress , litigation and other re gulatory matter s. Management judgment is need ed to determine whether a pr esent o bligation e xists and a pro vision should be rec orded at 31 December 2 021 in acc ordance with the accoun ting criteria set out u nder IA S 37. The most significan t areas o f judgment are:  Judgment and risk of manage ment bias - A uditing the adequacy of these pro v isions is comple x because judgment is in volv ed in the selection and use o f assumptions in the estimation o f material pro v isions and ther e is a ris k of management bias in the deter mination of whether an outflo w in re spect of identified material cust omer re dress , litigation and other re gulatory matter s is probable and can be es timated reliably; and  Disclosur e - Judgment is requir ed to assess the adequacy o f disclosur es of pro v ision for con tingent liabilities giv en the underlying estimation unc ertainty in the pro visions, and other uncertainties and assumptions. Controls testing : W e ev aluated the design and oper ating effe ctiv eness of c ontrols ov er the identification, estimation, monitoring and disc losure o f provisions and other uncert ainties and assumptions re lated to cust om er r edress , lit igation and other regulator y matters c onsidering the potential for man agement ov erride of controls . The controls te sted, a mong others, included those to identify and monitor claims, determine when a pr ovision is r equired and to ensure the completeness and accurac y of data used to esti mate pr ovision s. Ex amination of r egulatory corr espondence : W e ex am ined the r elevant r egulatory and legal corr espondence to as sess de velopments in c ertain c ases. W e also consider ed regulator y dev elopments to i dentify actual or possible non-complianc e with law s and re gulations that might ha ve a mate rial effec t on the financial state ments. F or cases whic h we re settled during the per iod, we c ompared the actual outflow s with the pr ovisi on that had been rec orded, c onsidere d whether further risk e xisted, and ev aluated the le vel o f disclosur es pro vided. Inquiry of legal counse l : For sig nificant legal matter s, w e rece ived confirmations from the Group ’ s e xternal legal c o unsel to e valu ate the lik elihoo d of the obligation and management’ s es timate of the outflo w at year-e nd. W e also conduct ed inquiries with internal legal c ounsel o ver the e xistence o f t he legal obligations and relate d pro vision. W e performed a tes t for unr ecor ded pro visions to asses s if there we re c ases not considere d in the pr ovision esti mate by as sessing against e xternal legal confirmations and discu ssing with internal c ounsel. T esting of assumptions : Wher e appropriate, w e involv ed our conduct risk and forensic s specialists to assist us in ev aluating the pro vision for specific cust omer redr ess, litigation and other reg ulatory matters . W e test ed the underly ing data and assumptions used in the de termination of the pr ovisions r ecor ded, including e xpected claim rat es, legal co sts , and the timing of set tlement. W e evaluate d the accur acy of management ’ s hist orical estimate s by c om paring the actual settlement to the pr ovisio n and c onsidered peer bank settlement in similar cases . W e assessed the r ea sonablenes s of the assumptions use d by m anagement by comparing to the r esults of our independently perf ormed benchmarking and sensitivity analy sis. W e also dev eloped our own range o f reaso nable alternative estimates and c ompared them to management ’ s pro vision. W e test ed utilisations of r emaining pro v isions during the y ear and assesse d the sufficienc y of the remaining pr ovisions y et to be paid for specific customer r edr ess, litigation and other regulator y matters . Disclosur e : W e ev alua ted the di sclosure s pro vided on custo mer redr ess, litigation and other regulator y matters to assess whether the y complied with acc ounting standar d s. Key observations communicated to the Group Audit Committee W e are sa tisfied that pro visions for cust omer r edres s, litigation and other r egulatory matt ers ar e r easonable and rec o gnised in accor d ance with IFRS. W e concurr ed with the rec o gnition, measur ement and lev el of disclosur es of pr ovisions r ela ting to customer r edres s, litigation and other regulatory matters. W e did not identify an y materi al unrec o rded pr o visions. W e highlighted the followin g matters to the Gr oup A udit Committ ee:  The lev el of pro visions by their nature incorpor ates significa nt judgments to be made and ma y change as a r esult of futur e dev elopments.  Continued vigilanc e in assessing c onduct risks from the i mpact of C OVID-19 , which may no t manifest until w ell after the pandemic has passed. Relevant references in the A nnual Report and Accounts Report of the Group Audit Committee Accounting policies Note 21 and 27 to the financial statements Independent a uditors’ report to the member s of NatWest Gr oup plc continued NatWest Group A nnual Repor t and Accou nts 2021 294 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Risk Our response to the risk V aluation of financial instrumen ts with higher risk charact eristi cs including relate d income fr om trading activities As reported in note 11 to the financial statements, as at 31 December 202 1 the company held financial instrume nts with higher risk characteristics. This included (but is not limited to) reported level 3 assets of £2.0 billion (2020: £1.7 billion) and level 3 liabilities of £0.6 billion (2020: £0.9 billion) whose value is dependent upon unobservable inputs. The valuation of those financial i nstruments with higher risk characteristics can include both significant judgment and the risk of inappropriate revenue recognition through incorrect pricing as outlined below. The fair value of these instruments can involve complex valuation models and significant fair value adjustments, both of which may be reliant on inputs where there is limited market observability. Management’s estimates which required significant judgment include:  Complex models - Complex model- dependent valuations of financial instruments, which include interest rate swaps linked to pre-payment be haviour and interest rate and foreign exchange options with exotic features;  Illiquid inputs - Pricing inputs and calibrations for illiquid instruments, including debt securities and loans. Additionally, the valuation of derivative instruments is dependent on discount rates associated with complex collateral arrangements;  Fair value adjustments - The appropriateness and completene ss of fair value adjustments made to derivatives valuations including Funding Valuation Adjustments (FVA), Credit Valuation Adjustments (CVA), and material product and deal specific adjustments o n long dated derivative portfolios; and  The manipulation of revenue re cognition is most likely to arise through t he inappropriate valuation of these instruments given the level of judgment involved. Controls testing : We evaluated the design and oper ating effectiveness of controls relating to financial ins trument valuation and related income statement measurement including independent price verific ation, valuation models governance, collateral management, income st atement analysis, and the associated controls over relevant info rmation technology systems. We also observed the Valuation Commit tees where valuation inputs, assumptions and adjustments were discussed and approved. We involved our financial instru ment valuation and modelling specialists to assist us in performing procedures including the followi ng:  Complex models : Testing complex model-dependen t valuations by performing independent revaluation to asse ss the appropriateness of models and the adequacy of assumptions and inputs used by the Group;  Illiquid inputs : Independently re-pricing instrume nts that had been valued using illiquid pricing inputs, using alte rnative pricing sources where available, to evaluate management’s valuation;  Fair value adjustments : Comparing fair v alue adjustment methodologies to current market practice and as sessing the appropriateness and adequacy of the valuation adjustment framework in light of e merging market practice and changes in the risk profile of th e underlying portfolio; and revaluing a sample of counterparty level FVA and CVA, comparing fundi ng spreads to third party data, independently chall enging illiquid CVA inputs, and testing material product and deal specif ic adjustments on long-dated derivative portfolio. Throughout our audit procedure s we considered the appropriateness of modelling changes in relation to IBOR transiti on and impact of climate change on the valuation of financial ins truments, particularly in relation to long-dated illiquid positions. In addition, we asse ssed wheth er there w ere an y indicators o f aggregate bias in financial instrument marking a nd methodology assumptions. W e performed back-testing ana lysis o f rec ent trade activity an d asset disposals to ev alua te the driver s of signific ant differe nces betw een book value and trade value and to assess the impact on the fair value o f similar instr uments within the portfolio. W e performed an analysis o f significant collater al discrepancies with counter parties to assess the pote ntial impact on the fair v alue of the underlying (and similar) financial ins truments. Key observations communicated to the Group Audit Committee We are satisfied that the assum ptions used by management to reflect the fai r value of financial instruments with higher risk characteristics and the recognition of related income is reasonable and in accordance with IFRS. We hig hlighted the following matters to the Group Audit Committee:  Complex-model dependent valuations were approp riate based on the output of our independent re valuations, analysis of trade activity, assessment of the output of the independent price verification process , inspection of collateral disagreements and peer benchmarking;  The fair value estimates of hard-to-price fin ancial instruments appropriately reflected pricing information available at 31 December 2021; and  Valuation adjustments applied to derivative portfolios for credit, funding and othe r risks were recorded in accordance with the requirements of IFRS considering trade activi ty for positions with common risk characteri stics, analysis of market data and peer benchmarking. Relevant references in the A nnual Report and Accounts Report of the Group Audit Committee Accounting policies Note 11 to the financial statements Independent a uditors’ report to the member s of NatWest Gr oup plc continued NatWest Group A nnual Repor t and Accou nts 2021 295 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Risk Our response to the risk Pension valuation and net pension asset The Group operates a number of def ined benefit schemes which in aggregate are significant in the context of the overall balance sheet. At 31 December 2 021, the Group reported a net pension ass et of £488 million (2020: £602 million) com prising £602 million of schemes in surplus and £114 million of schemes in deficit (2020: £ 723 million and £121 million respectively ). The net pension asset is sensitive to changes in the key judgments and estimates, which include:  Assumptions - Actuarial assumptions and inputs including discount rate, i nflation, pension payment and longevity to determine the valuation of retire ment benefit liabilities;  Valuations - Pricing inputs and calibrations for illiquid or comple x model- dependent valuations of certain investments held by the schemes ; and  Augmentation cap - Quantification of trustee’s rights to unilaterally augment benefits (Augmentation cap) to determine the recognition of surplus. Controls testing - We evaluated the design and operating effectiveness of controls over the actuarial assu mptions setting process, the data inputs used in the actuarial calculation and the measurement of the fair value of the schemes’ assets. Assumptions - We involved our actuarial s pecialists to evaluate the actuarial assumptions by comparing them to independently ob tained third party sources and market practice. We asses sed the impact on pension liabilities due to changes in financial, demographic and longevi ty assumptions over the year, including the continued effects of CO VID-19, and whether these were supported by objective external evidence and ration ales. Valuations - We involved our valuation specialists t o assess the appropriateness of management’s valuation methodology inclu ding the judgments made in determining significant assumptions used in the valuation of complex and illiquid pension assets. We tested the fair value of scheme asse ts by independently calculating fair value for a sample of the assets held. Ou r sample included cash, equity and debt instruments, derivative fina ncial instruments and illiquid assets. Augmentation cap and equalisation adjus tments - We involved our actuarial specialists to test the estimation of the augmen tation cap including the inputs used in the calculation. We also assess ed the methodology and judgments made in calculating these estimates and the associate d accounting treatment in accordance with IAS 19 and IFRIC 14. Disclosure - We assessed the adequacy of the disclosu res made in the financial statements, including the appropriateness of the assumptions and sensitivities disclosed. Key observations communicated to the Group Audit Committee We ar e satisfied th at the valuation and disclosure of the net pension ba lance are r easonable and in accordance w ith IFRS. We highlighted the following matters to the Group Audit Co mmittee:  Our bench marking of key actuarial assu mptions inclu ding the discount rate, inflation, longevity and pension payments concluded that assumptions we re within a reasonable range;  No material differences were identified through our i ndependent valuation testing for a sampl e of pension assets; and  Management’s estimate of the impact of t he augmentation cap was materially consistent with our independent estimate using our own model. Relevant references in the A nnual Report and Accounts Accounting policies Note 5 to the financial statements Independent a uditors’ report to the member s of NatWest Gr oup plc continued NatWest Group A nnual Repor t and Accou nts 2021 296 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Risk Our response to the risk IT access management The IT environment is complex and pervasive to the operations of the Group due to the large volume of transactions processed in numerous locations on a daily basis with extensive reliance on automated controls. Appropriate IT controls are required to ensure that applications process data as expected and that cha nges are made in an appropriate manner. This risk is also impacted by the greater d ependency on third parties, increasing use of cl oud platforms, decommissioning of l egacy systems, and migration to new sys tems. Such controls contribute to mitigating the risk of potential fraud or errors as a resul t of changes to applications and data. The Group has implemented use r access management controls across IT applications, databases and operating systems. We have identified user access-related de ficiencies in the past and whilst the number of deficiencies has reduced year o ver year, the risk of inappropriate access remains. We evaluated the design and operating effectiveness of IT general controls over the applications, operating systems and databases th at are relevant to financial reporting. During our planning and test of design phases, we performed procedures to determine whethe r changes in restrictions in different global locations, as a result of the ongoing global COVID-19 p andemic had caused material changes in IT processes or controls and o bserved no such changes that would result in an increased IT risk. Controls testing We tested user access by assess ing the controls in place for in-scope applications, in particular testin g the addition and periodic recertification of users’ access. We continue to f ocus on key controls enforced by the Group’s user access management tools, including the completeness of use r data, automated identification of mo vers and leavers and the adequacy of the ove rall control environment. Our testing included the G roup’s additional attestation and leaver checks enhancing its identity and access control environment. A number of systems are outsourced to thi rd party service providers. For these systems, we tested IT general controls through evalu ating the relevant Service Organisation Controls reports (where available). This include d assessing the timing of the reporting, the controls tes ted by the service auditor and whether they address relevant IT risks. We also tested required complementary user entity controls performed by management. Where a SOC report was not available we identified and reviewed compensating business controls to address this risk. Several systems have been migrated to a cloud -hosted infrastructure model, access management proce sses and controls remain in-house which formed part of our testing. Where control deficiencies wer e identified, we tested remediation activities performed by management and compens ating controls in place and assesse d what additional testing procedu res were necessary to mitigate any residu al risk. We also performed a further analysis of acces s management deficiencies identified by EY, Management and Inte rnal Audit to revalidate our overall approach to access management testing. Key observations communicated to the Group Audit Committee We are satisfied that IT controls impacting financial reporting are designed and operating effe ctively. The following matters were reported to the Group Audit Committee:  We have seen an overall reduction in the number of discrete IT control deficiencie s identified compared to prior year.  Improvements were m ade to further standardise access m anagement p rocesses and controls across the Group, which was one of the drivers for the reduce d number of deficiencies.  Particular att ention should continue to be paid t o controls over user access management in cluding ensuring the completeness and accu racy of the data used t o perform a ccess controls. Where issues w ere noted in relation t o acces s management, these were r emediated by year end or mitigated by compensating controls. We performed additional testing in response to deficiencies identified, where required. Our application of materiality W e apply the conce pt of materiality in planni ng and performing the audit, in e valuatin g the effect of identified misstat ements on the audit and in forming our audit opinion. Materiality The magnitude o f an omission or misst atement that , individually or in the aggr egat e, could r e as onably be expect e d t o inf luence the economic decisions o f the users of the financial s t at ement s. Mat e rialit y pro vides a b asis f or de t ermining the nat ure and e xt ent of our audit proc edures . W e determined mater iality for the Group t o be £157 million (2020: £ 160 million), which is 5% (2020 : 5%) of the prof it before t ax of the Group o f £4,032 million (2020: loss before t ax of the Group including discon tinued operations o f £351 million) adjuste d for loan impairment releases ari sing fr om C OVID-1 9 economic re co ve ry, normalised loan impairment charges , loss on redemption of own debt, non-recurr ing conduct and str a tegic c osts and cer tain non-r ecurring tr ansactions. W e believ e removing ite ms that would otherwise hav e a disproportionate impact on materiali ty refle cts the most use ful measure f or users o f the financial st atements and is consiste nt with the prior ye ar . The 5% basis used for Group materi ality is consist ent with the wider industry , and is the sta ndard for listed and regulate d entities. W e determined mater iality for the P arent Co mpany to be £1 57 million (2020: £160 million) which is 0.3 % (2020: 0.4%) of equity of the Par ent Compan y and is con sistent with the prior y ear. W e believe this r eflects the most u seful measur e for user s of the fi nancial state ments as the Par ent Co mpany ’ s primary purpose is to act as a holding c ompany with in vestments in the Gr oup ’ s subsidiaries, not to gener ate opera ting prof its and theref ore a profit b ased measure i s not rele vant. Independent a uditors’ report to the member s of NatWest Gr oup plc continued NatWest Group A nnual Repor t and Accou nts 2021 297 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Per formance materiality The application o f mat e rialit y at the individual ac count or balanc e lev e l. It is s et at an amo unt to r educe to a n appropriat ely low le vel the probabilit y that the aggregat e of uncorr ect ed and unde t ect ed miss tat ements e xceeds mat erialit y. On the basis of our risk assessments, t ogether with our assessment o f the Group ’ s o ver a ll contr ol envir onment, our judgment w a s that performance mater iality w as 75% (2020: 50%) o f our planning materiality, namely £1 18 million (2020: £80 million). W e hav e increased the perc entage of perf ormance materiality from the prior ye ar considering that the number and amount of iden tified misstatemen ts has decr eased and to r eflect the continued impr ove ments in the effectiv eness of the c ontrol en viro nment and other factors aff ecting the entity and its financi al reporting. Audit w ork at component te ams for the purpose of obtaining au dit cov erage ov er significant financial state ment accoun ts is undertak en based on a per centage o f total per formance materi ality. The performance materiali ty set for each component is based on the r elat ive scale and risk o f the c omponent to the Group as a whole and our assessment of the risk of misst atement at that c omponent. In the curr ent ye ar, the r ange of performance mater iality allocated to c omponents was £ 35 million to £106 million (2020: £30 million to £72 million ). Re porting th res hold An amount below which id entified misst atement s are consider ed as being clearly trivial. W e agreed with the Audit C ommittee t hat we w ould report to them all uncorr ected audit differ ences in e xcess o f £8 million ( 2020: £8 million), which is set at 5% of planning materialit y, as well a s differ ences belo w t hat threshold that, in our vie w, warra nted reporting on qualita tive gr ounds. W e ev a luate an y uncorr ected mis statements agai nst both the quantitativ e measur es of materia lity discussed abo ve and in light of other rele vant qualitative consider a tions in for ming our opinion. Other information The other information comprises the information i ncluded in the Annual Report and Accounts, including the Strategic Report, Financial Review, Corporate Governance, Report of the Group Nominations and Governance Committee, Report of the Group Audit Committee, Report of the Group Board Risk Com mittee, Report of the Group Sustain able Banking Committee, Report of the Technology and Innovation Co mmittee, Report of the directors, Risk and c apital management, Non-IFRS financial measure s, Risk factors, Material contracts, and Additional info rmation, other than the financial st atements and our auditor’s report thereon. The directors are responsible for the other information contained within the annual repo rt. Our opinion on the financial st atements does not co ver the other information and, e xc ept to the e xtent otherwise e xplicitly st a ted in this report, w e do not e xpress any f orm of assur ance conclusi o n thereon. Our responsibility is to read the other infor mation and, in doing so, consider whet her the other information is materially inconsistent with the financial statements or ou r knowledge obtained in the course of the audi t, or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misst atements, we are required to determine whether this gives rise to a material misstatement in the fin ancial statements themselves. If, b ased on the work we have performed, we conclude that there is a material misstatement of the other info rmation, we are required to report that fact. We have nothing to report in th is regard. Opinions on other matters pr escribed by the C omp anies A ct 2006 In our opinion, the part of the D irect ors ’ Remuner a tion R eport to be audited h as been properly prepar ed in accor dance with the Companies Act 2006. In our opinion, based on the w ork undert aken in t he course o f the audit:  the information give n in the Str a tegic r eport and the Report o f the dire ctors for the financial y ear for which the financial state ments are pr epared is c onsiste nt with the financial state ments; and  the Strategic r eport and the Report of the dir ectors ha ve been prepar ed in accor dance with applicable legal r equirements. Matters o n which we are required to report by ex ception In the light of the kno wledge and underst an ding of t he Group a nd the Pare nt C ompany and its en vironment obtained in the c ourse of the audit, w e hav e not id entif ied material misst atements in the Str ategic r eport or the Re port of the dir ectors . We have nothing to report in respect of the followi ng matters in relation to which the Compa nies Act 2006 requires us to report to you if, in our opinion:  adequate acc ounting rec o rds h av e not b een k ept by the P a re nt Compan y, or r eturns adequate f or our audit hav e not been rec eiv ed from br anches not visit ed by us; or  the Par ent Compan y financia l s tatements and the part of the Dir ectors ’ Remuner ation Report to be audite d are not i n agreement with the accounting rec o rds and r eturns ; or  cert ain disclosures o f direct ors ’ remuner a tion specified b y la w are not made; or  we hav e not rec eiv ed all the information and e xplanations w e re quire for our audit. Independent a uditors’ report to the member s of NatWest Gr oup plc continued NatWest Group A nnual Repor t and Accou nts 2021 298 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Corporat e Gover nance State ment We have reviewed the directors’ statement in rela tion to going concern, longer-term viabili ty and that part of the Corporate Governance Statement relating to the group and company’s compliance with the provisions o f the UK Corporate Governanc e Code specified for our review by the Listing Rules. Based on the w ork undertak en as part of our audit, we ha ve c oncluded that each of the follo wing elements of the Corpor ate Gov ernance Statement is mate rially consist ent with the financi al statemen ts or our knowle dge obtained during the au dit: Dire ctors ’ statement with regar d s to the appr op riateness o f adopting the going co ncern basis of accounting and an y mater ial uncert ainties identified;  Dire ctors ’ explanation as to its assessment of the company ’ s pr ospects, the period this assess ment cov ers and why the period is appropriate;  Dire ctors ’ statement on fair , balanced and under standable;  Director’s statement on whether it has a reasonable expectation that the group will be able to continue in operation and meet s its liabilities;  Board’ s c onfirmation that it has c arried out a robust assessment of the emer ging and principal risks ;  The section of the annual report that descr ibes the re view of effectiv eness of risk management and inter nal control s ystems ; and;  The section descr ibing the work o f the audit committee . R esponsibilities of direct ors As explained more fully in the Statemen t of directors’ responsibilities, the directors are respo nsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such in ternal control as the directors determine is necessary to enable the preparation of f inancial statements that are free from m aterial misstatement, whether due to fraud or error. In preparing the financial statements, the di rectors are responsible for assessing the Group and Paren t Company’s ability to continue as a going concern, disclosing, as applicable, m atters related to going concern and us ing the going concern basis of accounting unless the directors e ither intend to liquidate the Group or the Parent Company o r to cease operations, or have n o realistic alternative but to do so. A uditor’ s responsibilities for the audit of the financial stat ements Our objectiv es are t o obtain reason able assur ance about whether the financial s tatements as a whole are fr ee from mater ial misstatemen t, whether due to f raud or err or, and to issue an auditor’ s report that includes our opinion. R easonable assuranc e is a high lev el of assur a nce, bu t is not a guar antee that an audit conduct ed in acc ordanc e with IS As (UK) will alwa ys det ect a mate rial misstatemen t when it e xists. Misstate m ents can arise fr om fr aud or err or and are c onsidered material if, indivi dually or in the aggregate, t hey c ould rea sonably be e xpected to influence the ec onomic decisions of users t aken on the basis of the se financial state ments. Explanation as to what e xtent the audit w as considered c apable of detect ing irregu larities, including fraud Irregularities , including fr aud , ar e instances o f non-compliance with law s and regula tions. W e design procedure s in line with our responsibilities , outlined below , to detec t irregularities , including fr a ud. The ris k of not detecting a mater ial misst atement due to fraud is hi gher than the risk o f not detecting one r esulting fr om err or , as frau d may in v olve deliber a te c oncealment by, for e xample, forger y or intentional misre pre sentations , or thr ough collusion. The e xtent to which our pr o ced ures ar e capable of det ecting irre gularities, including fr aud is det ailed below . Ho wev er, the primary r esponsibility for the pre ve ntion and detection of frau d rests with both those char ged with gov ernance of the company and ma nagement.  W e obtained an underst a nding o f the legal and regul atory fr amew orks th at are applic able to the Group and dete rmined that the most significant are the r egulations , licence conditions and supervisory requir em ents of the Pr udential Regula tion Aut hority (PRA) and the Financial Co nduct Authority (FC A); Companies Act 2006; and the Sarbanes Oxle y Act (SO X).  W e understood how the Group is complying with those f r amew orks b y making inquiries o f management, inter nal audit and those responsible f or legal and c ompliance matters . W e also re view ed correspondence between the Gr oup and regul atory bodies; re view ed minutes of the Board and Risk Commit tees; a nd gained an underst anding of the Gr oup ’ s gov ernance fra mew ork.  W e assessed the susc ept ibility o f the Group ’ s financial sta tements to m aterial misst a tement, inclu ding how fr a ud might occur by considering the con trols est a blished to addr ess risks identified t o pre vent or det ect fr aud. W e also identifie d the risks o f fr aud in our k ey audit m atters as describe d abov e and identified areas that w e consider ed when perfor ming our fraud pr o cedur es, su ch as cyberse curity, the impact of r emote wor king, implementation of new go ver nment supported lending pr oducts, and the appropriatene ss of sour ces u sed when performing co nfirmation tes ting on acc ounts such as c ash, loans and securities .  Based on this unders tanding w e designed our audit proce dure s to identify non-com pliance with such la ws and regulations . Our procedur es in volv ed inquiries of legal counsel, e xecutiv e management, and inter nal audit. W e also test ed contr ols and performed proce dures to r espond to the fraud risk s a s identified in our k ey audit matter s. The se proce dures w ere performed b y both the primary team and co mponent teams with o ver sight fr om the primary team.  The Group oper ates in the banking industry which is a highly r egulated en vironment. As such, the Senior St atutory Auditor consider ed the exper ience and e xpertise of the engagement team to e nsure that the t eam had the appro priate compete nce and capabilities, in volvin g specialists wher e ap pro priate. A further description of our responsibilities fo r the audit of the financial statements is located on the Financial Reporting Council’s website at frc.org.uk/auditorsresponsibilities. This d escription forms part of our a uditor’s report. Independent a uditors’ report to the member s of NatWest Gr oup plc continued NatWest Group A nnual Repor t and Accou nts 2021 299 Financial statements Strategic report Governance Risk and capital management Additional information Financial review meeting on 4 Ma y 2016 t o audit the financial statemen ts for the y ear ending 31 Dec ember 2016 and subsequent financial periods.  The audit opinion is consis tent with the additional report to th e Group Audit C ommittee. This re port is made solely to the c ompany ’ s members, as a body, in acc ordanc e with Chapter 3 of P art 16 of the C ompanies A ct 2006. Our audit wor k has been undertak en so that w e might state to the c ompany ’ s members those matters we ar e re quired to Other matters we are required to address  Follo wing the rec ommendation f rom the Gr oup A udit Committe e, we w ere appointed by the Group at its annual gene ral Use of our r eport  The period of total uninter rupted engagement includin g previ ous r enew als an d re appointments is 6 y ears, c over ing perio ds fr om our appointment through 31 D ec ember 2021. European Single Electronic Format The directors are responsible for presenting and marking up the consolidated financial statements in compliance with the requirements set out in the Delegated Regulation 2019/815 on European Single Electronic Format (“ESEF Regulation”). Our responsibility is to assess whether the consolidated financial statements have been prepared, in all material respects, in compliance with the requirements laid down in the ESEF Regulation. We have checked the compliance of the consolidated financial statements of the Group as at 31 December 2021 with relevant statutory requirements set out in the ESEF Regulation that are applicable to consolidated financial statements. For the Group it relates to: - Consolidated financial statements prepared in a valid XHTML format; - The XBRL markup of the consolidated financial statements using the core taxonomy and the common rules on markups specified in the ESEF Regulation In our opinion, the consolidated financial statements of the Group as at 31 December 2021, identified as 2138005O9XJIJN4JPN90-2021-12-31.zip , have been prepared, in all material respects, in compliance with the requirements laid down in the ESEF Regulation. state t o them in an auditor’ s r eport and for no other purpose. T o the fullest exte nt permitted b y law, w e do not accept or as sume responsibility to an yone other than the compan y and the c ompany ’ s members as a bod y, for our audit wor k, for this r eport, or for the opinions we hav e formed. Micha Missakian (Senior s tatutor y auditor) for and on behalf of Erns t & Y oung LLP , Statutory A uditor London, United Kingdom 0 4 March 2022 C on soli d at ed income st at ement f or the y ea r ended 31 Dec emb er 2021 NatWest Group A nnual Repor t and Accou nts 2021 300 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Note 2021 2020 (1) 2019 (1) £m £m £m Interest receivable 9,313 9,798 11,127 Interest payable (1,699) (2,322) (3,328) Net interest income 1 7,614 7,476 7,799 Fees and commis sions receivable 2,698 2,722 3,345 Fees and commis sions payable (574) (722) (848) Income from trading act ivities 323 1,125 932 Other operating i ncome 451 (93) 2,759 Non-interest income 2 2,898 3,032 6,188 Total income 10,512 10,508 13,987 Staff costs (3,676) (3,878) (3,976) Premises and equip ment (1,133) (1,222) (1,258) Other administrat ive expenses (2,026) (1,845) (2,828) Depreciation and a mortisation (923) (913) (1,218) Operating expenses 3 (7,758) (7,858) (9,280) Profit before impairme n t releases/(losses) 2,754 2,650 4,707 Impairment releas es/(losses) 15 1,278 (3,131) (724) Operating profit/ (loss) before tax 4,032 (481) 3,983 Tax charge 7 (996) (74) (439) Profit/(loss) from co ntinuing opera tions 3,036 (555) 3,544 Profit from discontin ued operatio ns, net of tax (2) 8 276 121 256 Profit/(loss) for the year 3,312 (434) 3,800 Attributable to: Ordinary sharehold ers 2,950 (753) 3,133 Preference share holders 19 26 39 Paid-in equity h olders 299 355 367 Non - controlli ng interests 44 (62) 261 3,312 (434) 3,800 Earnings per ordi nary share - continui ng operations 9 23.0p (7.2p) 23.9p Earnings per ordi nary share - dis continued operatio ns 9 2.4p 1.0p 2.1p Total earnings per s hare attributa ble to ordinary shareh olders - bas ic 9 25.4p (6.2p) 26.0p Earnings per ordi nary share - fully dil uted continuing operati ons 9 22.9p (7.2p) 23.8p Earnings per ordi nary share - fully dil uted discontinued operatio ns 9 2.4p 1.0p 2.1p Total earnings per s hare attributa ble to ordinary shareh olders - fully dilute d 9 25.3p (6.2p) 25.9p (1) Comparative results have been re-presented from those previously published to reclassify certain items as discontinued operations as des cribed in Note 8 to the consolidated financial statements. (2) The results of discontinued operations, comprising th e post-tax profit is shown as a single amount on the face of the income statement. An analysis of this amount is presented in Note 8 to the consolidated financial statements. The accompanying notes on pages 31 3 to 377, the Accounting policies on pages 307 to 312 and the audited sections of the Financial review and Risk and capital man agement sections on pages 84 to 95 and 1 88 to 285 form an integral part of these financial statements. C on soli d at ed st a t ement o f c ompr ehensiv e inco me f or the y ear ended 31 D ecember 20 21 NatWest Group A nnual Repor t and Accou nts 2021 301 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 2021 2020 2019 £m £m £m Profit/(loss) for the year 3,312 (434) 3,800 Items that do not qualify for rec lassification Remeasurement of retirement benefit schemes - other movements (1) (669) 4 (142) Loss on fair value of credit in financial liabili ties designated at FVTPL due to own credit risk (29) (52) (189) FVOCI financial assets 13 (64) (71) Tax 164 42 28 (521) (70) (374) Items that do qualify for reclassif ication FVOCI financial assets (100) 44 (14) Cash flow hedges (848) 271 294 Currency translation (382) 276 (1,836) Tax 213 (89) (170) (1,117) 502 (1,726) Other comprehensive (loss)/income afte r tax (1,638) 432 (2,100) Total comprehensive income/(loss) for the ye ar 1,674 (2) 1,700 Attributable to: Ordinary shareholders 1,308 (338) 1,044 Preference shareholders 19 26 39 Paid - in equity holders 299 355 367 Non-controlling interests 48 (45) 250 1,674 (2) 1,700 (1) Following the purchase of ordinary shares from UKGI in Ma rch 2021, NatWest Group contributed £500 million to its main pension scheme in line with the memorandum of understanding announced on 17 April 2018. After tax relief, this contribution reduced total equity by £365 million. There w as also a pre-tax loss of £192 million (€224 million) in relation to the re-measurement of the Group’s Republic of Ireland pension schemes, p rimaril y as a result of significant movements in underlying a ctuarial assumptions (2020: pre-tax gain of £72 million (€81 million)). In line with our policy, the present value of defined ben efit obligations and the fair value of plan assets at the end of the reporting period, are assessed to identify significant market fluctuations and one -off events since the end of the prior financial year. The accompanying notes on pages 31 3 to 377, the Accounting policies on pages 307 to 312 and the audited sections of the Financial review and Risk and capital man agement sections on pages 84 to 95 and 1 88 to 285 form an integral part of these financial statements. C on soli d at ed balance shee t as at 31 Dec e mber 2021 NatWest Group A nnual Repor t and Accou nts 2021 302 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Note 2021 2020 £m £m Assets Cash and balances at central banks 10 177,757 124,489 Trading assets 13 59,158 68,990 Derivatives 14 106,139 166,523 Settlement balances 2,141 2,297 Loans to banks - amortised cost 10 7,682 6,955 Loans to customers - amortised cost 10 358,990 360,544 Securities subject to repurchas e agreements 11,746 11,542 Other financial assets excluding secu rities subject to repurchase agreements 34,399 43,606 Other financial assets 16 46,145 55,148 Intangible assets 17 6,723 6,655 Other assets 18 8,242 7,890 Assets of disposal groups 8 9,015 — Total assets 781,992 799,491 Liabilities Bank deposits 10 26,279 20,606 Customer deposits 10 479,810 431,739 Settlement balances 2,068 5,545 Trading liabilities 13 64,598 72,256 Derivatives 14 100,835 160,705 Other financial liabilities 19 49,326 45,811 Subordinated liabilities 20 8,429 9,962 Notes in circulation 3,047 2,655 Other liabilities 21 5,797 6,388 Total liabilities 740,189 755,667 Ordinary shareholders' interests 37,412 38,367 Other owners' interests 4,384 5,493 Owners’ equity 22 41,796 43,860 Non - controlling interests 7 (36) Total equity 41,803 43,824 Total liabilities and equity 781,992 799,491 The accompanying notes on pages 31 3 to 377, the Accounting policies on pages 307 to 312 and the audited sections of the Financial review and Risk and capital man agement sections on pages 84 to 95 and 1 88 to 285 form an integral part of these financial statements. The accounts were approved by the Board of di rectors on 17 February 2022 and signed on it s behalf by: Howard Davies Alison Rose-Slade Katie Murray NatWest Group plc Chairman G roup Chief Executive Off icer Group Chief Financial Officer Registered No. SC4555 1 C on soli d at ed st a t ement o f changes in e quit y f or the y ea r ended 31 D ec ember 2021 NatWest Group A nnual Repor t and Accou nts 2021 303 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 2021 2020 2019 £m £m £m Called - up share capital - at 1 January 12,129 12,094 12,049 Ordinary shares issued 37 35 45 Share cancellation (1,5) (698) — — At 31 December 11,468 12,129 12,094 Paid-in equity - at 1 January 4,999 4,058 4,058 Redeemed — (1,277) — Reclassified (2) (2,046) — — Securities issued during the period 937 2,218 — At 31 December 3,890 4,999 4,058 Share premium - at 1 January 1,111 1,094 1,027 Ordinary shares issued 50 17 67 At 31 December 1,161 1,111 1,094 Merger reserve - at 1 January and 31 December 10,881 10,881 10,881 FVOCI reserve - at 1 January 360 138 343 Unrealised gains/(losses) 32 76 (107) Realised (gains)/losses (3) (122) 152 (90) Tax (1) (6) (8) At 31 December 269 360 138 Cash flow hedging reserve - at 1 January 229 35 (191) Amount recognised in equity (687) 321 573 Amount transferred from equity to earnings (161) (50) (279) Tax 224 (77) (68) At 31 December (395) 229 35 Foreign exchange reserve - at 1 January 1,608 1,343 3,278 Retranslation of net assets (484) 297 (428) Foreign currency gains/(losses) on hedges of net asse ts 88 (55) 83 Tax (17) 6 (110) Recycled to profit or loss on disposal of businesse s 10 17 (1,480) At 31 December 1,205 1,608 1,343 Capital redemption reserve - at 1 January — — — Share cancellation (1) 698 — — Redemption of preference shar es 24 — — At 31 December 722 — — Retained earnings - at 1 January 12,567 13,946 14,312 Implementation of IFRS 16 on 1 January 20 19 — — (187) Profit/(loss) attributable to ordinary shareholders and other equity owners - continuing operations 2,992 (493) 3,283 - discontinued operations 276 121 256 Equity preference dividends paid (19) (26) (39) Paid-in equity dividends paid (299) (355) (367) Ordinary dividends paid (693) — (3,018) Shares repurchased during the ye ar (1,5) (1,423) — — Unclaimed dividend — 2 — Redemption of preference shar es (24) — — Redemption/reclassification of paid-in equity (2,6) 150 (355) — Realised gains/(losses) in period on FVOCI equi ty shares - gross 3 (248) 112 - tax — — — Remeasurement of the retirement benefit schemes - other movements (4) (669) 4 (142) - tax (4) 168 22 24 Changes in fair value of credit in fi nancial liabilities designated at FVTPL - gross (29) (52) (189) - tax 3 8 20 Shares issued under employee share schemes 8 (11) (6) Share-based payments (7) (45) 4 (113) At 31 December 12,966 12,567 13,946 For the notes to this table refer to the following pa ge. Consolidated statem ent of changes in equity f or the year end ed 31 Decembe r 2021 co ntinued NatWest Group A nnual Repor t and Accou nts 2021 304 Financial statements Strategic report Governance Risk and capit al management Additional information Financial review 2021 2020 201 9 £m £ m £ m Own shares held - at 1 January (24) (42) (21) Shares issued under employee share schemes 36 95 39 Own shares acquired (1) (383) (77) (60) At 31 December (371) (24) (42) Owners’ equity at 31 December 41,796 43,860 43,547 Non-controlling interests - at 1 January (36) 9 754 Currency translation adjustments and othe r movements 4 17 (11) Profit/(loss) attributable to non-controlling i nterests 44 (62) 261 Dividends paid (5) — (5) Equity raised — — 45 Equity withdrawn and disposals — — (1,035) At 31 December 7 (36) 9 Total equity at 31 December 41,803 43,824 43,556 Attributable to: Ordinary shareholders 37,412 38,367 38,993 Preference shareholders 494 494 496 Paid - in equity holders 3,890 4,999 4,058 Non-controlling interests 7 (36) 9 41,803 43,824 43,556 (1) In March 2021, there was an agreement with HM Treasury to buy 591 million ordinary shares in the Company from UK Government Investments Ltd (UKGI), at 190.5p per share for the total consideration of £1.13 billion. NatWest Group cancelled 391 million of the purchased ordinary shares, amounting to £744 million excluding fees, and held the remaining 200 million in own shares held, amounting to £381 million excluding fees. T he nominal value of the share cancellation has been transferred to the capital redemption reserve. (2) In July 2021, paid-in equity reclassified to liabili ties as th e result of a call in August 2021 of US$2.65 billion AT1 capital notes. (3) In 2020, the completion of the Ala wwal bank merger resulted in the derecognition of the associate investment in Alawwal bank and recognition of a new investment in SABB h eld at fair value through other comprehensive income (FVOCI). (4) Following the purchase of ordinary shares from UKGI in Ma rch 2021, NatWest Group contributed £500 million to its main pension scheme in line with the memorandum of understanding announced on 17 April 2018. After tax relief, this contribution reduced total equity by £365 million. There w as also a pre-tax loss of £192 million (€224 million) in relation to the re-measurement of the Group’s Republic of Ireland pension schemes, p rimaril y as a result of significant movements in underlying a ctuarial assumptions (2020: pre-tax gain of £72 million (€81 million)). In line with our policy, the present value of defined ben efit obligations and the fair value of plan assets at the end of the reporting period, are assessed to identify significant market fluctuations and one -off events since the end of the prior financial year. (5) In line with the announcement in July 2021 , NatWest Group plc repurchased and cancelled 310.8 million shares for total consideration of £676.2 million excluding fees. Of the 310.8 million shares bought back, 2.8 million sha res were settled and cancelled in January 2022. The nominal value of the share cancellations has been transferred to the capital redemption reserve with the share premium element to retained earnings. (6) The redemption of pa id-in equity includes a tax credit of £16 million. (7) Share-based payments includes a tax credit of £10 million. The accompanying notes on pages 31 3 to 377, the Accounting policies on pages 307 to 312 and the audited sections of the Financial review and Risk and capital man agement sections on pages 84 to 95 and 1 88 to 285 form an integral part of these financial statements. C on soli d at ed cash fl o w st at ement fo r the y e ar ended 31 Dec e mber 2021 NatWest Group A nnual Repor t and Accou nts 2021 305 Financial statements Strategic report Governance Risk and capital managemen t Additional information Financial review 2021 2020 2019 Note £m £m £ m Cash flows from operating activities Operating profit/(loss) before tax from continuing operations (1) 4,032 (481) 3,983 Operating profit before tax from discon tinued operations 279 130 249 Adjustments for: Impairment (releases)/losses (1,335) 3,242 696 Amortisation of discounts and premiums of othe r financial assets 203 267 255 Depreciation and amortisation 923 914 1,220 Change in fair value taken to profit or loss of ot her financial assets 1,771 (1,474) (280) Change in fair value taken to profit or loss on o ther financial liabilities and subordi nated liabilities (1,083) 962 856 Elimination of foreign exchange diff erences 2,446 (2,497) 949 Other non-cash items (164) (2) (272) Income receivable on other financial asse ts (581) (518) (854) (Profit)/loss on sale of other financial assets (118) (96) 22 (Profit)/loss on sale of subsidiarie s and associates (48) 16 (2,224) Share of (profit)/loss of associates (216) 30 14 Loss/(profit) on sale of other asse ts and net assets/liabiltiies 23 (16) (58) Interest payable on MRELs and subordina ted liabilities 964 1,182 1,151 Loss on sale of MRELs and subordinated liabilities 145 324 — Charges and releases on provisions 478 296 1,243 Defined benefit pension schemes 215 215 188 Net cash flows from trading act ivities 7,934 2,494 7,138 Decrease/(increase) in trading asse ts 7,751 4,147 (659) Decrease/(increase) in derivative assets 59,697 (16,173) (16,680) Decrease/(increase) in settlement balance assets 156 2,090 (1,459) (Increase)/decrease in loans to banks (252) (554) 3,563 Decrease/(increase) in loans to c ustomers 2,721 (33,748) (22,642) (Increase)/decrease in other financial assets (128) 221 924 (Increase)/decrease in other asse ts (57) 8 707 Increase in assets of disposal groups (9,015) — — Increase/(decrease) in banks de posits 5,673 113 (2,804) Increase in customer deposits 48,071 62,492 8,333 (Decrease)/increase in settlement balance li abilities (350) (1,652) 1,003 (Decrease)/increase in trading liabilities (7,658) (1,693) 1,599 (Decrease)/increase in derivative liabilities (59,870) 13,826 17,982 Increase/(decrease) in other financial li abilities 938 (1,085) 2,871 Increase/(decrease) in notes in circulation 392 546 (43) Decrease in other liabilities (1,463) (1,723) (2,634) Changes in operating assets and liabili ties 46,606 26,815 (9,939) Income taxes paid (856) (214) (278) Net cash flows from operating activi ties (2) 53,684 29,095 (3,079) For the notes to this table refer to the following pa ge. Consolidated ca sh flow statem ent for the year en ded 31 D ecember 202 1 continued NatWest Group A nnual Repor t and Accou nts 2021 306 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 2021 2020 2019 Note £m £m £m Cash flows from investing activities Sale and maturity of other financial assets 16,859 25,952 19,990 Purchase of other financial assets (10,150) (18,825) (21,345) Income received on other financial assets 581 518 854 Net movement in business interests and intangible assets 28 (3,489) (70) (84) Sale of property, plant and equipment 165 348 428 Purchase of property, plant and equipmen t (901) (376) (559) Net cash flows from investing activities 3,065 7,547 (716) Cash flows from financing activities Movement in MRELs 2,736 636 1,927 Movement in subordinated liabilities (3,452) (2,381) (1,064) Ordinary shares issued — 17 Share cancellation (1,806) (2) (21) Dividends paid (1,016) (381) (3,429) Issue of paid-in equity 937 2,218 — Net cash flows from financing activities (2,601) 90 (2,570) Effects of exchange rate changes on cash and cash equivalents (2,641) 1,879 (1,983) Net increase/(decrease) in cash and c ash equivalents 51,507 38,611 (8,348) Cash and cash equivalents at 1 January 139,199 100,588 108,936 Cash and cash equivalents at 31 December 30 190,706 139,199 100,588 (1) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8 to the consolidated financial statements. (2) Includes interest received of £9,696 mill ion (2020 - £10,007 million, 2019 - £11,245 million) and interest paid of £1,668 million (2020 - £2,414 million, 2019 - £3,318 million). The accompanying notes on pages 31 3 to 377, the Accounting policies on pages 307 to 312 and the audited sections of the Financial review and Risk and capital man agement sections on pages 84 to 95 and 1 88 to 285 form an integral part of these financial statements. Accounting policies NatWest Group A nnual Repor t and Accou nts 2021 307 Financial statements Strategic report Governance Risk and capital management Additional information Financial review This section includes the basis of preparation of the financial statements and the significa nt accounting policies used to prep are the financial statements. Our accounting policies are the s pecific principles, bases, conventions, rules, and pr actices we apply in preparing and present ing the financial statements. Further information is provided where judgment and estimation is ap plied to critical accounting policie s and key sources of estimation unce rtainty. Future accounting developmen ts details new or amendments to existing accounting s tandards, when they are effective from and where the NatWest Group is as sessing their impact on future financial statemen ts. 1. Presentation of financial statements NatWest Group plc is incorporated in the UK a nd registered in Scotland. The financial statements are presen ted in the functional currency, pounds sterling. NatWest Group plc’s consolidated financial s tatements incorporate the results of NatWest Group plc and the entities it controls. Control arises when NatWest Group plc has the power to direct the activities of an entity so as to affect the return from the entity. Control is assessed by reference to our ability to enforce our will on the other entity, typically th rough voting rights. The consolidated f inancial statements are prepared under consistent accountin g policies. Transactions and balances betwee n Group companies are eliminated in the consolidated financial statemen ts to show only those transactions and balances e xternal to the NatWest Group. The audited financial statements are set out on pages 30 0 to 394 and the audited sections of Ris k and capital management on pages 97 to 285. The directors have pre pared the financial statements on a going concern basis after assess ing the principal risks, forecasts, projections and other relevant evidence over the twelve months f rom the date the financial statements are approved (see the Report of the directo rs, page 183) and in accordance with UK adopted In ternational Accounting Standards (IAS), Internation al Financial Reporting Standards (IFRS) as issued by the Inte rnational Accounting Standards Board (IASB) and IFRS as adopted by the European Union. The significant accounting policies and rel ated judgments are set out below. Except for certain financial instruments as described in Accounting policies 10 and 15 and inves tment property, the financial statements are presen ted on a historical cost basis. Accounting policy changes effective 1 January 202 1. The IASB amended IFRS 16 Leases with “COVI D-19 amendments on lease modifications – A mendments to IFRS 16 – Leases (IFRS 16)”. The ef fect of the amendment on NatWest Group’s financial statements is i mmaterial. 2. Revenue recognition Interest income and expense are recognised in the income statement using the effective interest rate method for: all financial instruments measured at amortised cost, debt instruments measured as fair value th rough other comprehensive income and the ef fective part of any related accounting hedging instrument s. Finance lease income is recognised at a constant periodic rate of return bef ore tax on the net investment on the lease. N egative interest on financial assets is presented in interest payable and neg ative interest on financial liabilities is presented in interest receiva ble. Other interest relating to financial instruments measu red at fair value is recognised as part of the movement in f air value and is reported in income from trading activities or other ope rating income as relevant. Fees in respect of services a re recognised as the right to consideration accrues through the pe rformance of each distinct service obligation to the custo mer. The arrangements are generally contractual and the cost of providing the service is incurred as the service is rendered. The price is usually fixed and always determinable. 3. Discontinued operations, Held for sale and Disposal group The results of discontinued operations (co mprising the post-tax profit or loss of discontinued operations and t he post-tax results of either the ongoing measurement at fair v alue less costs to sell or disposal of the discontinued operation) a re excluded from the results of continuing operations and are presented as a single amount as profit/(loss) f rom discontinued operations, net of tax in the income statement. Compa ratives are represented for the income state ment, cash flow statement, statement of changes in equity and related notes. An asset or disposal group (assets and liabilities ) is classified as held for sale if NatWest Group will recover its ca rrying amount principally through a sale transaction rathe r than through continuing use. These are measured at the lower of its carrying amount or fair value less cost to sell unless scoped out of IFRS 5 in which case the existing measure ment provisions of IFRS apply. These are presented as single amounts, comparatives are not represented. 4. Staff costs Employee costs, such as salaries, paid absence s, and other benefits are recognised over the period in which the employees provide the related services to NatWest Group. Employees may receive variable compensation in cash, in defe rred cash or debt instruments of NatWest Group or in ordina ry shares of NatWest Group plc. NatWest Group operates a numbe r of share-based compensation schemes under which it grants awards of NatWest Group plc shares and share o ptions to its employees. Such awards are subject to vesting conditi ons. Variable compensation that is se ttled in cash or debt instruments is charged to the income statemen t on a straight- line basis over the period during which services are provided, taking account of forfeiture an d clawback criteria. The value of employee services received in exchange fo r NatWest Group plc shares and share options is recognised as an expense o ver the vesting period, subject to defer ral. clawback and forfeiture criteria with a corresponding increase in equity. The fai r value of the instruments granted is based on ma rket prices at the grant date. Defined contribution pension scheme A scheme where NatWest Grou p pays fixed contributions and there is no legal or constructive obligation to pay furthe r contributions or benefits. Contributions are recognised in the income statement as employee service costs acc rue. Defined benefit pension scheme A scheme that defines the ben efit an employee will receive on retirement and is dependent on one or more f actors such as age, salary, and years of service . The net of the recognisable scheme assets and obligations is reported on the balance sheet in other assets or other liabilities. T he defined benefit obligation is measured on an actuarial bas is. The charge to the income statement for pension costs (m ainly the service cost and the net interest on the net defined benefit asset or liability) is recognised in operating expenses . Actuarial gains and losses (i.e. gains and/or losses on re- measuring the net defined ben efit asset or liability due to changes in actuarial measurement assumptions) a re recognised in other comprehensive income in full in the pe riod in which they arise, and not subject to re cycling to the income statement. Accounting polici es continued NatWest Group A nnual Repor t and Accou nts 2021 308 Financial statements Strategic report Governance Risk and capital management Additional information Financial review The difference between scheme assets and scheme liabilities, the net defined benefit asset or liability, is recognised on the balance sheet if the criteria of the asse t ceiling test are met. This requires the net defined benef it surplus to be limited to the present value of any economic benefits a vailable to NatWest Group in the form of re funds from the plan or reduced contributions to it. NatWest Group will recognise a liability where a minimum funding requirement exists for any of its defined benefit pension schemes. This reflects agreed minimum funding and the availability of a net surplus as d etermined as described above. When estimating the liability for minimum fundi ng requirements NatWest Group plc only include cont ributions that are substantively or contractually agreed and do not include discretionary features, including dividend-linked co ntributions 5. Intangible assets and goodwill Intangible assets are identifiable non-monetary assets without physical substance acquired by NatWest G roup are stated at cost less accumulated amortisa tion and impairment losses. Amortisation is a method to spr ead the cost of such assets over time to the income statement. This is charged to the income statement over the assets' estimated useful e conomic lives using methods that best reflect the pattern of econo mic benefits. The estimated useful ec onomic lives are: Computer software 3 to 12 years Other acquired intangibles 5 to 10 years Expenditure on internally generated goodwill an d brands is charged to the income statement as incur red. Direct costs relating to the development of internal-use computer software are reported on the bal ance sheet after technical feasibility and economic viability h ave been established. These direct costs include payroll, t he costs of materials and services, and dir ectly attributable overheads. Capitalisation of costs ceases when the softwa re can operate as intended. During and after development, accumulated costs are reviewed for impairment against the ben efits that the software is expected to generate. Costs incurred prior to the establishment of technic al feasibility and economic viability are expe nsed to the income statement as incurred, as are all training costs and gener al overheads. The costs of licences to use computer software that are expected to generate economic benef its beyond one year are also reported on the balance shee t Goodwill on the acquisition of a subsidiary is the excess of the fair value of the consideration paid, the fair value of any existing interest in the subsidiar y and the amount of any non- controlling interest measured ei ther at fair value or at its share of the subsidiary’s net assets ove r the net fair value of the subsidiary’s identifiable assets, l iabilities, and contingent liabilities. Goodwill is measured at initial cost less any subsequent impairment losses. The gain or loss on the disposal of a subsidiary includes the carrying value of any related goodwill when such transactions occur. 6. Impairment of non-financial ass ets At each balance sheet date, NatWest Grou p assesses whether there is any indication that its intangible assets or p roperty, plant and equipment are impaired. If any such in dication exists, NatWest Group estimates the recoverable amount of the asset and compares it to its balance s heet value to calculate if an impairment loss should be charged to the inco me statement. The balance sheet value of the asset is reduced by the amount of the impairment loss. A reversal of an impairment loss o n intangible assets or property, pl ant and equipment is recognised in the income statement pro vided the increased carrying value is not greater than it would have been h ad no impairment loss been recognised. Goodwill is tested for impairment annually o r more frequently if events or changes in circumstances indicate that it mig ht be impaired. Impairment losses on goodwill are not reversed The recoverable amount of an asset that does not generate cash flows that are independent from those of othe r assets or groups of assets, is determined as part of the cash-gener ating unit to which the asset belongs. A cash-generati ng unit is the smallest identifiable group of asse ts that generates cash inflows that are largely independent of the cash inflows f rom other assets or groups of assets. For the purposes of impairment testing, goodwill acquired in a busines s combination is allocated to NatWest Group’s cash-generating units or groups of cash- generating units expected to be nefit from the combination. The recoverable amount of an asset or cash-generating u nit is the higher of its fair value less cost to sell or i ts value in use. Value in use is the present value of fu ture cash flows from the asset or cash-generating unit discounted at a rate t hat reflects market interest rates adjusted for risks specific to the asset or cash-generating unit that have not been considered in estimating future cash flows. 7. Foreign currencies Foreign exchange differences arising on the set tlement of foreign currency transactions and from the transla tion of monetary assets and liabilities are reported in income fr om trading activities except for differences arising on cash flow hedges and hedges of net investments in foreign ope rations. Non-monetary items denominated in foreign currencies that are stated at fair value are translated into the fu nctional currency at the foreign exchange rates ruling at the d ates the values are determined. Translation differences are recog nised in the income statement except for differences arisi ng on non- monetary financial assets classif ied as fair value through other comprehensive income. Income and expenses of foreign subsidia ries and branches are translated into sterling at avera ge exchange rates unless these do not approximate the foreign e xchange rates ruling at the dates of the transactions. Foreign exchange differences a rising on the translation of a foreign operation are recognised in other comprehensive income. The amount accumulated in equity is reclassified from equity to the income st atement on disposal of a foreign operation. 8. Provisions and contingent liabilities NatWest Group recognises a provision for a p resent obligation resulting from a past event when it is more likely than not that it will be required to pay to settle the obligation and the amount of the obligation can be estimated reliably. Provision is made for restructuri ng costs, including the costs of redundancy, when NatWest Group has a const ructive obligation. An obligation exists when NatWest Group has a detailed formal plan for the restructuring and h as raised a valid expectation in those affected either by s tarting to implement the plan or by announcing its main features. NatWest Group recognises any onerous cost of the present obligation under a contract as a provision. An onerous cost is the unavoidable cost of meeting its contractu al obligations that exceed the expected economic benefits. When Na tWest Group intends to vacate a leasehold property o r right of use asset, the asset would be tested for impairment and a provisi on may be recognised for the ancillary contractual occupa ncy costs, such as rates. Accounting polici es continued NatWest Group A nnual Repor t and Accou nts 2021 309 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Contingent liabilities are possible obligations arising f rom past events, whose existence will be confirmed only by uncertain future events, or present obligations arising from pas t events that are not recognised because e ither an outflow of economic benefits is not probable, or the amount of the obligation cannot be reliably measured. Continge nt liabilities are not recognised but information about them is d isclosed unless the possibility of any outflow of economic benefits in settle ment is remote. 9. Tax Tax encompassing current tax and deferred tax is recognised in the income statement except when taxable items are recognised in other comprehensive income or equity. T ax consequences arising from servicing financial inst ruments classified as equity are recogni sed in the income statement in line with IAS 12. Current tax is tax payable or re coverable in respect of the taxable profit or loss for the year arisin g in the income statement, other comprehensive income or equity. P rovision is made for current tax at rates enacted, or subs tantively enacted, at the balance sheet date. Deferred tax is the tax expected to be payable or recoverable in respect of temporary difference s between the carrying amount of an asset or liability for accountin g purposes and the carrying amount for tax purposes. Defe rred tax liabilities are generally recognised for all taxable temporary diff erences and deferred tax assets are recogni sed to the extent their recovery is probable. Deferred tax is not recognised on temporary differences that arise from initial recognition of an asset or a liability in a transaction (other than a busines s combination) that at the time of the transaction affects neither accounting nor taxa ble profit or loss. Deferred tax is calculat ed using tax rates expected to apply in the periods when the a ssets will be realised or the liabilities settled, based on tax rates and la ws enacted, or substantively enacted, at the b alance sheet date. Deferred tax assets and liabilities are offse t where NatWest Group has a legally enforceable right to offset and where they relate to income taxes levied by the same taxation authority either on an individual NatWest Group company or on NatWest Group companies in the same tax group th at intend, in future periods, to settle current tax liabilities an d assets on a net basis or on a gross basis simultaneous ly. Accounting for taxes is judgmental and c arries a degree of uncertainty because tax law is subject to inter pretation, which might be questioned by the rele vant tax authority. NatWest Group recognises the most likel y current and deferred tax liability or asset, assessed for unce rtainty using consistent judgments and estimates. Current and deferre d tax assets are only recognised where their recovery is deemed probable, and current and deferred tax liabilities are recognise d at the amount that represents the best estimate of the proba ble outcome having regard to their acceptance by the tax authorities. 10. Financial instruments Financial instruments are meas ured at fair value on initial recognition on the balance sheet. Monetary financial assets are classifie d into one of the following subsequent measurement categories (subject to busi ness model assessment and review of contractual cash flow for the purposes of sole payments of p rincipal and interest where applicable):  amortised cost measured at cost using the ef fective interest rate method, less any impairment allowance;  fair value through other compr ehensive income (FVOCI) measured at fair value, using the e ffective interest rate method and changes in fair valu e through other comprehensive income;  mandatory fair value through profit or loss (M FVTPL) measured at fair value and cha nges in fair value reported in the income statement; or  designated at fair value through profit or loss (DFV) measured at fair value and cha nges in fair value reported in the income statement . Classification by business model refle cts how NatWest Group manages its financial assets to generate cash flows. A busi ness model assessment helps to asce rtain the measurement approach depending on whethe r cash flows result from holding financial assets to collect the contractual cash f lows, from selling those financial assets, or both. Business model assessment of asse ts is made at portfolio level, being the level at which they are managed to achie ve a predefined business objective. T his is expected to result in the most consistent classification of assets because it aligns wi th the stated objectives for the portfolio, its risk management, manager’s remuneration and the ability to monit or sales of assets from a portfolio. The contractual terms of a financial asset; any leverage features; prepayment and exte nsion terms; and triggers that might reset the effective rate of interest; are considered in determining whether cash flows are solely payments of principal and interest. Certain financial assets may be designa ted at fair value through profit or loss (DFV) upon initial recognition if s uch designation eliminates, or significantly reduces , accounting mismatch . Equity shares are measured at fair value throug h profit or loss unless specifically ele cted as at fair value through other comprehensive income (FVOCI). Upon disposal, the cumulative gains or losses in fair value through other comprehensive income reserve are recycled to the income statement for monetary asse ts and non-monetary assets (equity shares) the cumulative gains o r losses are transferred directly to retained e arnings. Regular way purchases of financ ial assets classified as amortised cost are recognised on the set tlement date; all other regular way transactions in fin ancial assets are recognised on the trade date. Financial liabilities are classified into one of following measurement categories:  amortised cost measured at cost using the ef fective interest rate method;  held for trading measured at fair value and c hanges in fair value reported in income statement; or  designated at fair value through profit or loss measured at fair value and changes in fair value repo rted in the income statement except changes in fair value attributable to the credit risk component recognis ed in other comprehensive income when no accounting mismatch occurs. 11. Impairment: expected credit losses (ECL) At each balance sheet date eac h financial asset or portfolio of financial assets measured at amortised cost or at fair value through other comprehensive income, issued fi nancial guarantee and loan commitment (other than those cl assified as held for trading) is assessed for impair ment. Any change in impairment is reported in the income statemen t. Loss allowances are forward-looking , based on 12-month ECL Accounting polici es continued NatWest Group A nnual Repor t and Accou nts 2021 310 Financial statements Strategic report Governance Risk and capital management Additional information Financial review where there has not been a significant increase in c redit risk rating, otherwise allowances are based on lifetime expected losses. ECL are a probability-weighted e stimate of credit losses. The probability is determined by the risk of def ault which is applied to the cash flow estimates. In the absence of a change in credit rating, allowances are recognised when there is a reduction in the net present value of expected cash flows. Followin g a significant increase in credit risk, ECL a re adjusted from 12 months to lifetime. This will lead to a higher impai rment charge. Judgment is exercised as follows:  Models – in certain low default portfolios, B asel parameter estimates are also applied for IFRS 9.  Non-modelled portfolios , mainly in Private Banking, RBSI and Lombard, use a standardised capital requirement un der Basel II. Under IFRS 9, they have bespoke treatmen ts for the identification of significant increase in c redit risk. Benchmark PDs, EADs and LGDs are reviewed annually for appropriateness. The ECL calculation is based o n expected future cash flows, which is typic ally applied at a portfolio level.  Multiple economic scenarios (MES) – the central, or base, scenario is most critical to the ECL calcula tion, independent of the method used to generate a range of alternative outcomes and their probabilities .  Significant increase in credit risk - IFRS 9 requires that at each reporting date, an entity s hall assess whether the credit risk on an account has increased significa ntly since initial recognition. Part of this asse ssment requires a comparison to be made between the current lifetime PD (i.e. the current probability of def ault over the remaining lifetime) with the equivalent lifetime PD as deter mined at the date of initial recognition. On restructuring where a financial asset is no t derecognised, the revised cash flows are used in re-estimating the credit loss. Where restructuring causes derecognition of the o riginal financial asset, the fair value of the replacement asset is used as the closing cash flow of the original asset. Where in the course of the ord erly realisation of a loan, it is exchanged for equity shares or property, the exch ange is accounted for as the sale of the loan and the acquisition of equity securities or investment property. Where Na tWest Group’s acquired interest is in equity shares, relevan t policies for control, associates and joint ventures apply. Impaired financial assets are written off and the refore derecognised from the balance shee t when NatWest Group concludes that there is no longer any realistic prospect of recovery of part, or all, of the loan. For fin ancial assets that are individually assessed for impairment, the timing of the write-off is determined on a case-by-cas e basis. Such financial assets are reviewed regularly and write -off will be prompted by bankruptcy, insolvency, re-neg otiation, and similar events. The typical time frames from initial impair ment to write-off for NatWest Group’s collectively assess ed portfolios are:  Retail mortgages: write-off usually occurs within five ye ars, or earlier, when an account is clos ed, but can be longer where the customer engages constructively;  Credit cards: the irrecoverable amount is typically w ritten off after twelve arrears cycles or at four years pos t default any remaining amounts outstanding are wri tten off;  Overdrafts and other unsecured loans: write-off occurs within six years;  Commercial loans: write-offs are determined in the light of individual circumstances; and Busines s loans are generally written off within five years. 12. Derecognition A financial asset is derecognised (removed f rom the balance sheet) when the contractual right to receive cash flows f rom the asset has expired or when it has been transfer red and the transfer qualifies for derecognition. Conve rsely, an asset is not derecognised in a contract under which N atWest Group retains substantially all the risks and rewards of owne rship. A financial liability is removed from the balance s heet when the obligation is paid, or is cancelled, or expires. Cance llation includes the issuance of a substitute inst rument on substantially different terms. 13. Netting Financial assets and financial li abilities are offset, and the net amount presented on the balance sheet when, and only when, NatWest Group currently has a legally enforceable right to set off the recognised amounts and it intends eithe r to settle on a net basis or to realise the asset and settle the li ability simultaneously. NatWest Group is party to a nu mber of arrangements, including master netting agreements, that give it the right to offset financial assets and financi al liabilities, but where it does not intend to settle the amounts net or simultaneously, the assets and liabilities conce rned are presented separately on the ba lance sheet. 14. Capital instruments NatWest Group classifies a fina ncial instrument that it issues as a liability if it is a contractual obligation to delive r cash or another financial asset, or to exchange financi al assets or financial liabilities on potentially unfavourable ter ms and as equity if it evidences a residual interest in the assets of NatWest Group after the deduction of liabilities. Inc remental costs and related tax that are directly attributable to an e quity transaction are deducted from equity. The consideration for any ordin ary shares of NatWest Group plc purchased by NatWest Group (known as treasury shares or own shares held) is deducted from equity. On the cancell ation of treasury shares their nominal value is removed fr om equity and any excess of consideration over nominal value i s treated in accordance with the capital maintena nce provisions of the Companies Act 2006. On the sale or re-issue of treasu ry shares the consideration received and related tax are cre dited to equity, net of any directly attributable incremental costs. 15. Derivatives and hedging Derivatives are reported on the balance she et at fair value. NatWest Group uses derivative s as part of its trading activities, to manage its own risk such as i nterest rate, foreign exchange, or credit risk or in certain custo mer transactions. Not all derivatives used to manage risk are in he dge accounting relationships (an IFRS method to reduce accoun ting mismatch from changes in the fair value of the derivatives repo rted in the income statement). Gains and losses arising from changes in the fai r value of derivatives that are not in hedge relationships are reco gnised in the income statement in Income f rom trading activities except for gains and losses on those d erivatives that are managed together with financial instruments designated a t fair value; these gains and losses are included in Othe r operating income. Hedge accounting NatWest Group enters into three types of hedge accounting relationships (see later)). Hedge accounting relationships are designated and documented at inception in line with t he requirements of IAS 39 Financi al instruments – Recognition and Measurement. The documentation identifies the hedged item, the hedging instrument and details of the risk that is being Accounting polici es continued NatWest Group A nnual Repor t and Accou nts 2021 311 Financial statements Strategic report Governance Risk and capital management Additional information Financial review hedged and the way in which eff ectiveness will be assessed at inception and during the period of the hedge. Fair value hedge - the gain or loss on the hedging instrumen t and the hedged item attributable to the hedged risk is recognised in the income statement. Where the hedged item is measured at amortised cost, the balance sheet amount of the hedged item is also adjusted. Cash flow hedge - the effective portion of the design ated hedge relationship is recognised in other comprehensive inco me and the ineffective portion in the in come statement. When the hedged item (forecasted cash flows) results in the recognition of a financial asset or financial liability, the cumul ative gain or loss is reclassified from equity to the income s tatement in the same periods in which the hedged forecas ted cash flows affect the income statement. Hedge of net investment in a foreign operation - In the hedge of a net investment in a foreign operation, the effective portion of the designated hedge relationship is recognise d in other comprehensive income. Any ine ffective portion is recognised in profit or loss. Non-derivative financial li abilities as well as derivatives may be designated as a hedging instrument in a net investment hedge. Discontinuation of hedge accounting Hedge accounting is discontinue d if the hedge no longer meets the criteria for hedge accounting i.e. the hedge is n ot highly effective in offsetting changes in f air value or cash flows attributable to the hedged risk, consistent with the documented risk management strategy; the he dging instrument expires or is sold, terminated or exercised; or if hedge design ation is revoked. For fair value hedging any cumulative adjust ment is amortised to the income statement over t he life of the hedged item. Where the hedge item is no longer on the balance sheet the adjustment to the hedged item is reported in the income statement. For cash flow hedging the cum ulative unrealised gain or loss is reclassified from equity to the income statemen t when the hedged cash flows occur or, if the forecast transac tion results in the recognition of a financial asset or financial liability, when the hedged forecast cash flows affec t the income statement. Where a forecast transaction is no longer expected to occu r, the cumulative unrealised gain or loss is reclassified fro m equity to the income statement immediately. For net investment hedging on disposal or partial disposal of a foreign operation, the amount accumulated in equi ty is reclassified from equity to the income statemen t. 16. Investment in Group undertakings NatWest Group plc’s investmen ts in its Group undertakings (subsidiaries) are stated at cost less any impairment. Critical accounting policies and key sources of estimation uncertainty The reported results of NatWest Group are sensiti ve to the accounting policies, assumptions and esti mates that underlie the preparation of the financial s tatements. The accounting standards used in the preparati on of the financial statements (see presentation of financial statemen ts above) require the directors, in preparing NatWest Group's financial s tatements, to select suitable accounting policies , apply them consistently and make judgments and estimates that are reas onable and prudent. In the absence of accounting guid ance, standards used in the preparation of the fi nancial statements require the directors to develop and apply an accounting policy t hat results in relevant and reliable information in the ligh t of the requirements and guidance in IFRS de aling with similar and related issues and the IASB's ’Conceptual F ramework for Financial Reporting’. The judgments and assumptions involved in NatWes t Group's accounting policies that are considered by the Board to be the most important to the portrayal of its financial condition are noted below. The use of estimates, assumptions o r models that differ from those adopted by NatWest G roup would affect its reported results. Estimation unce rtainty continues to be affected by the COVID-19 pandemic. The COVID-19 pandemic continued to cause significant economic and soci al disruption during 2021. Key financial estimates are b ased on management's latest five-year revenue an d cost forecasts. Measurement of goodwill, deferred tax and expected c redit losses are highly sensitive to reasonably possible cha nges in those anticipated conditions. Other reasona bly possible assumptions about the future inc lude a prolonged financial effect of the COVID-19 pandemic on the economy of the U K and other countries or greater economic effe ct as countries and companies implement plans to counter climate risks. How Climate risk affects our accounting judgments and estimates NatWest Group makes use of reasonable and supportable information to make accounting judg ments and estimates. This includes information about the observable ef fects of the physical and transition risks of c limate change on the current creditworthiness of borrowers, asset values and market indicators. It also includes the eff ect on NatWest Group’s competitiveness and profitability. Many of the effe cts arising from climate change will be longer term in nature, with an inherent level of uncertainty , and have limite d effect on accounting judgments and estimates for the current period . Some physical and transition risk s can manifest in the shorter term. The following items represe nt the most significant effects:  The classification of financial instruments linked to clim ate, or other sustainability indicators: consideration is given t o whether the effect of climate related terms preven t the instrument cashflows being sole ly payments of principal and interest.  The measurement of expected credit loss considers the ability of borrowers to make pay ments as they fall due. Future cashflows are discounte d, so long dated cashflows are less likely to affect current expectations on credi t loss. NatWest Group’s assessment of s ector specific risks, and whether additional adjustments are required, inclu de expectations on the ability of those sectors to meet their financing needs in the market. Changes in c redit stewardship and credit risk appetite that s tem from climate considerations, such as oil and gas, will directly affect our positions.  The assessment of asset impairment and deferred tax are based upon value in use. This represents the value of f uture cashflows and uses the Group’ s five-year forecast and the expectation of long term economic g rowth beyond this period. The five-year forecast takes account of management’s current expectations on co mpetitiveness and profitability, including near term effects of cli mate transition risk. The long term growth rate refle cts external indicators which will include market expectations o n climate risk. NatWest Group did not consider any additional adjustments to this indicator.  The use of market indicators as i nputs to fair value is assumed to include current information an d knowledge regarding the effect of climate risk. Accounting polici es continued NatWest Group A nnual Repor t and Accou nts 2021 312 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Changes in judgments and assumptions could result in a material adjustment to those es timates in the next reporting periods. Consideration of this source of e stimation uncertainty has been set out in the notes below (as applic able). Critical accounting policy Note Deferred tax 7 Fair value - financial instruments 11 Loan impairment provisions 15 Goodwill 17 Provisions for liabilities and charges 21 Future accounting developments International Financial Reporting Standards Effective 1 January 2022  Onerous Contracts – Cost of Fulf illing a Contract (Amendments to IAS 37);  Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16);  Reference to Conceptual Framework (A mendments to IFRS 3); and  Fees in the “10 per cent” test for Derecognition of Financial Liabilities (Amendments to IFRS 9 ). Other new standards and amendments that are effective for annual periods beginning after 1 January 20 23, with earlier application permitted, are set out below. Effective 1 January 2023  IFRS 17 Insurance Contracts (Amend ments to IFRS 17 Insurance Contracts);  Classification of Liabilities as Current or Non-cu rrent (Amendments to IAS 1);  Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendmen ts to IAS 12);  Definition of Accounting Estimates (Amendments to IAS 8); and  Disclosure of Accounting Policie s (Amendments to IAS 1 and IFRS Practice Statement 2). NatWest Group is assessing the e ffect of adopting these standards and amendments on its f inancial statements but does not expect the effect to be material. Notes to the consolidate d financial statem ents NatWest Group A nnual Repor t and Accou nts 2021 313 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 1 Net interest income Net interest income is the differe nce between the interest NatWest Group earns from its inte rest-bearing assets, such as loa ns, balances with central banks and other financial assets, and the interest paid on its interest-b earing liabilities, such as deposits and subordinated liabilities. Interest receivable on financial instruments cl assified as amortised cost, debt instruments clas sified as FVOCI and the interest element of the effective portion of any designated hedging relationships are measured usi ng the effective interest rate, which allocates the interest receivable or interest p ayable over the expected life of the financi al instrument at the rate that exactly discounts all estimated future cash flows to e qual the financial instrument's initial ca rrying amount. Calculation of the effec tive interest rate takes into account fee s payable or receivable that are an integral part of the fin ancial instrument’s yield, premiums or discounts on acquisition or issue, early redemption fe es and transaction costs. All contractual terms of a financial instrument are considered when estimating future cash flows. Neg ative interest on financial assets is present ed in interest payable and negative interest on financial liabilities is presented in interest receivable. Included in interest receivable is finance lease income which is recognised at a constant p eriodic rate of retur n before tax on the net investment. For accounting policy information se e Accounting policies note 2. 2021 2020 (1) 2019 (1) Continuing operations £m £m £m Balances at central banks 99 90 321 Loans to banks - amortised cost 346 246 405 Loans to customers - amortised cost 8,615 8,979 9,547 Other financial assets 253 483 854 Interest receivable 9,313 9,798 11,127 Balances with banks 204 144 319 Customer deposits 556 911 1,256 Other financial liabilities 670 846 1,102 Subordinated liabilities 267 402 483 Internal funding of trading business es 2 19 168 Interest payable 1,699 2,322 3,328 Net interest income 7,614 7,476 7,799 (1) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8. Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 314 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 2 Non-interest income There are three main categories of non-interest income: net fees and commissions, inc ome from trading activities, and other operating income. Net fees and commissions is the diffe rence between fees received from customers for se rvices provided by Natwest Group, s uch as credit card annual fees, mortgage arrangemen t fees, underwriting fees, payment ser vices, brokerage fees, trade finance, investment management fees, trustee and fiducia ry services, and fees incurred in the provisio n of those services, such as credit card interchange fees, custome r incentives, loan administration, foreign currency transaction charges, brokerage fees , and mortgage valuation reports. Income from trading activities is earned from shor t-term financial assets and financial liabilitie s to either make a spread between purchase and sale price or held to take advantage of movements in prices and yie lds. Other operating income includes revenue from othe r operating activities which are not related to the principal activities of the company, such as share of profit or loss f rom associate, operating lease income, the profit or l oss on the sale of a subsidiary or property, plant and equipment, profit or loss on own debt, and changes in the fair value of fin ancial assets and liabilities designated at fair value through profit or loss . For accounting policy information se e Accounting policies note 2. 2021 2020 (1) 2019 (1) Continuing operations £m £m £m Net fees and commissions (2) 2,124 2,000 2,497 Income from trading activities Foreign exchange 364 569 448 Interest rate (130) 541 532 Credit 83 3 32 Changes in fair value of own de bt and derivative liabilities attributable to own cre dit risk - debt securities in issue 6 (24) (60) - derivative liabilities — — (20) Equities, commodities and other — 36 — 323 1,125 932 Other operating income Loss on redemption of own debt (145) (324) — Operating lease and other rental income 225 232 250 Changes in fair value of financial assets and liabilities des ignated at fair value (8) (54) (17) through profit or loss (3) Changes in fair value of other financial asse ts at fair value through profit or loss (4) 5 2 58 Hedge ineffectiveness 25 24 48 (Loss)/profit on disposal of amortised cost assets (15) (18) 42 Profit/(loss) on disposal of fair value through othe r comprehensive income assets 117 96 (22) (Loss)/profit on sale of property, plant and equip ment (5) (30) 13 58 Share of profits/(losses) of associated en tities 216 (30) (14) Profit/(loss) on disposal of subsidiaries and associates (6) 48 (16) 2,224 Other income (7,8) 13 (18) 132 451 (93) 2,759 2,898 3,032 6,188 (1) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8. (2) Refer to Note 4 for further analysis. (3) Including related derivatives . (4) Includes instruments that hav e failed Solely payments of principal and interest testing under IFRS 9. (5) Includes £44 million loss on the purchase of freeholds for propert ies where the Group was the primary leaseholder. (6) 2019 includes a gain of £444 million (€523 mil lion), a legacy liability release of £256 million and an FX recycling gain of £290 million on completion of the Alawwal bank merger in June 2019; In 2019, £1,102 million of FX recycling gains arising on the liquidation of R FS Holdings BV and £67 millio n in relat ion to a capital repayment by UBIDAC. The recycling gains and capital repayment have been calculated using the step-by-step method in IFRIC 16 and by reference to the proportion of equity applied to the FX translation reserve. (7) Includes income from activities other than banking. (8) 2020 includes £58 million loss on a cquisition of a £3.0 billion prime UK mortgages portfolio from Metro Bank plc. Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 315 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 3 Operating expenses Operating expenses are expenses N atWest Group incurs for operation of the business such a s salaries, bonus awards, pension costs, depreciation and other a dministrative expenses. Operating expenses a re expenses NatWest Group incurs in the runni ng of the business such as all personnel expenditure (fo r example salaries, bonus awards, pension costs and social security costs), premises and equipment costs (that arise from the occupation of premises and the use of equipment), depreciation and amortisation and other adminis trative expenses. For accounting policy information se e Accounting policies note 4. 2021 2020 (1) 2019 (1) Continuing operations £m £m £m Salaries 2,295 2,494 2,477 Bonus awards 267 232 299 Temporary and contract costs 240 258 401 Social security costs 300 316 296 Pension costs 354 340 301 - defined benefit schemes (see Note 5) 215 215 188 - defined contribution schemes 139 125 113 Other 220 238 202 Staff costs 3,676 3,878 3,976 Premises and equipment (2) 1,133 1,222 1,258 UK bank levy (3) 99 167 134 Depreciation and amortisation (4,5) 923 913 1,218 Other administrative expenses (6) 1,927 1,678 2,694 Administrative expenses 4,082 3,980 5,304 7,758 7,858 9,280 (1) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8. (2) 2021 includes cost of £33 million including accelerated d epreciation of £41 million (2020 - £144 million including £71 million accelerated depreciation; 2019 - £161 million including £40 million accelerated depreciation) in relation to the planned red uction of the property portfolio (2021 – freehold £3 million; leasehold £30 million; 2020 - freehold £1 million; leasehold £143 million; 2019 – freehold £4 million; leasehold £15 7 millio n). (3) 2019 includes a rebate of £31 mill ion relating t o prior periods. (4) 2021 includes a £58 million charge relating to t he reduction in property portfolio, leasehold £48 million and freehold £10 million (2020 - £107 million charge, leasehold £86 million and freehold £21 million; 2019 - £287 million charge, leasehold £37 million and freeh old £250 million). (5) Includes impairment of goodwill of £85 million. (6) Includes litigation and conduct costs, net of amounts recovered. Refer to Notes 21 and 27 for further details. The average number of persons e mployed, rounded to the nearest hundred, during the yea r, excluding temporary staff, was 59,200 (2020 - 61,4 00; 2019 - 64,200). The average number of temporary employee s during 2021 was 2,500 (20 20 – 3,200; 2019 - 4,100). The number of persons employe d at 31 December, excluding temporary staff, by re portable segment, was as follows: Continuing operatio ns 2021 2020 2019 Retail Banking 15,800 17,200 19,600 Private Banking 1,900 1,900 1,700 Commercial Banking 8,400 9,700 9,700 RBS International 1,400 1,500 1,600 NatWest Markets 1,600 2,100 5,000 Central items & other 27,000 24,900 22,600 Ulster Bank RoI (1) 1,700 1,900 2,000 Total 57,800 59,200 62,200 UK 40,600 42,500 44,600 USA 300 300 400 India 13,500 13,200 13,500 Poland 1,400 1,200 1,300 Republic of Ireland 1,200 1,400 1,500 Rest of the World 800 600 900 Total 57,800 59,200 62,200 (1) Total number of persons employe d in Ulster Bank RoI of 2,400 (202 0 – 2,600; 2019 – 2,700) includes 700 people employed in discontinued operations at 31 December 2021 (20 20 – 700; 2019 – 700 ). Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 316 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 3 Operating expenses continued Share-based payments As described in the Remunerati on report, NatWest Group grants share-based awards to em ployees principally on the followi ng bases: Award plan Eligible employees Nature of award Vesting conditions (1) Settlement Sharesave UK, Channel Islands, Gibraltar, Isle of Man, Poland and India. Option to buy shares under employee savings plan Continuing employment or leavers in certain circumstances 2022 to 2026 Deferred performance awards All Awards of ordinary shares and conditional shares Continuing employment or leavers in certain circumstances 2022 to 2028 Long-term incentives (2) Senior employees Awa rds of ordinary shares and conditional shares Continuing employment or leavers in certain circumstances and/or satisfaction of the pre- vest assessment and underpins 2022 to 2028 (1) All awards have vesting conditions which may not be met. (2) Long-term incentives include buy-out awa rds offered to compensate certain new hires for the loss of forfeited awards from their previous employment. All awards are granted under the Employee Share Plan. The fair value of Sharesave options grante d in 2021 was determined using a pricing model that included: expected volatility of shares determined at the grant date based on histo rical volatility over a period of up to five ye ars; expected option lives that equal the vesting period; expected dividends on equi ty shares; and risk-free interest rates determin ed from UK gilts with terms matching the expected lives of the options. The exercise price of options and the fair value on g ranting awards of fully paid shares is th e average market price over the f ive trading days (three trading days for Sharesave) precedi ng grant date. When estimating the fa ir value of the award, the numbe r of shares granted, and the prevailing market price (as defi ned on pages 146-147 ) are used. The fair value of the award is recognised as services are provided over t he vesting period. Sharesave 2021 2020 20 19 Average Shares Average Shares Average Shares exercise price under option exercise price under option exercise price under option £ (million) £ (million) £ (million) At 1 January 1.64 96 2.01 84 2.18 75 Granted 1.80 24 1.12 35 1.78 25 Exercised 1.76 (10) 1.83 — 2.83 (4) Cancelled 2.02 (15) 2.20 (23) 2.25 (12) At 31 December 1.61 95 1.64 96 2.01 84 Options are exercisable within six months of vesti ng; 6.0 million options were exercisable at 3 1 December 2021 (2020 – 6.3 million; 2019 – 3.2 million). The weighted average share p rice at the date of exercise of options was £2.19 (2020 - £1.57; 2019 - £2.49). At 31 December 2021, exercise price s ranged from £1.12 to £2.27 (2020 - £1.12 to £2.27; 2019 - £1.68 to £2.91 ) and the remaining average contractual life was 2.1 years (2020 - 2.3 years; 2019 – 2.7 y ears). The fair value of options granted in 2021 was £17 million (2020 - £8 million; 2019 - £11 million). Deferred performance awards 2021 2020 20 19 Value at Shares Value at Shares Value at Shares grant awarded grant awarded grant awarded £m (million) £m (million) £m (million) At 1 January 169 77 196 76 233 92 Granted 61 32 109 67 110 42 Forfeited (10) (5) (5) (2) (10) (4) Vested (88) ( 39) (131) ( 64) (137) (54) At 31 December 132 65 169 77 196 76 The awards granted in 2021 ve st in equal tranches on their anniversaries, predominan tly over three years. Long - term incentives 2021 2020 2019 Value at Shares Options Value at Shares Options Value at Shares Options grant awarded over shares grant awarded over shares grant awarded over shares £m (million) (million) £m (million) (million) £m (million) (million) At 1 January 50 24 — 63 25 — 85 32 2 Granted 6 3 — 14 10 — 15 6 — Vested/exercised (12) (6) — (17) (7) — (12) (4) — Lapsed — — — (10) (4) — (25) (9) (2) At 31 December 44 21 — 50 24 — 63 25 — The market value of awards vested/exercised in 202 1 was £13 million (2020 - £13 million; 2019 - £10 million). There are no vested options of shares exercisable up to 2022 (2020 - nil; 2019 - nil). Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 317 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 3 Operating expenses continued Bonus awards The following tables analyse NatWest Group's bonus awards for 2021. 2021 2020 Cha nge £m £m % Non-deferred cash awards (1) 38 35 9% Deferred cash awards 214 111 93% Deferred share awards 49 60 (18%) Total deferred bonus awards 263 171 54% Total bonus awards (2) 301 206 46% Bonus awards as a % of operating profit before tax (3) 7% (83%) Proportion of bonus awards that are defe rred 87% 83% of which - deferred cash awards 81% 65% - deferred share awards 19% 35% Reconciliation of bonus awards t o income statement charge 2021 2020 2019 £m £m £m Bonus awarded 301 206 307 Less: deferral of charge for amounts a warded for current year (99) (77) (110) Income statement charge for amoun ts awarded in current year 202 129 197 Add: current year charge for amounts deferred f rom prior years 80 114 127 Less: forfeiture of amounts deferred from prior years (15) (11) (25) Income statement charge for amoun ts deferred from prior years 65 103 102 Income statement charge for bonus aw ards (2) 267 232 299 (1) Non-deferred cash awards a re limi ted to £2 ,000 for all employees. (2) Excludes other performance related compensation. (3) Operating profit before tax and bonus expense. Actual Expected Year in which income statement charge is expected to be taken for deferred bonus awards 20 23 2019 2020 2021 2022 and beyond £m £m £m £m £m Bonus awards deferred from 20 19 and earlier 127 114 28 11 6 Bonus awards deferred from 20 20 — — 52 8 7 Less: forfeiture of amounts deferred from prior years (25) ( 11) (15) — — Bonus awards for 2021 defe rred — — — 86 13 102 103 65 105 26 Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 318 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 4 Segmental analysis NatWest Group analyses its per formance between the different operating s egments of the Group. Ulster Bank RoI is presente d separately from the Go-forward group (refe r to the split below) to reflect the strategic decision on the phased withdrawal from the Republic of Ireland announced in Februa ry 2021. This is consistent with internal f inancial reporting and how senior manageme nt assesses the performance of each ope rating segment. The directors manage NatWest Group p rimarily by class of business and present the segmental analysis on that basis. This in cludes the review of net interest income for each class of busines s. Interest receivable and payable f or all reportable segments is therefore presented net. Segments charge market prices for services rendered between each othe r; funding charges between segments are determined by NatWest Group Treasury, h aving regard to commercial demands. The segme nt performance measure is operating profit/(loss). Reportable operating segments: The reportable operating segments are as follows: Retail Banking serves personal customers in the UK and includes Uls ter Bank customers. Private Banking serves UK-connected high net worth individu als and their business interests. Commercial Banking serves start-up, SME, commercial, corporate an d institutional customers in the UK. RBS International (RBSI) serves retail, commercial, an d corporate customers in the Channel I slands, Isle of Man and Gibraltar, and financial institution clients in th ose same locations in addition to the UK and Lu xembourg. NatWest Markets (NWM) helps NatWest Group’s corporate and institutional cust omers manage their financial risks safely and achieve their short-term and long-term sustain able financial goals. Central items & other includes corporate functions, s uch as NatWest Group Treasury, financ e, risk management, compliance , legal, communications and human resources. Ce ntral functions manages NatWest Group ca pital resources and NatWest Group- wide regulatory projects and provides se rvices to the reportable se gments. Balances in relation to litigation issues and the international private banking business are included in Central items in the relevant periods. Ulster Bank RoI serves individu als and businesses in the Republic of Irel and (RoI). Allocation of central balance sheet items NatWest Group allocates all ce ntral costs relating to Services and Functions to the business u sing appropriate drivers; these are reported as indirect costs in the se gmental income statements. Assets and risk-weighted asse ts held centrally, mainly relating to NatWest Group Treasury, are allocated to the busine ss using appropriate drivers . Go-forward group Total Central ex cluding Retail Private Commercial RBS NatWest items Ulster Ulster Banking Banking Banking International Markets & other Bank RoI Bank RoI Tota l 2021 £m £m £m £m £m £m £m £m £m Continuing operations Net interest income 4,074 480 2,582 383 9 (14) 7,514 100 7,614 Net fees and commissions 377 258 1,158 124 158 (16) 2,059 65 2,124 Other non-interest income (6) 78 135 41 248 215 711 63 774 Total income 4,445 816 3,875 548 415 185 10,284 228 10,512 Depreciation and amortisation (85) — (146) (13) (14) (665) (923) — (923) Other operating expenses (2,428) (520) (2,208) (229) (1,147) 179 (6,353) (482) (6,835) Impairment releases 36 54 1,073 52 35 — 1,250 28 1,278 Operating profit/(loss) 1,968 350 2,594 358 (711) (301) 4,258 ( 226) 4,032 2020 (2) Continuing operations Net interest income 3,868 489 2,740 371 (57) (57) 7,354 122 7,476 Net fees and commissions 379 257 1,110 94 99 (16) 1,923 77 2,000 Other non-interest income (66) 17 108 32 1,081 (163) 1,009 23 1,032 Total income 4,181 763 3,958 497 1,123 (236) 10,286 222 10,508 Depreciation and amortisation — (8) (149) (17) (16) (723) (913) — ( 913) Other operating expenses (2,540) ( 447) (2,281) (274) (1,294) 332 (6,504) (441) ( 6,945) Impairment losses (792) (100) ( 1,927) (107) (40) ( 26) (2,992) (139) ( 3,131) Operating profit/(loss) 849 208 (399) 99 (227) (653) (123) (358) ( 481) Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 319 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 4 Segmental analysis continu ed Go - forward group Total Central excluding Retail Private Commercial RBS NatWest items Ulster Ulster Banking Banking Banking Interna tional Markets & other (1) Bank RoI Bank RoI Total 2019 (2) £m £m £m £m £m £m £m £m £m Continuing operations Net interest income 4,130 521 2,842 478 (188) (136) 7,647 152 7,799 Net fees and commissions 696 226 1,312 106 85 (23) 2,402 95 2,497 Other non-interest income 40 30 164 26 1,445 1,932 3,637 54 3,691 Total income 4,866 777 4,318 610 1,342 1,773 13,686 301 13,987 Depreciation and amortisation — (4) (142) (10) (12) (1,050) (1,218) — (1,218) Operating expenses (3,618) (482) (2,458) (254) (1,406) 666 (7,552) (510) (8,062) Impairment losses (393) 6 (391) (2) 51 (1) ( 730) 6 (724) Operating profit/(loss) 855 297 1,327 344 (25) 1,388 4,186 (203) 3,983 (1) 2019 predominantly related to st rategic disposals in Functions . (2) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8. Total revenue (2) Go - forward group Total Central excluding Ulster Retail Private Commercial RBS NatWest items & Ulster Bank Banking Banking Banking International Markets Other Bank RoI RoI Total Year ended 31 D ecember 2021 £m £m £m £m £m £m £m £m £m Continuing operations External 5,419 792 3,751 594 823 1,109 12,488 297 12,785 Inter-segmental 14 127 87 6 30 (265) ( 1) 1 — Total 5,433 919 3,838 600 853 844 12,487 298 12,785 Year ended 31 December 2020 (1) Continuing operations External 5,386 702 3,734 505 1,984 961 13,272 280 13,552 Inter-segmental 39 163 64 3 13 (284) ( 2) 2 — Total 5,425 865 3,798 508 1,997 677 13,270 282 13,552 Year ended 31 December 2019 (1) Continuing operations External 6,161 703 4,347 639 2,516 3,447 17,813 350 18,163 Inter-segmental 62 241 139 19 558 (1,025) (6) 6 — Total 6,223 944 4,486 658 3,074 2,422 17,807 356 18,163 (1) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8. (2) Total revenue comprises interest receivable, fees and commissions receivab le, income from trading activities and other operating income. Total income Go - forward group Total Central excluding Retail Private Commercial RBS NatWest items & Ulster Ulster Banking Banking Banking International Markets Other Bank RoI Bank RoI Total Year ended 31 D ecember 2021 £m £m £m £m £m £m £m £m £m Continuing operations External 4,433 801 3,939 548 554 — 10,275 237 10,512 Inter-segmental 12 15 (64) — (139) 185 9 (9) — Total 4,445 816 3,875 548 415 185 10,284 228 10,512 Year ended 31 December 2020 (1) Continuing operations External 4,157 700 4,065 500 1,395 (537) 10,280 228 10,508 Inter-segmental 24 63 ( 107) (3) (272) 301 6 (6) — Total 4,181 763 3,958 497 1,123 (236) 10,286 222 10,508 Year ended 31 December 2019 (1) Continuing operations External 4,834 631 4,814 603 1,664 1,145 13,691 296 13,987 Inter-segmental 32 146 ( 496) 7 (322) 628 (5) 5 — Total 4,866 777 4,318 610 1,342 1,773 13,686 301 13,987 (1) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8. Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 320 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 4 Segmental analysis continu ed Go-forward group Total Central excluding Retail Private Commercial RBS NatWest items Ulster Ulster Analysis of net fees and commissions Banking Banking Ban king Intern ational Markets & other Bank RoI Bank RoI Tota l 2021 £m £m £m £m £m £m £m £m £m Continuing operations Fees and commissions receivable - Payment services 306 35 538 19 20 — 918 53 971 - Credit and debit card fees 344 10 147 2 — — 503 19 522 - Lending and financing 13 10 515 54 74 — 666 4 670 - Brokerage 48 6 — 1 41 — 96 — 96 - Investment management, trustee and fiduciary services (1) 3 230 — 45 — — 278 2 280 - Underwriting fees — — — — 127 — 127 — 127 - Other — 35 105 4 — (112) 32 — 32 Total 714 326 1,305 125 262 (112) 2,620 78 2,698 Fees and commissions payable (337) (68) (147) (1) ( 104) 96 (561) (13) ( 574) Net fees and commissions 377 258 1,158 124 158 (16) 2,059 65 2,124 2020 (2) Continuing operations Fees and commissions receivable - Payment services 264 28 507 18 18 — 835 57 892 - Credit and debit card fees 299 9 129 2 — — 439 21 460 - Lending and financing 42 7 505 34 86 — 674 4 678 - Brokerage 54 6 — 1 93 — 154 1 155 - Investment management, trustee and fiduciary services (1) 3 225 1 38 2 — 269 2 271 - Underwriting fees — — — — 183 — 183 — 183 - Other 1 26 82 3 4 (33) 83 — 83 Total 663 301 1,224 96 386 (33) 2,637 85 2,722 Fees and commissions payable (284) (44) (114) (2) ( 287) 17 (714) (8) (722) Net fees and commissions 379 257 1,110 94 99 (16) 1,923 77 2,000 2019 (2) Fees and commissions receivable - Payment services 292 33 659 27 24 — 1,035 60 1,095 - Credit and debit card fees 427 12 154 2 — — 595 28 623 - Lending and financing 356 3 510 36 85 — 990 4 994 - Brokerage 55 5 — — 96 — 156 8 164 - Investment management, trustee and fiduciary services 44 186 3 41 1 — 275 3 278 - Underwriting fees — — — — 170 — 170 — 170 - Other 2 27 90 2 69 (173) 17 4 21 Total 1,176 266 1,416 108 445 (173) 3,238 107 3,345 Fees and commissions payable (480) (40) (104) (2) ( 360) 150 (836) (12) ( 848) Net fees and commissions 696 226 1,312 106 85 (23) 2,402 95 2,497 (1) Comparisons with prior periods are impact ed by the transfer of the Private Client Advice business to Private Banking from 1 January 2020. (2) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8. 2021 2020 2019 Assets Liabilities Assets Liabilities Assets Liabilities £m £m £m £m £m £m Retail Banking 209,973 192,715 197,618 178,617 182,305 153,999 Private Banking 29,854 39,388 26,206 32,457 23,304 28,610 Commercial Banking 184,564 184,890 187,413 174,251 165,399 140,863 RBS International 40,578 38,436 33,984 31,989 31,738 30,330 NatWest Markets 200,576 188,431 270,147 254,098 263,885 246,907 Central items & other 93,614 77,308 57,503 61,262 31,023 57,762 Total excluding Ulster Bank RoI 759,159 721,168 772,871 732,674 697,654 658,471 Ulster Bank RoI 22,833 19,021 26,620 22,993 25,385 21,012 Total 781,992 740,189 799,491 755,667 723,039 679,483 Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 321 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 4 Segmental analysis continu ed Segmental analysis of goodwill There was an £85 million impairment of goodwill in Retail banking during 2021. The total car rying value of goodwill at 31 December was £5,522 million, comprised of Retail Banking £2,607 million; Commercial Bankin g £2,606 million; Private Banking £9 million; and RBS International £3 00 million. (2020 – total carrying value was £5,607 million comprising of Retail Banking £2,692 million; Commercial Banking £2,6 06 million; Private Banking £9 million; and RBS In ternational £300 million). See note 17 for fu rther details. Geographical segments The geographical analysis in the tables below has been co mpiled on the basis of location of of fice where the transactions are recorded. UK USA Europe RoW Total 2021 £m £m £m £m £m Continuing operations Total revenue 12,100 87 565 33 12,785 Interest receivable 8,949 20 336 8 9,313 Interest payable (1,483) (2) (211) (3) (1,699) Net fees and commissions 1,820 27 235 42 2,124 Income from trading activities 247 53 (1) 24 323 Other operating income 387 2 62 — 451 Total income 9,920 100 421 71 10,512 Operating profit/(loss) before tax 4,143 48 (199) 40 4,032 Total assets 693,221 21,776 64,415 2,580 781,992 Total liabilities 676,684 23,286 38,835 1,384 740,189 Contingent liabilities and commitments 117,225 1 8,114 27 125,367 2020 (1) Continuing operations Total revenue 12,511 211 656 174 13,552 Interest receivable 9,479 — 297 22 9,798 Interest payable (2,163) — (158) (1) (2,322) Net fees and commissions 1,637 33 233 97 2,000 Income from trading activities 911 170 33 11 1,125 Other operating income (117) (22) 42 4 (93) Total income 9,747 181 447 133 10,508 Operating profit/(loss) before tax (193) (85) (291) 88 (481) Total assets 704,725 25,439 66,884 2,443 799,491 Total liabilities 686,500 26,932 41,018 1,217 755,667 Contingent liabilities and commitments 118,654 — 10,068 10 128,732 2019 (1) Continuing operations Total revenue 16,925 228 882 128 18,163 Interest receivable 10,923 — 169 35 11,127 Interest payable (3,255) — (70) (3) (3,328) Net fees and commissions 2,191 37 197 72 2,497 Income from trading activities 727 148 49 8 932 Other operating income 2,305 13 432 9 2,759 Total income 12,891 198 777 121 13,987 Operating profit/(loss) before tax 3,543 186 172 82 3,983 Total assets 634,642 27,396 57,534 3,467 723,039 Total liabilities 613,151 31,715 33,539 1,078 679,483 Contingent liabilities and commitments 114,422 — 10,571 2 124,995 (1) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8. Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 322 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 5 Pensions NatWest Group operates two types of pension scheme: defined benefit and defined contribution. The def ined contribution schemes invest contributions in a choice of funds and the accumulated contributions and inves tment returns are used by the employee to provide benefits on re tirement, there is no legal or constructive obligation for NatWest Group to pay any further contributions or benefits. T he defined benefit schemes provide pensions in retirement based on e mployees’ pensionable salary and service. NatWest Group’s balance sheet includes any defined benefit pension scheme surplus or deficit as a retiremen t benefit asset or liability reported in other asse ts and other liabilities. The surplus or deficit is the difference between the liabilities t o be paid from the defined benefit scheme, and the assets held by the scheme to meet these liabilities. T he liabilities are calculated by external actuaries using a nu mber of financial and demographic assumptions. For some NatWest Group define d benefit schemes where there is a net defined benefit surplus which means a ny surplus in excess of present value of any e conomic benefits, the application of accounting standards means we don’t recognise that surplus on the balance she et as the trustees may have control over the use of the surplus. For accounting policy information se e Accounting policies note 4. Defined contribution schemes NatWest Group sponsors several defined contribution s chemes in different territories, which new employees are en titled to join. NatWest Group pays specific contributions into indi vidual investment funds on employees’ behalf. Once those contributions are paid, there is no further liability on the NatWest Group balance sheet relating to the defined contribution scheme. Defined benefit schemes NatWest Group sponsors a number of pension schemes in the UK and overseas, including the Main section of the N atWest Group Pension Fund (the “Main se ction”) which operates under UK trust law and is managed a nd administered on behalf of its members in accordance with the terms of the trust deed, the scheme rules and UK legislation. Pension fund trustees are appointed to operate eac h fund and ensure benefits are paid in accordance with the sche me rules and national law. The trustees are the legal owner of a scheme’s assets, and have a duty to act in the best in terests of all scheme members. The schemes generally provide a pension of one-si xtieth of final pensionable salary for each year of service prior to retirement up to a maximum of 40 years and a re contributory for current members. These have been close d to new entrants for over ten years, although current members continue to buil d up additional pension benefits, currently subject to 2% maximum annual salary inflation, while they remain employed by N atWest Group. The Main section corporate trustee is NatWest Pension Trustee Limited (the Trustee), a wholly owned subsidiary of NWB Plc, Principal Employer of the Main section. The B oard of the Trustee comprises four member trustee direc tors selected from eligible active staff, deferred and pensioner membe rs who apply and six appointed by Nat West Group. Under UK legislation, a defined benefit pensi on scheme is required to meet the statutory funding objec tive of having sufficient and appropriate assets to cover its liabilities ( the pensions that have been promised to members). Similar governance principles apply to NatWest G roup’s other defined benefit pension schemes. Investment strategy The assets of the Main section, which is typic al of other group schemes, represent 90% of all p lan assets at 31 December 2021 (2020 - 90%) and are invested as shown below. The Main section employs both physical and de rivative instruments to achieve a desired asset class expos ure and to reduce the section’s interest rate, inflati on, and currency risk. This means that the net funding position is conside rably less sensitive to changes in market conditions than the value of the assets or liabilities in isolation. In particular, move ments in interest rate and inflation are substantially hed ged by the Trustee. Major classes of plan assets as a percentage of total plan assets of the Main section 2021 2020 Quoted Unquoted Total Quoted Unquoted Total % % % % % % Equities 3.7 4.7 8.4 3.9 4.6 8.5 Index linked bonds 46.7 — 46.7 49.4 — 49.4 Government bonds 9.8 — 9.8 6.2 — 6.2 Corporate and other bonds 10.7 4.4 15.1 11.8 5.0 16.8 Real estate — 4.4 4.4 — 4.2 4.2 Derivatives — 8.8 8.8 — 10.0 10.0 Cash and other assets — 6.8 6.8 — 4.9 4.9 70.9 29.1 100.0 71.3 28.7 100.0 Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 323 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 5 Pensions continued The Main section’s holdings of derivative instruments are summarised in the table below: 2021 2020 Notional Fair value Notional Fair v alue amounts Assets Liabilities a mounts Assets Liabilities £bn £ m £m £bn £m £ m Inflation rate swaps 20 1,408 796 18 1,390 1,716 Interest rate swaps 172 8,385 4,421 68 11,197 6,215 Currency forwards 12 61 98 11 334 38 Equity and bond call options — 1 — 1 169 1 Equity and bond put options — 1 3 3 1 19 Other 1 9 10 2 63 17 Swaps have been executed at prevailing market rates and within standard market bid/offe r spreads with a number of counterparties, including NWB Plc. At 31 December 2021, the gross notional v alue of the swaps was £192 billion (202 0 - £88 billion) and had a net positive fair value of £4,573 million (2020 - £4 ,706 million) against which the counterparties had pos ted approximately 95% collateral. The schemes do not invest dire ctly in NatWest Group but can have exposure to NatWes t Group. The trustees of the respective UK schemes are responsible for ensuring that indirect inves tments in NatWest Group do not exce ed the regulatory limit of 5% of plan assets. Main section All schemes Present Present value of Asset Net value of Asset Net Fair value defined ceiling/ pension Fair value defined ceiling/ pension of plan benefit minimum (assets)/ of plan benefit minimum (assets)/ assets obligation funding liability assets obligation funding liability Changes in value of net pension (assets)/li ability £m £m £m £m £m £m £m £m At 1 January 2020 46,555 39,669 6,886 — 51,925 44,115 7,315 (495) Currency translation and other adjustments — 4 — 4 92 71 — (21) Income statement 936 954 141 159 1,037 1,103 149 215 Statement of comprehensive income 5,486 5,130 426 70 6,027 5,704 319 (4) Contributions by employer 233 — — ( 233) 296 — — ( 296) Contributions by plan participants and other scheme members 9 9 — — 14 14 — — Assets/liabilities extinguished upon settle ment — — — — (2) (3) — (1) Benefits paid (1,896) (1,896) — — (2,140) (2,140) — — At 1 January 2021 51,323 43,870 7,453 — 57,249 48,864 7,783 ( 602) Currency translation and other adjustments — — — — (129) (116) (3) 10 Income statement Net interest expense 713 603 105 (5) 795 676 109 (10) Current service cost — 158 — 158 — 213 — 213 Past service cost — 6 — 6 — 12 — 12 713 767 105 159 795 901 109 215 Statement of comprehensive income Return on plan assets excluding recognised interest income 841 — — (841) 872 — — (872) Experience gains and losses — (241) — (241) — (236) — (236) Effect of changes in actuarial financial assum ptions — (1,165) — (1,165) — (1,204) — (1,204) Effect of changes in actuarial demographic assum ptions — 350 — 350 — 379 — 379 Asset ceiling adjustments — — 2,443 2,443 — — 2,602 2,602 841 (1,056) 2,443 546 872 (1,061) 2,602 669 Contributions by employer 705 — — (705) 780 — — (780) Contributions by plan participants and other scheme members 8 8 — — 13 13 — — Assets/liabilities extinguished upon settle ment — — — — — — — — Benefits paid (1,569) (1,569) — — (1,793) (1,793) — — At 31 December 2021 52,021 42,020 10,001 — 57,787 46,808 10,491 (488) (1) Defined benefit obligations are s ubject to annual valuation by independent actuaries. (2) NatWest Group recognises the net p ension scheme surplus or deficit as a net asset or liability. In doing so, the funded status is adjusted to reflect any schemes with a surplus that NatWest Group may not be able to access, as well as any minimum funding req uirement to pay in additional contributions. This is most relevant to the Main section, where the surplus is not recognised as the trustees may have control over the use of the surplus. Other NatWest Group schemes that this applies to include the Ulster Bank Pension Scheme (NI) and the NatWest Markets section. (3) NatWest Group expects to make contributions to the Main section of £714 million in 2022. Following the £500 million contribution in March 2021, additional contributions of up to £500 million will be paid to the Main section in 2022, should NatWest Group make further distributions in 2022. This leaves one remaining payment of up to £500 million to be paid to the Main Section after 2022, in line with the ring-fencing ag reement with the Trustee. Such contributions do not constitute a minimum funding requirement as the obligation to pay only arises on the payment of a distribution to sha reholders. Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 324 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 5 Pensions continued All schemes 2021 2020 Amounts recognised on the balance sheet £m £m Fund asset at fair value 57,787 57,249 Present value of fund liabilities 46,808 48,864 Funded status 10,979 8,385 Assets ceiling/minimun funding 10,491 7,783 488 602 2021 2020 Net pension assets/(liability) comprise s £m £m Net assets of schemes in surplu s (included in Other assets, Note 18 ) 602 723 Net liabilities of schemes in deflicit (included in Othe r liabilities, Note 21) (114) (121) 488 602 The income statement charge comprises (1) : 2021 2020 £m £m Continuing operations 196 195 Discontinued operations 19 20 (1) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8. Funding and contributions by NatWest Group In the UK, the trustees of defined benefit pension sc hemes are required to perform funding valu ations every three years. The trustees and the sponsor, with the suppo rt of the Scheme Actuary, agree the assumptions used to value the liabilities and to determine future contribution requirements. The fundi ng assumptions incorporate a margin for prudence o ver and above the expected cost of providing the benefits p romised to members, taking into account the s ponsor’s covenant and the investment strategy of the scheme. Simil ar arrangements apply in the other territories where NatWest Group sponsors defined benefit pension schemes. A full triennial funding valuation of the Main section, effe ctive 31 December 2020, was comple ted during the year. This triennial funding valuation determined t he funding level to be 104%, pension liabilities to be £49 billion and the surplus to be £2 billion, all assessed on the agreed funding b asis. The average cost of the future service of current members is 49% of salary before contributions from those members. In addition, the sponsor has agreed to mee t administrative expenses. Following the ring-fencing agreement with the T rustee reached in 2018, additional contributions of up to £500 million p.a. are payable to the Main section should the Group m ake distributions to shareholders of an equal amount. These contributions are capped at £1.5 billion in tot al; £500 million was made in 2021 (2020 – Nil). The key assumptions used to determine the fundin g liabilities were the discount rate, which is determined base d on fixed interest swap and gilt yields plus 0.6 4% per annum, and mortality assumptions, which res ult in life expectancies of 27.7/29.4 years for males/female s who are currently age 60 and 28.9/30.7 years from age 60 for males/females who are currently aged 40. The 2020 triennial valuation of the G roup Pension Fund included an allowance for the es timated impact of guaranteed minimum pension equalisation, which is reflected in the IAS 19 valuation at 31 December 2021. As s uch, no explicit allowance is required in the IAS 19 figures (2020: £169 million). Accounting Assumptions Placing a value on NatWest Gr oup’s defined benefit pension schemes’ liabilities requires NatWes t Group’s management to make a number of assumptions, with the support of independent actuaries. The ultimate cost of the def ined benefit obligations depends upon actu al future events and the assumptions made are unlikely to be exactly borne out in practice, meaning the final cost may be hi gher or lower than expected. Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 325 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 5 Pensions continued The most significant assumptions use d for the Main section are shown below: Principal IAS 19 a ctuarial assumptions 2021 2020 % % Discount rate 1.8 1.4 Inflation assumption (RPI) 3.3 2.9 Rate of increase in salaries 1.8 1.8 Rate of increase in deferred pensions 3.7 3.0 Rate of increase in pensions in paymen t 2.5 2.7 Lump sum conversion rate at r etirement 18 20 Longevity at age 60: years years Current pensioners Males 27.3 27.1 Females 29.0 29.0 Future pensioners, currently aged 40 Males 28.2 28.3 Females 30.1 30.4 Discount rate The IAS 19 valuation uses a single discount rate s et by reference to the yield on a basket of ‘h igh quality’ sterling corporate bonds. Significant judgment is required when se tting the criteria for bonds to be included in the bask et of bonds that is used to dete rmine the discount rate used in the IAS 19 valua tions. The criteria include issue size, quality of pricing and the exclusion of outliers. Judgment is also required in determining the sha pe of the yield curve at long durations; a co nstant credit spread relative to g ilts is assumed. Sensitivity to the main assumptions is prese nted below. The weighted average duration of the Main se ction’s defined benefit obligation at 31 December 2021 is 2 0 years (2020 – 22 years). The chart below shows the projected benefit p ayment pattern for the Main section in nomin al terms. These cashflows are bas ed on the most recent formal actuarial valuation, eff ective 31 December 2020. The larger outflow in the first three years represents the expected level of transfers out to 31 December 2023. 0 500 1000 1500 2000 2500 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 2051 2053 2055 2057 2059 2061 2063 2065 2067 2069 2071 2073 2075 2077 2079 2081 2083 2085 2087 2089 2091 2093 2095 Expected C ashflows (£m) Year Non pension er Pensioner Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 326 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 5 Pensions continued The table below shows how th e net pension asset of the Main section would chan ge if the key assumptions used were ch anged independently. In practice the v ariables have a degree of correlation an d do not move completely in isolation. (Decrease)/ (Decrease)/ Increase in increase increase net pension in value of in value of (obligations)/ assets liabilities assets 2021 £m £m £m 0.25% increase in interest rates/discount rate (2,917) (1,926) (991) 0.25% increase in inflation 1,883 1,329 554 0.25% increase in credit spreads (3) (1,926) 1,923 Longevity increase of one year — 1,790 (1,790) 0.25% additional rate of increase in pensions in payment — 1,485 (1,485) Increase in equity values of 10% (1) 442 — 442 2020 0.25% increase in interest rates/discount rate (2,585) (2,384) (201) 0.25% increase in inflation 2,204 1,603 601 0.25% increase in credit spreads (6) (2,384) 2,378 Longevity increase of one year — 1,930 (1,930) 0.25% additional rate of increase in pensions in payment — 1,608 (1,608) Increase in equity values of 10% (1) 454 — 454 (1) Includes both quoted and p rivate equity. The funded status is most sensitive to move ments in credit spreads and longevity. The table b elow shows the combined change in the funded status of the Main s ection as a result of larger movements in these ass umptions, assuming no changes in othe r assumptions. Change in life expecta ncies - 2 years - 1 years No change + 1 year + 2 years 2021 £bn £bn £bn £bn £bn Change in credit spreads +50 bps 6.9 5.3 3.8 2.3 0.8 No change 3.6 1.8 — (1.8) (3.6) -50 bps (0.3) ( 2.4) ( 4.5) (6.6) (8.7) 2020 Change in credit spreads +50 bps 7.8 6.1 4.5 2.9 1.3 No change 3.9 1.9 — ( 1.9) (3.9) -50 bps (0.6) ( 2.8) ( 5.1) (7.4) (9.7) The defined benefit obligation of the Main section is attributable to the different classes of sc heme members in the following proportions: 2021 2020 Membership category % % Active members 10.7 14.2 Deferred members 47.6 50.9 Pensioners and dependants 41.7 34.9 100.0 100.0 The experience history of NatWe st Group schemes is shown below: Main section All schemes 2021 2020 2019 2018 2017 2021 2020 2019 2018 2017 History of defined benefit schemes £m £m £m £m £m £m £m £m £m £m Fair value of plan assets 52,021 51,323 46,555 43,806 44,652 57,787 57,249 51,925 48,752 49,746 Present value of plan obligations 42,020 43,870 39,669 35,466 37,937 46,808 48,864 44,115 39,607 42,378 Net surplus/(deficit) 10,001 7,453 6,886 8,340 6,715 10,979 8,385 7,810 9,145 7,368 Experience gains/(losses) on plan liabilities 241 427 275 (122) (107) 237 455 279 (81) (93) Experience gains/(losses) on plan assets 841 5,486 3,021 ( 1,891) 1,580 872 6,027 3,556 ( 2,090) 1,728 Actual return on plan assets 1,554 6,422 4,266 (768) 2,735 1,667 7,064 4,930 (848) 3,013 Actual return on plan assets % 3.0% 13.8% 9.7% ( 1.7%) 6.2% 2.9% 13.6% 10.1% ( 1.7%) 6.1% Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 327 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 6 Auditor’s remuneration Amounts payable to NatWest Group's auditors fo r statutory audit and other services are set out below. All audit-related and other service s are approved by the Group Audit Committee a nd are subject to strict controls to ensure the external auditor’s independence is unaffected by the provision of other se rvices. The Group Audit Committee recognise s that for certain assignments, the auditors are best placed to perform the work economically; for o ther work, NatWest Group selects the supplier best placed to meet its require ments. NatWest Group’s auditors are permitted to tender for such work in competition with other firms where the work is pe rmissible under audit independence rules. 2021 2020 2019 £m £m £m Fees payable for: - the audit of NatWest Group’s annual accoun ts (1) 4.4 4.7 3.8 - the audit of NatWest Group p lc’s subsidiaries (1) 29.6 30.6 25.7 - audit-related assurance service s (1,2) 5.3 4.7 3.2 Total audit and audit-related as surance services fees 39.3 40.0 32.7 Other assurance services 0.4 0.6 1.2 Corporate finance services (3) 0.5 0.4 0.6 Total other services 0.9 1.0 1.8 (1) The 2021 audit fee was approved by the Group Audit Committee. At 31 December 2021, £19.7 million has been billed and paid in respect of the 2021 NatWest Group audit fees. (2) Comprises fees of £1.1 million (2020 - £1.1 million) in relat ion to reviews of interim financial information, £3.5 million (2020 - £3.2 million) in respect of reports t o NatWest Group’s regulators in the UK and overseas, and £0.7 million (2020 - £0.4 million) in relation t o non-statutory audit opinions. (3) Comprises fees of £0.5 million (2020 - £0.4 million) in resp ect of work performed by the auditors as reporting accountants on debt and equity issuances undertaken by NatW est Group. 7 Tax NatWest Group’s corporate income t ax charge for the period is set out below, toge ther with a reconciliation to the expected tax charge calculated using the UK standard corpo ration tax rate and details of the NatWest Group’s deferred tax balances. For accounting policy information se e Accounting policies note 9. Analysis of the tax charge for the year The tax charge comprises curre nt and deferred tax in respect of profits and losse s recognised or originating in the income statement. Tax on items originating outside the inco me statement is charged to othe r comprehensive income or direct to e quity (as appropriate) and is therefore not reflected in the table belo w. Current tax is tax payable or re coverable in respect of the taxable profit or loss fo r the year and any adjustments to tax p ayable in prior years. Deferred tax is explained on page 328. 2021 2020 (1) 2019 (1) Continuing operations £m £m £m Current tax Charge for the year (1,036) (191) (673) Over provision in respect of prior years 31 86 122 (1,005) (105) (551) Deferred tax (Charge)/credit for the year (185) 176 38 UK tax rate change impact (2) 165 75 — Net increase/(decrease) in the car rying value of deferred tax assets in respect of UK, Ireland and Netherlands losses 12 (130) 55 Over/(under) provision in respect of prior yea rs (3) 17 (90) 19 Tax charge for the year (996) (74) (439) (1) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8. (2) It was announced in the UK Government’s bu dget on 3 March 2021 th at the main UK corporation tax rate will increase from 19% to 25% from 1 April 2023. This legislative change was enacted on 10 June 2021. (3) Prior year tax adjustments incorporate refinem ents t o tax computations made on submission and agreement with the tax authorities and adjustments to provisions in respect of uncertain tax positions. Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 328 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 7 Tax continued Factors affecting the tax charge for the year Taxable profits differ from profi ts reported in the income statement as certain amou nts of income and expense may not be taxable or deductible. In addition, taxa ble profits may reflect items that have been inclu ded outside the income statement (for insta nce, in other comprehensive income) or adjustments that are made for tax purposes only. The expected tax charge for the year is calculated by applying the standard UK corpo ration tax rate of 19% (2020 and 2019 – 19%) to the Operating profit or loss be fore tax in the income statement. The actual tax charge differs from the expected tax charge as follows: 2021 2020 (1) 2019 (1) Continuing operations £m £m £m Expected tax (charge)/credit (766) 92 (757) Losses and temporary differen ces in year where no deferred tax asset recognised (51) (43) ( 24) Foreign profits taxed at other rates (11) (29) 7 Non deductible goodwill impairment (16) — — Items not allowed for tax: - losses on disposals and write-downs (55) (22) ( 71) - UK bank levy (18) (32) ( 26) - regulatory and legal actions (74) 14 (165) - other disallowable items (28) (70) ( 62) Non-taxable items: - Alawwal bank merger gain dis posal — — 215 - FX recycling on the liquidation of RFS Holdin gs — — 279 - other non-taxable items 73 28 80 Taxable foreign exchange movements 8 (3) (1) Unrecognised losses brought forward and utilised 10 16 16 (Decrease)/increase in the carrying value of defer red tax assets in respect of: - UK losses (9) 7 129 - Ireland losses (27) (137) (74) - Netherlands losses 48 — — Banking surcharge (341) (27) (199) Tax on paid-in equity 48 61 73 UK tax rate change impact 165 75 — Adjustments in respect of prior ye ars 48 (4) 141 Actual tax charge (996) (74) (439) (1) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8. Judgment: tax contingencies NatWest Group’s corporate income t ax charge and its provisions for corporate income taxes necessarily involve a degree of estimation and judgment. The tax treatment of some transactions is uncertain and tax com putations are yet to be agreed wi th the tax authorities in a number of jurisdictions. N atWest Group recognises anticipated tax li abilities based on all available evidence and, where appropriate, in the light of external advice. Any dif ference between the final outcome a nd the amounts provided will aff ect current and deferred income tax charges in the perio d when the matter is resolved. Deferred tax Deferred tax is the tax expected to be payable or recoverable in respect of temporary diffe rences where the carrying amount of an asset or liability differs for accounting and t ax purposes. Deferred tax liabilities reflect the expected amount of tax payab le in the future on these temporary differences. Deferred tax assets refle ct the expected amount of tax recoverable in the futu re on these differences. The net deferred tax asset recognised by the NatWe st Group is shown below, together with de tails of the accounting judgments and tax rates that have been used to calculate the de ferred tax. Details are also provided of any defe rred tax assets or liabilities that have not been recognised on the bala nce sheet. Analysis of deferred tax £m £m Deferred tax asset (1,195) (901) Deferred tax liability 359 291 Net deferred tax asset (836) (610) Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 329 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 7 Tax continued Accelerated Tax losses capital Expense Financial carried Pension allowances provisions instruments forward Other Total £m £m £m £m £m £m £m At 1 January 2020 (139) 172 (118) 315 (951) (24) (745) Charge/(credit) to income state ment: (1) - continuing operations 15 (234) 33 114 46 ( 5) (31) - discontinued operations — — — — 9 — 9 Charge/(credit) to other compre hensive income 119 — — 51 — ( 7) 163 Currency translation and other adjustments 1 (2) — — (9) 4 (6) At 1 January 2021 (4) (64) (85) 480 (905) (32) (610) Charge/(credit) to income state ment: - continuing operations 19 21 ( 5) (10) (1) (33) (9) - discontinued operations — — — — 3 — 3 Charge/(credit) to other compre hensive income 10 — (7) (222) — (5) (224) Currency translation and other adjustments (1) 1 — — 4 — 4 At 31 December 2021 24 (42) (97) 248 (899) (70) (836) (1) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8. Deferred tax assets in respect of carried for ward tax losses are recognised if the losses can be used to offset probable future taxable profits after taking into account the expec ted reversal of other temporary differences. R ecognised deferred tax assets in respect of tax losses are analysed further below. 2021 2020 £m £m UK tax losses carried forward - NWM Plc 56 62 - NWB Plc 608 592 - RBS plc 176 200 - Ulster Bank Limited — 8 Total 840 862 Overseas tax losses carried for ward - UBIDAC 11 43 - NWM N.V. 48 — 899 905 Critical accounting policy: Deferred tax NatWest Group has recognised a defe rred tax asset of £1,195 million (31 December 2020 - £901 million) and a deferred tax liability of £359 million (31 December 2020 - £2 91 million). These include amounts recognised in respect of UK and overseas tax losses of £899 million (31 December 2020 - £905 million). Deferred tax assets are recognis ed to the extent that it is probable that there will be future taxable profits to recover them. Judgment - NatWest Group has considered the carrying value of deferred tax assets and concluded that, based o n management’s estimates, suffic ient taxable profits will be generated in future years to recover recognised defe rred tax assets. Estimate - These estimates are partly base d on forecast performance beyond the horizon for management’s det ailed plans. They have regard to inhe rent uncertainties, such as climate change and the impact of C OVID. The deferred tax assets in NWM Plc and UBIDAC are supported by w ay of future reversing taxable temporary differences on which deferred tax liabilities are recognised at 31 December 2021 . UK tax losses Under UK tax rules, tax losses can be carrie d forward indefinitely. As the recognised tax losses in Na tWest Group arose prior to 1 April 2015, credit in future periods is given against 25% of profits at the main rate of UK corporati on tax, excluding the Banking Surcharge 8 % rate introduced by The Finance (No. 2) Act 2015. It was announced in the UK Government’s budget o n 3 March 2021 that the main UK corpora tion tax rate will increase from 19% to 25% from 1 April 2023. T his legislative change was enacted on 10 June 2021 . NatWest Group’s closing deferred tax assets and liabilities have therefore been recalcul ated taking into account this change of rat e and the applicable period the deferred tax assets and liabilities are expected to crystallise. As a result, the net deferred tax asse t position in NatWest Group has increased by £163 million, with a £16 5 million tax credit included in the income stateme nt (refer to reconciling item above), and a £2 million tax charge included in other comprehensive income. It was subsequently announced in the UK Govern ment’s budget on 27 October 2021 that the U K banking surcharge will decrease from 8% to 3% from 1 April 2023 . This legislative change was substantively enacted on 2 Feb ruary 2022. Had this rate reduction been substantively enacted as at the balance sheet date, the estimated rate change i mpact would not have been material. Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 330 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 7 Tax continued NWM Plc – NWM Plc expects th at the balance of recognised deferred tax asset at 31 December 202 1 of £56 million (2020 - £62 million) in respect of tax losse s amounting to £254 million will be recovered by the end of 2 027. The movement in the current financial year reflects a £1 3 million decrease in the carrying value of the deferred tax asset, offse t by a £7 million increase due to the UK tax rate change imp act. NWB Plc – A deferred tax asset of £608 million (2020 - £592 million) has been recognised in respect of total loss es of £2,610 million. The losses arose principally as a result of sig nificant impairment and conduct charges between 2009 and 2012 during challenging economic conditions in the UK b anking sector. NWB Plc expects the deferred tax asset to be u tilised against future taxable profits by the end of 20 25. RBS plc – A deferred tax asset of £176 million (2020 - £200 million) has been recognised in respect of losses of £722 million of total losses of £3,979 million carried forward at 31 December 2021. The losses were transferred from NatWe st Markets Plc as a consequence of the ring fencing regulations. RB S plc expects the deferred tax asset to be util ised against future taxable profits by the end of 2027. Overseas tax losses UBIDAC – A deferred tax asset of £11 million (2020 - £43 million) has been recognised in respect of los ses of £88 million, and is now entirely supported by way of f uture reversing taxable temporary differences on which def erred tax liabilities are recognised at 31 December 20 21. The movement in the current financial year reflects a £32 million reduction in the ca rrying value of the deferred tax asset f ollowing the announcement of the Group’s withdrawal from the Republic of Irel and. NatWest Market N.V. (NWM N.V.) – A deferred tax asset of £4 8 million has been recognised in respect of p reviously unrecognised tax losses and cre dits of £187 million of total tax losses and credits of £2,785 million carried fo rward at 31 December 2021. NWM N.V. Group expects the defe rred tax asset to be utilised against future taxa ble profits by the end of 2026. NWM N.V. Group’s Dutc h fiscal unit has reported taxable profits in the period since the adoption of the ne w business model and repurposing of NWM N.V.’s ba nking license in 2019. In addition, NatWest Group strategic review of NWM G roup has been largely completed in 2021, which h as removed material uncertainties around the future busines s of NWM N.V.. As a result, NWM N.V. Group now considers it to be probable, based on its 5 year budget forecast, that future tax able profit will be available against which the tax losses and tax credits can be partially utilised. Unrecognised deferred tax Deferred tax assets of £5,437 million (2020 - £4,965 million; 2019 - £4,653 million) have not been recognised in respect of tax losses and other deductible temporary differences carried forward of £24,699 million (202 0 - £25,091 million; 2019 - £23,555 million) in jurisdictions where dou bt exists over the availability of future taxable prof its. Of these losses and other deductible temporary difference s, £77 million expire within five years and £4,288 million thereaf ter. The balance of tax losses and other deductible temporary diffe rences carried forward has no expiry date. Deferred tax liabilities of £302 million (2020 - £242 million; 2019 - £262 million) on aggregate underlying temporary differences of £1,032 million (2020 - £1 ,021 million; 2019 £1,074 million) have not been recognised in res pect of retained earnings of overseas subsidiaries and held- over gains on the incorporation of certain overseas branches. Retained earnings of overseas subsidiaries are expected to be reinvested indefinitely or remitted to the UK free from fu rther taxation. No taxation is expected to arise in the foresee able future in respect of held- over gains on which deferred t ax is not recognised. Changes to UK tax legislation largely exem pts from UK tax overseas dividends received on or after 1 July 2009. Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 331 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 8 Discontinued operations and assets and liabili ties of disposal groups Discontinued operations are reported sepa rately on the income statement to allow users to di stinguish the profits and cash flows from continuing operations from those activities that are subject to disposal. Assets and liabilities which we intend to dispose of in a single transaction a re also presented separately on the balance sheet. For accounting policy information se e Accounting policies note 3. This note sets out the profit/(loss) from the discontinued o perations (represented for comparati ve periods), the assets and liabilities of the disposal group and the operating c ash flows attributable to the discontinued oper ations. Two legally binding agreements f or the sale of UBIDAC business were announced in 2021 as part of the phased withdrawal from the Republic of Ireland: On 28 June 2021 we announced it had agreed a binding sale agreement with Allied Irish Banks, p.l.c. for the transfer of c.€4 .2 billion (plus up to €2.8 billion of undrawn exposures), of performing commercial loans as well a s c.280 colleagues that are w holly or mainly assigned to supporting t hat part of the business, with the final number of roles to be confirmed as the deal completes. T he sale, subject to Competition and Consume r Protection Commission (CCPC) approval, is expe cted to be completed in a series of transactions during 2022 and Q1 2 023. On the 17 December 2021 we s igned a legally binding agreement with Permanent TSB p.l.c. The proposed sale will include performing non-tracker mortgages, the perfo rming loans in the micro-SME business; the UB IDAC Asset Finance business, in cluding its Lombard digital platform, and a subset of Uls ter Bank branch locations in the Republic of Ireland. The majority of loans are expected to transfer by Q4 2022 . As part of the transaction it is anticipated that c.450 colleagues will have the right to transfe r under the TUPE regulations with the final num ber of roles to be confirmed as the deal comple tes. The business activities relating to these sales t hat meet the requirements of IFRS 5 are p resented as a discontinued operation and as a disposal group at 31 December 2021. T he Ulster Bank RoI operating segment con tinues to be reported separately and r eflects the results and balance sheet position of its co ntinuing operations. (a) Profit from discontinued operations, net of tax 2021 2020 2019 £m £m £m Interest receivable 260 273 248 Net interest income 260 273 248 Non-interest income 9 15 18 Total income 269 288 266 Operating expenses (47) (47) (45) Profit before impairment losses 222 241 221 Impairment releases/(losses) 57 (111) 28 Operating profit before tax 279 130 249 Tax (charge)/credit (3) (9) 7 Profit from discontinued operations, net of t ax 276 121 256 (b) Assets and liabilities of disposal groups 2021 £m Assets of disposal groups Loans to customers - amortised cost 9,002 Derivatives 5 Other assets 8 9,015 Liabilities of disposal groups Other liabilities 5 5 Net assets of disposal groups 9,010 (c) Operating cash flows attributable to discontin ued operations 2021 2020 2019 £m £m £m Net cash flows from operating activi ties 1,290 (895) (3,909) Net increase/(decrease) in cash and c ash equivalents 1,290 (895) (3,909) Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 332 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 9 Earnings per share Earnings per share is a metric to measure how much profit NatWest Group makes for each sh are that is in issue during the year. Basic earnings per ordinary share is calcul ated by dividing the profit attributable to o rdinary shareholders by the weighted average number of ordinary sh ares outstanding. Diluted earnings per ordina ry share is calculated by dividing the basic ea rnings by the weighted average number of ordinary shares ou tstanding plus the weighted aver age number of ordinary shares that wo uld be issued on conversion of dilutive share options and conve rtible securities. 2021 2020 2019 £m £m £m Earnings Profit/(loss) from continuing operations attributable to ordinary shareholders 2,674 (874) 2,877 Profit from discontinued operations attribut able to ordinary shareholders 276 121 256 Profit/(loss) attributable to ordinary shareholders 2,950 (753) 3,133 Weighted average number of shares (millions) Weighted average number of ordinary sh ares outstanding during the year 11,622 12,095 12,067 Effect of dilutive share options and convertible securities (1) 45 — 35 Diluted weighted average number of ordin ary shares outstanding during the year 11,667 12,095 12,102 (1) As there was a loss from continuing op erations attributable to the parent company for the period to 31 December 2020, the effect of share options and convertible securities was not dilutive. 10 Financial instruments – classification Financial instruments are contracts that give rise to a financial asset of one entity and a co rresponding financial liability or equity instrument of a counterparty entity, such as: cash; de rivatives; loans; deposits; and settlemen t balances. This note presents financial instruments classified in accordance with IFR S 9 – Financial Instruments. Judgment: classification of finan cial assets Classification of financial assets be tween amortised cost and fair value through other comp rehensive income requires a degre e of judgment in respect of business models a nd contractual cashflows.  The business model criteria is as sessed at a portfolio level to determine whether assets are cl assified as held to collect or hel d to collect and sell. Information t hat is considered in determining the applic able business model includes the portfolio’s policies and objectives, how the performance and risks of the p ortfolio are managed, evaluated and reported to management; and the frequency, volume and timing of s ales in prior periods, sales expectation for future periods, and the reasons for sales.  The contractual cash flow characteris tics of financial assets are assess ed with reference to whether the cash flows represe nt solely payments of principal and interes t. A level of judgment is made in assessing terms t hat could change the contractual cash flows so that it would not meet the co ndition for solely payments of principal and in terest, including contingent and leverage features, non-recours e arrangements and features that could modify the time value of money. For accounting policy information se e Accounting policies 10, 12, 13 and 15. Notes to the c onsolidated fi nancial statement s NatWest Group A nnual Repor t and Accou nts 2021 333 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 10 Financial instruments - classification continu ed Judgment: classification of finan cial assets The following tables analyse financial assets and liabili ties in accordance with the categories of financial instruments on an IFRS 9 basis. Amortised Other MFVTPL FVOCI cost assets T otal Assets £m £m £m £m £m Cash and balances at central banks 177,757 177,757 Trading assets 59,158 59,158 Derivatives (1) 106,139 106,139 Settlement balances 2,141 2,141 Loans to bank - amortised cost (2) 7,682 7,682 Loans to customers - amortised cost (3) 358,990 358,990 Other financial assets 317 37,266 8,562 46,145 Intangible assets 6,723 6,723 Other assets 8,242 8,242 Assets of disposal groups 9,015 9,015 31 December 2021 165,614 37,266 555,132 23,980 781,992 Cash and balances at central banks 124,489 124,489 Trading assets 68,990 68,990 Derivatives (1) 166,523 166,523 Settlement balances 2,297 2,297 Loans to bank - amortised cost (2) 6,955 6,955 Loans to customers - amortised cost (3) 360,544 360,544 Other financial assets 440 44,902 9,806 55,148 Intangible assets 6,655 6,655 Other assets 7,890 7,890 31 December 2020 235,953 44,902 504,091 14,545 799,491 Held-for- Amortised Other trading DFV cost liabilities Total Liabilities £m £m £m £m £m Bank deposits (4) 26,279 26,279 Customer deposits 479,810 479,810 Settlement balances 2,068 2,068 Trading liabilities 64,598 64,598 Derivatives (1) 100,835 100,835 Other financial liabilities (5) 1,671 47,655 49,326 Subordinated liabilities 703 7,726 8,429 Notes in circulation 3,047 3,047 Other liabilities (6) 1,356 4,441 5,797 31 December 2021 165,433 2,374 567,941 4,441 740,189 Bank deposits (4) 20,606 20,606 Customer deposits 431,739 431,739 Settlement balances 5,545 5,545 Trading liabilities 72,256 72,256 Derivatives (1) 160,705 160,705 Other financial liabilities (5) 2,403 43,408 45,811 Subordinated liabilities 793 9,169 9,962 Notes in circulation 2,655 2,655 Other liabilities (6) 1,882 4,506 6,388 31 December 2020 232,961 3,196 515,004 4,506 755,667 (1) Includes net hedging derivatives ass ets of £44 milli on (2020 - £93 million) and net hedging derivatives liabilities of £120 million (2020 - £130 million). (2) Includes items in the course of collection from other banks of £67 million (2020 - £148 million). (3) Includes finance lease receivables of £8,531 million (2020 - £9,061 million). (4) Includes items in the course of transmission to oth er banks of £56 milli on (2020 - £12 million). (5) The carrying amount of other customer accounts d esignated at fair value through profit or loss is the same as the principal amount for both periods. No amounts have been recognised in the profit or loss for changes in credit risk associated with these liabilities as the changes are immaterial both during the period and cumulatively. (6) Includes lease liabilities of £1,263 million (2020 - £1,698 million) held at amortised cost. Notes to the c onsolidated fi nancial statement s NatWest Group A nnual Repor t and Accou nts 2021 334 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 10 Financial instruments - classification continu ed Judgment: classification of finan cial assets 2021 2020 £m £m Reverse repos Trading assets 20,742 19,404 Loans to banks - amortised cost 189 153 Loans to customers - amortised cost 25,962 25,011 Repos Bank deposits 7,912 6,470 Customer deposits 14,541 5,167 Trading liabilities 19,389 19,036 The tables below present information on financi al assets and financial liabilities that are offse t on the balance sheet under IFRS or subject to enforceable master netting agree ments together with financial coll ateral received or given. Instruments which can be offset Potential for of fset not recognised by IFRS Effect of Net amount master after the effect Instruments netting of netting outside IFRS Balance and similar Cash Securities agreements and netting Balance Gross offset sheet agreements collateral collateral related collateral agreements sheet total 2021 £m £ m £m £m £m £m £m £m £m Derivative assets 113,220 (7,961) 105,259 (85,006) (15,035) (2,428) 2,790 880 106,139 Derivative liabilities 108,594 (8,568) 100,026 (85,006) (9,909) (2,913) 2,198 809 100,835 Net position (1) 4,626 607 5,233 — (5,126) 485 592 71 5,304 Trading reverse repos 44,529 (24,422) 20,107 ( 900) — (19,136) 71 635 20,742 Trading repos 42,664 (24,422) 18,242 ( 900) — (17,341) 1 1,147 19,389 Net position 1,865 — 1,865 — — (1,795) 70 (512) 1,353 Non trading reverse repos 33,729 (7,594) 26,135 — — (26,135) — 16 26,151 Non trading repos 30,047 (7,594) 22,453 — — (22,453) — — 22,453 Net position 3,682 — 3,682 — — (3,682) — 16 3,698 2020 Derivative assets 176,425 (10,807) 165,618 (137,086) (19,608) (5,053) 3,871 905 166,523 Derivative liabilities 171,614 (11,540) 160,074 (137,086) (15,034) (4,921) 3,033 631 160,705 Net position (1) 4,811 733 5,544 — (4,574) (132) 838 274 5,818 Trading reverse repos 43,908 (24,867) 19,041 (929) — (18,040) 72 363 19,404 Trading repos 42,203 (24,867) 17,336 (929) — (16,407) — 1,700 19,036 Net position 1,705 — 1,705 — — (1,633) 72 (1,337) 368 Non trading reverse repos 36,117 (10,953) 25,164 — — (25,164) — — 25,164 Non trading repos 22,590 (10,953) 11,637 — — (11,637) — — 11,637 Net position 13,527 — 13,527 — — (13,527) — — 13,527 (1) The net IFRS offset balan ce of £607 million (2020 - £733 million) relates to variation margin netting reflected on other balance sheet lines. Notes to the c onsolidated fi nancial statement s NatWest Group A nnual Repor t and Accou nts 2021 335 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 10 Financial instruments - classification continu ed Interest rate benchmark reform The NatWest G roup IBOR pro gram successfully delivered the conversion of the vast majority of the IBOR exposures to risk free rates (RFR) in advance of the cessation date. This encompasses loa ns, deposits, c apital instruments and d erivatives, which, have been converted using fallback provisions, switch pr ovisions or as part of market-wide conv ersion events in t he case of der ivatives subject to clearing. These instruments will conver t at the first repricing date post cessation. The total amount of exposure for NatWest Gr oup at 31 December 2021 subject to the above conversion provisions are £22,056 million of assets, £426 million of liabilities, £15,785 million of loan commitments and £557 .7 billion of derivative notionals. Despite the significant conversion le vels achieved, certain instruments remain in discussi on with customers and counter parties to achieve consensual conversion. If consensual conversion is not achieved these instruments will default to synthetic LIBOR in li ne with relevant legislation. The level of exposures without explicit o r agreed conversion provisions as of 31 Dece mber 2021 is as follows: Rates subject t o IBOR reform GBP LIBOR USD IBOR (1) Other IBOR (2) Total 2021 £m £m £m £m Trading assets 62 90 — 152 Loans to banks - amortised cost — 11 — 11 Loans to customers - amortised cost 4,788 4,565 267 9,620 Other financial assets 864 768 — 1,632 Bank deposits — 37 — 37 Customer deposits — — — — Trading liabilities 31 166 — 197 Other financial liabilities 2,390 7,023 131 9,544 Subordinated liabilities — 90 — 90 Loan commitments (3) 1,016 6,366 55 7,437 Derivatives notional (£bn) 3.6 1,152.0 — 1,155.6 At December 2021 NatWest Group held certain cur rency swaps with both legs subject to IBO R reform, for which only the G BP LIBOR leg has an explicit or agreed conve rsion provisions as of 31 December 2021 , but not the entire contract. These include currency swaps of GBP LIBOR of £8 .7 billion with USD IBOR £8.2 billion and Other IBOR £0 .5 billion; currency swaps of USD IBO R of £117 billion with GBP LIBOR £91.7 billion and Other IBOR £25 .3 billion; currency swaps of EURIBOR of £0 .1 billion with GBP LIBOR £0.1 billion; currency swaps of Othe r IBOR of £0.4 billion with USD IBOR £0.4 billion. Notes to the c onsolidated fi nancial statement s NatWest Group A nnual Repor t and Accou nts 2021 336 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 10 Financial instruments - classification continu ed Interest rate benchmark reform Rates subject to IBOR reform GBP LIBOR USD IBOR (1) EURIBOR (2) Other IBOR Total 2020 £m £m £m £m £m Trading assets 75 60 348 1 484 Loans to banks - amortised cost 23 82 101 — 206 Loans to customers - amortised cost 40,299 6,366 4,950 234 51,849 Other financial assets 2,918 303 370 — 3,591 Bank deposits — 367 — 107 474 Customer deposits — — — 4 4 Trading liabilities 54 414 269 2 739 Other financial liabilities 2,492 9,806 5,902 196 18,396 Subordinated liabilities 8 850 438 — 1,296 Loan commitments (3) 25,616 9,228 7,176 682 42,702 Derivatives notional (£bn) 1,407.5 1,368.8 2,358.7 289.6 5,424.6 (1) In 2021 the FCA declared that USD IBOR will be non-representative post 30 June 2023; at the time of preparing the 31 December 2020 Annual Reports & Accounts this date was expected to be 31 December 2021. (2) In 2021 management concluded that E URIBOR is not expected to be significantly reformed further and therefore any uncertainty due to interest benchmark rate reform for EURIBOR has ended. 31 December 2020 data includes EURIBOR exposure as subject to reform. (3) Certain loan commitments are multi-currency fa cilities. Where these are fully undrawn, they are allocated to the principal currency of the facility. Where the facilities are partly drawn, the remaining loan commitment is a lloc ated to the currency wit h the largest drawn amount. Included within the 31 Decemb er 2020 table above for derivatives were currency s waps with corresponding legs also subject to IBOR reform of GBP LIBOR of £5 .2 billion with USD IBOR £2.0 billion, EURIBOR £2.9 billion and Other IBOR £0.3 billion. Cur rency swaps of USD IBOR of £231.7 billion with GBP LIBOR £9 8.5 billion, EURIBOR £8 5.8 billion and Other IBOR £47.4 billion. Cur rency swaps of EURIBOR of £5.1 billio n with GBP LIBOR £2.3 billion, USD IBOR £1.8 billion and Other IBOR £1.0 billion. Currency s waps of Other IBOR of £2.2 billion with EUR IBOR £0.7 billion, USD IBOR £1 .2 billion and Other IBOR £0.3 billion. Additionally, included above are basis swaps for GBP LIBOR of £97 billion, USD IBOR of £81 billion, EURIBOR of £49 billion and Other IBOR of £10 billion. AT1 issuances NatWest Group has issued certain capital inst ruments, AT1, under which reset clauses are li nked to IBOR rates subject to reform. Where under the contractual terms of the instrumen t the coupon resets to a rate which has IB OR as a specified component of its pricing structure, these are subject to IBOR reform an d listed below: 31 December 31 December 2021 2020 £m £m US$1.15 billion 8% notes 734 734 US$2.65 billion 8.625% notes — 2,046 NatWest Group‘s non-cumulative preference shares of USD$0.01 Series U (£494 million) are also subject to IBOR reform. Notes to the c onsolidated fi nancial statement s NatWest Group A nnual Repor t and Accou nts 2021 337 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 11 Financial instruments - valuation Financial instruments recognised at f air value are revalued using techniques th at can include observable inputs (pricing infor mation that is readily available in the market, for exa mple UK Government securities), and unobse rvable inputs (pricing information that is not readily available, for example unlisted securities). Gains and losses are recognised in the income statement and state ment of comprehensive income as appr opriate. This note presents information on the valuation of financial instruments. The table below provides an overview of the various sections contained within the note. Critical accounting policy: Fair val ue – financial instruments Financial instruments classified as mand atory fair value through profit or loss; held-fo r-trading; designated fair value through profit or loss and fair value through o ther comprehensive income are recognised in the financial statements at fair value. All deriv atives are measured at fair value. Fair value is the price that would be received to sel l an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fai r value measurement considers the characteris tics of the asset or liability and th e assumptions that a market participan t would consider when pricing the asset or liabili ty. NatWest Group manages some portfolios of financi al assets and financial liabilities based on it s net exposure to either market or credit risk. In these cases, the fair value is derived from the net risk exposure of that po rtfolio with portfolio level adjustments applied to incorporate bid-offer s preads, counterparty credit risk, and funding cos ts (see ‘Valuation Adjustments’). Where the market for a financial instrumen t is not active, fair value is established us ing a valuation technique. These valuation techniques involve a degree of estimation, the extent of which depends on the instrument’s complexity and the availabili ty of market-based data. The complexity and uncertainty in t he financial instrument’s fair value is c ategorised using the fair value hierarchy. For accounting policy information se e Accounting policies notes 10 and 15. Valuation Fair value hierarchy Financial instruments carried at f air value have been classified under the fair value hierarchy. The classification ranges from level 1 to level 3, with more expert judgment and price uncertainly for those classified at level 3. The determination of an instrument’s level ca nnot be made at a global product level as a single product type can be in more than one level. For example, a si ngle name corporate credit default swap could be in level 2 or level 3 dependi ng on the level of market activity for the re ferenced entity . Level 1 – instruments valued usi ng unadjusted quoted prices in active and liquid markets, for id entical financial instruments. Examples include government bonds, listed e quity shares and certain exchange-traded derivatives. Level 2 - instruments valued usi ng valuation techniques that have observable inputs. Observable inputs a re those that are readily available with limited adjus tments required. Examples include most government agency securities, investment-grade corporate bonds, certain mortgage products - includin g CLOs, most bank loans, repos and rev erse repos, state and municipal obligations, most notes issued, ce rtain money market securities, loan commitments and most OTC deriv atives. Level 3 - instruments valued usi ng a valuation technique where at least one input which could have a significan t effect on the instruments valuation, is not base d on observable market data. Examples include non-derivativ e instruments which trade infrequently, certain syndicated and comme rcial mortgage loans, private equity, and derivatives with unobserv able model inputs. Page Financial instrument s Critical accounting policy: Fair value 337 Valuation Fair value hierarchy (D) 337 Valuation techniques (D) 338 Inputs to valuation models (D) 338 Valuation control (D) 338 Key areas of judgment (D) 339 Table of assets and liabilities split by fair value hierarchy level (T) 340 Valuation adjustments Table of fair value adjustments made (T) 341 Funding valuation adjustments (FVA) (D) 341 Credit valuation adjustments (CVA) (D) 341 Bid-offer (D) 341 Product and deal specific (D) 341 Own credit (D) 3 41 Level 3 additional information Level 3 ranges of unobservable i nputs (D) 342 Table of level 3 instruments, valuation techniques and inputs (T) 342 Level 3 sensitivities (D) 343 Alternative assumptions (D) 343 Other considerations (D) 343 Table of high and low range of fair value of level 3 assets and liabilities (T) 343 Movement in level 3 assets and liabilities over the reporting period (D) 344 Table of the movement in level 3 assets and liabilities 344 Fair value of financial instruments me asured at amortised cost Table showing the fair value of financial instruments measured at amortised cost on the balance s heet (T) 345 (D) = Descripti ve; (T) = Table Notes to the c onsolidated fi nancial statement s NatWest Group A nnual Repor t and Accou nts 2021 338 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 11 Financial instruments – valuation continued Valuation techniques NatWest Group derives the fair value of its instru ments differently depending on whether the instrument is a non- modelled or a modelled product. Non-modelled products are valued directly from a price input, typically on a position-by-position basis. Examples inclu de equities and most debt securities . Non-modelled products can fall into any fair value levelling hierarchy depending on the obs ervable market activity, liquidity, and assessment of val uation uncertainty of the instruments. The assessment of fair value and the classification of the instrument to a fair value level is subject to the valuation controls discussed in the Valuation control sectio n. Modelled products valued using a pricing model range in complexity from comparatively vanilla products such as interest rate swaps and options (e.g., interest rate caps and floo rs) through to more complex derivatives (e.g., balance gu arantee swaps). For modelled products the fair value is derived using the model and the appropriate model inputs or parameters, as opposed to a cash price equivalent. Model inputs are t aken either directly or indirectly from available data, where some inpu ts are also modelled. Fair value classification of modelled instruments is eithe r level 2 or level 3, depending on the product/ model combination, the observability and quality of input paramete rs and other factors. All these must be assessed to c lassify a position. The modelled product is assigned to the lowest fair value hierarc hy level of any significant input used in that valuation. Most derivative instruments, for example vanilla interest rate swaps, foreign exchange swaps and liquid single n ame credit derivatives, are classified as level 2 . This is because they are vanilla products valued using standard m arket models and with observable inputs. Level 2 prod ucts range from vanilla to more complex products, where more complex pro ducts remain classified as Level 2 due to the materiality of any un observable inputs. Inputs to valuation models When using valuation techniques, the fair value can be significantly affected by the choice of valuation model and underlying assumptions. Factors considered include the cashflow amounts and timing of those cash flows, and application of appropriate discount rates, incorpor ating both funding and credit risk. Values between and beyond available data points are obtained by int erpolation and extrapolation. The principal inputs to these valuation techniques are as follows: Bond prices - quoted prices are gene rally available for government bonds, certain corporate securities, and some mortgage-related products. Credit spreads - these express the return require d over a benchmark rate or index to compensate for the referenced credit risk. Where available, thes e are derived from the price of credit default swaps or other cr edit-based instruments, such as debt securities. When direct price s are not available; credit spreads are determined with reference to available prices of entities with similar characteris tics. Interest rates - these are principally based on in terest rate swap prices referencing benchmark interest rates. Be nchmark rates include Interbank Offered Rates (IBOR) and the Overnight Index Swap (OIS) rate, including SONIA (Sterlin g Overnight Interbank Average Rate). Other quoted interest rates may also be used from both the bond, and futures marke ts. Foreign currency exchange rates - there are obser vable prices both for spot and forward contracts and futures in the world's major currencies. Equity and equity index prices - quoted prices a re generally readily available for equity share s listed on the world's major stock exchanges and for major indices on such sha res. Price volatilities and correlations - volatility is a measure of the tendency of a price to change with time. Correlation measures the degree which two or more prices or va riables are observed to move together. Variables that move in the s ame direction show positive correlation; those that m ove in opposite directions are negatively correl ated. Prepayment rates - rates used to reflect how fast a pool of assets prepay. The fair value of a financial instrument that can be prepaid by the issuer or borrower diff ers from that of an instrument that cannot be prepaid. When valui ng prepayable instruments, the value of this pre payment option is considered. Recovery rates/loss given defa ult - these are used as an input to valuation models and reserv es for asset-backed securities and other credit products as an indicator of se verity of losses on default. Recovery rates are prima rily sourced from market data providers, the value of the underlying collate ral, or inferred from observable credit spreads. Valuation control NatWest Group's control environment for the deter mination of the fair value of financial instruments includes fo rmalised procedures for the review and validation of fair values. T his review is performed by an independent price verification (IPV) team. IPV is a key element of the control envi ronment. Valuations are first performed by the business which entered in to the transaction. These valuations are then reviewed by the IPV team, independent of those trading the financi al instruments, in light of available pricing evidence . Independent pricing data is collated from a range of sou rces. Each source is reviewed for quality and the independen t data applied in the IPV processes using a formalise d input quality hierarchy. Consensus services are one sou rce of independent data and encompass interest rate, currency, credi t, and bond markets, providing comprehensive coverage of vanilla products and a wide selection of exotic products. Where measurement differences are identified through the IPV process these are grouped by the quality hierarchy of the independent data. If the size of the difference exce eds defined thresholds, an adjustment is made to bring the valu ation to within the independently calcul ated fair value range. IPV takes place at least monthly, for all fair value f inancial instruments. The IPV control inclu des formalised reporting and escalation of any valuation differences in breach of established thresholds. Notes to the c onsolidated fi nancial statement s NatWest Group A nnual Repor t and Accou nts 2021 339 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 11 Financial instruments – valuation continued The quality and completeness of the information gathered in the IPV process gives an indication as to the liquidi ty and valuation uncertainty of an inst rument and forms part of the information considered when de termining fair value hierarchy classifications. Initial fair value level classification of a fin ancial instrument is carried out by the IPV team. These initial classifications are subject to senior management review. P articular attention is paid to instruments transferring fro m one level to another, new instrument classes or products, instruments where the transaction price is significantly diff erent from the fair value and instruments where valuation uncertain ty is high. Valuation Committees are made u p of valuation specialists and senior business representatives f rom various functions and oversees pricing, reserving and valuations issues . These committees meet monthly to review an d ratify any methodology changes. The Executive Valuation Com mittee meets quarterly to address key material an d subjective valuation issues, to review items escalated by Valuation Committees and to discuss other relevant indust ry matters. The Group model risk policy se ts the policy for model documentation, testing and review. Governa nce of the model risk policy is carried out by the Group model risk oversight committee, which comprises model risk owners and independent model experts. All models are required to be independently validated in accordance with the Model Ris k Policy. Key areas of judgment Over the years the business ha s simplified, with most products classified as level 1 or 2 of the fair value hier archy. However, the diverse range of products h istorically traded by NatWest Group means some products remain classifi ed as level 3. Level 3 indicates a significant level of pricing uncertainty, where expert judgment is used. As su ch, extra disclosures are required in respect of level 3 instruments . Over the years the business ha s simplified, with most products classified as level 1 or 2 of the fair value hier archy. However, the diverse range of products h istorically traded by NatWest Group means some products remain classifi ed as level 3. Level 3 indicates a significant level of pricing uncertainty, where expert judgment is used. As su ch, extra disclosures are required in respect of level 3 instruments . In general, the degree of expert judgment used and hence valuation uncertainty depends on the degree of liquidity of an instrument or input. Where markets are liquid, little judgmen t is required. However, when the information regarding the liquidity in a particular market is not clear, a judgment may need to be made. For example, for an equity traded on an exchange, daily v olumes of trading can be seen, but for an over the counte r (OTC) derivative, assessing the liquidity of the market with no central exchange is more challenging. A key related matter is where a market moves fr om liquid to illiquid or vice versa. Where this movement is conside red temporary, the fair value level is not changed. For example, if there is little market trading in a product on a repo rting date but at the previous reporting date and during the in tervening period the market has been liquid. In this case, the instrument will continue to be classified at the same level in the hierarchy. This is to provide consistency so that transfe rs between levels are driven by genuine changes in market liquidity and do not reflect short term or seasonal e ffects. Material movements between levels are reviewed quarterly by the B usiness and IPV. The breadth and depth of the IPV data allows fo r a rules-based quality assessment to be made of market activity, liquidity, and pricing uncertainty, which assists with the process of alloc ation to an appropriate level. Where s uitable independent pricing information is not readily available, the quality assess ment will result in the instrument being ass essed as level 3. Notes to the c onsolidated fi nancial statement s NatWest Group A nnual Repor t and Accou nts 2021 340 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 11 Financial instruments - valuation continued The table below shows the asse ts and liabilities held by NatWest Group split by fair value hie r archy level. Level 1 are considered the most liquid instruments, and level 3 the mos t illiquid, valued using expert judgment and he nce carry the most significant price uncertainty. 2021 2020 Level 1 Level 2 Level 3 Total Level 1 Level 2 Le vel 3 Total £m £m £m £m £m £m £m £m Assets Trading assets Loans — 33,482 721 34,203 — 39,550 225 39,775 Securities 19,563 5,371 21 24,955 21,535 7,599 81 29,215 Derivatives — 105,222 917 106,139 — 165,441 1,082 166,523 Other financial assets Loans — 359 207 566 — 185 168 353 Securities 28,880 7,951 186 37,017 35,972 8,850 167 44,989 Total financial assets held at fair value 48,443 152,385 2,052 202,880 57,507 221,625 1,723 280,855 As % of total fair value assets 24% 75% 1% 20% 79% 1% Liabilities Trading liabilities Deposits — 38,658 2 38,660 — 44,062 7 44,069 Debt securities in issue — 974 — 974 — 1,408 — 1,408 Short positions 20,507 4,456 1 24,964 19,045 7,734 — 26,779 Derivatives — 100,229 606 100,835 — 159,818 887 160,705 Other financial liabilities Debt securities in issue — 1,103 — 1,103 — 1,607 — 1,607 Other deposits — 568 — 568 — 796 — 796 Subordinated liabilities — 703 — 703 — 793 — 793 Total financial liabilities held at fair value 20,507 146,691 609 167,807 19,045 216,218 894 236,157 As % of total fair value liabilities 12% 88% 0% 8% 92% 0% (1) Transfers between levels a re deemed to have occurred at the beginning of the quarter in which the instrument was transferred. (2) For an analysis of debt securities held at mandatory fair value th rough profit or loss by issuer as well as ratings and derivatives, by type and contract, refer to Risk and capital management – Credit risk. Notes to the c onsolidated fi nancial statement s NatWest Group A nnual Repor t and Accou nts 2021 341 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 11 Financial instruments – valuation continued Valuation adjustments When valuing financial instruments in the tradin g book, adjustments are made to mid-market valua tions to cover bid- offer spread, funding and credit risk. These adjust ments are presented in the table below: Adjustment 2021 £m 2020 £m Funding – FVA 90 140 Credit – CVA 390 390 Bid – Offer 113 148 Product and deal specific 119 172 712 850 There was a reallocation of FVA to CVA during the period following an update to the risk manageme nt of certain exposures. The net decrease across CVA an d FVA was driven by reduced exposures, due to increases in interest rates and trade exit activity. The reduction in bid-off er and product and deal specific reserves followed reduced risk due to trade exit activity and LIBOR cessation. Funding valuation adjustments (FVA) FVA represents an estimate of the adjustmen t that a market participant would make to incorporate funding cos ts and benefits that arise in relation to derivative exposures. FVA is calculated as a portfolio level adjustment and can result i n either a funding charge (positive) or funding benefit ( negative). Funding levels are applied to estimated poten tial future exposures. For uncollateralised derivatives, the e xposure reflects the future valuation of the deriv ative. For collateralised derivatives, the exposure reflects the difference bet ween the future valuation of the derivativ e and the level of collateral posted. Credit valuation adjustments (CVA) CVA represents an estimate of the adjustment to fair value that is made to incorporate the counterparty credit risk inherent in derivative exposures. CVA is actively manage d by a credit and market risk hedging process, and the refore movements in CVA are partially offset by trading revenue on the hedges. The CVA is calculated on a portfolio basis refle cting an estimate of the amount a third party would cha rge to assume the credit risk. Collateral held under a credit support agreemen t is factored into the CVA calculation. In such cases where NatWest Group holds collateral against counterparty exposu res, CVA is held to the extent that residual risk remains. Bid-offer Fair value positions are required to be marked to e xit, represented by bid (long positions) or offer (short pos itions) levels. Non-derivative positions are typically marked directly to bid or offer prices. However de rivative exposures are adjusted to exit levels by taking bid-offer reserves calculated on a portfolio basis. The bid-offer approach is b ased on current market spreads and standard market bucketing of risk. Bid-offer spreads vary by maturity and risk type to ref lect different spreads in the market. For positions where there is no observable quote, the bid-offer spreads are wi dened in comparison to proxies to reflect reduced li quidity or observability. Netting is applied on a portfolio basis to refle ct the value at which NatWest Group believes it could exi t the net risk of the portfolio, rather than the sum of exit costs for each of the portfolio’s individual trades. This i s applied where the asset and liability positions are managed as a portfolio for risk an d reporting purposes. Product and deal specific On initial recognition of financial assets and lia bilities valued using valuation techniques which have a significant dependence on information othe r than observable market data, any difference between the transaction price and that derived from the valuation technique is deferred. Such amounts are recognised in the income statement ove r the life of the transaction; when market data becomes observable; o r when the transaction matures or is close d out as appropriate. On 31 December 2021, net gains of £7 1 million (2020 - £63 million) were carried forward. During the y ear, net gains of £103 million (2020 - £75 million) were deferr ed and £94 million (2020 - £100 million) were recognised in the i ncome statement. Where system generated valuations do not accur ately recover market prices, manual valuation adjustmen ts are applied either at a position or portfolio level. Manual adjustmen ts are subject to the scrutiny of independent c ontrol teams and are subject to monthly review by senior management. Own Credit NatWest Group considers the eff ect of its own credit standing when valuing financial liabilities recorded a t fair value. Own credit spread adjustments are made when valuing issued deb t held at fair value, including issue d structured notes. An own credit adjustment is applied to positions where it is believed that counterparties would consi der NatWest Group’s creditworthiness when pricing trades. Notes to the c onsolidated fi nancial statement s NatWest Group A nnual Repor t and Accou nts 2021 342 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 11 Financial instruments - valuation continued Level 3 additional information For illiquid assets and liabilities, classifie d as level 3, additional information is provided on the valuation techniques used and price sensitivity of the products to those inputs. This is to en able the reader to gauge the level of un certainty that arises from positions with significant unobservable in puts or modelling parameters. Level 3 ranges of unobservable inputs The table below provides additional information on level 3 ins truments and inputs. This shows the valuation techni que used for the fair value calculation, the unob servable input or inputs and input range. 2021 202 0 Financial instrument Valuation technique Unobservable inputs Units Low High Low High Trading assets and Other financia l assets Loans Price-bas ed P rice % — 106 — 105 D iscount cas h flow Credit spreads bps 40 102 69 119 D iscount cas h flow D iscount margi n bps 46 55 51 226 Debt securities Price-based Price % — 240 — 232 Equity Shares Price-b ased Price GBP — 30,378 — 27,737 Price-based P rice % — 7 — 80 D iscount cas h flow D iscount margi n % 6 8 7 9 Net asset valuation Net asset value % 80 120 80 120 Derivative asset s and liabilities Credit derivatives Credit derivative pricing Credit spreads bps 6 635 2 500 Correlati on % (15) 95 ( 50) 95 Volat ility % 30 108 27 80 Up front points % — 100 — 100 Rec overy rate % — 60 10 40 Interest rate & F X Option pricing Correlation % (50) 100 ( 50) 100 derivatives Volatility % 17 77 17 60 Constant Prepay ment Rate % 2 16 2 18 Mean Re version % — 92 — 92 Bas is volatility bp s 8 18 15 21 Inflatio n volatility % 1 2 1 2 Inflatio n rate % 2 3 1 2 Equity derivatives Option pricing Correlation % (53) 87 (53) 87 (1) Valuation for private equity investments may be estimated by looking at past prices of simil ar stocks and from valuation statements where valuations are usually derived from earnings measures such as EBITDA or net asset value (NA V). Similarly, for equity or bond fund investments, prices may be estimated from valuation or credit statements using NAV or similar measures. (2) NatWest Group does not have any mat erial liabilities measured at fair value that are issued with an inseparable third-party credit enhancement. Notes to the c onsolidated fi nancial statement s NatWest Group A nnual Repor t and Accou nts 2021 343 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 11 Financial instruments – valuation continued Level 3 sensitivities The level 3 sensitivities presente d below are calculated at a trade or low-level portfolio basi s rather than an overall portfolio basis. As individual sensitivities are aggregated with no reflection of the correlated natu re between instruments, the overall portfolio sensitivity may not be accurately reflected. For example, some portfolios may be negatively cor related to others, where a downwards movement in one asse t would produce an upwards movement in another. However, due to the additive presentation of the above figures this co rrelation impact cannot be displayed. As such, the actual poten tial downside sensitivity of the total portfolio may be le ss than the non-correlated sum of the additive figures as shown in the below table. Alternative assumptions Reasonably plausible alternative assumptions of unobservable inputs are determined based on a specif ied target level of certainty of 90%. Alternative assumptions are determined wi th reference to all available evidence including consideration of the followin g: quality of independent pricing information conside ring consistency between different s ources, 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 holdin g of position; and market intelligence. Other considerations Whilst certain inputs used to ca lculate CVA, FVA and own credit adjustments are not base d on observable market data, the uncertainty of these inputs i s not considered to have a significant effect on the net valuation of the related derivative portfolios and issued debt. As such, the fair value levelling of the derivative po rtfolios and issued debt is not determined by CVA, FVA or own credit inputs. In addition, any fair value s ensitivity driven by these inputs is not included in the level 3 s ensitivities presented. The table below shows the high and low range of fair value of the level 3 assets and liabili ties. This range incorporates the range of fair value inputs as described in the p revious table. 2021 2020 Level 3 Favourable Unfa vourable Level 3 F avourable Unfavourable £m £m £m £m £m £m Assets Trading assets Loans 721 10 (10) 225 10 — Securities 21 — — 81 — — Derivatives 917 60 (70) 1,082 80 (80) Other financial assets Loans 207 10 (10) 168 20 (10) Securities 186 20 (20) 167 30 (20) 2,052 100 (110) 1,723 140 (110) Liabilities Trading liabilities Deposits 2 — — 7 — — Debt securities in issue — — — — — — Short positions 1 — — — - - Derivatives 606 30 (30) 887 50 (40) Other financial liabilities — — — — — — 609 30 (30) 894 50 (40) Notes to the c onsolidated fi nancial statement s NatWest Group A nnual Repor t and Accou nts 2021 344 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 11 Financial instruments – valuation continued Movement in level 3 assets and liabilities The following table shows the movement in level 3 asse ts and liabilities in the year. 2021 2020 Trading Other Trading Other assets financial Total Total assets financial T otal Total (2) assets (3) a ssets liabilities (2) assets (3) assets liabilities £m £m £m £m £m £m £m £m At 1 January 1,388 335 1,723 894 2,233 321 2,554 1,317 Amounts recorded in the income statement (1) (93) (29) ( 122) (90) 127 (21) 106 (67) Amounts recorded in the statement of comprehensive income — 23 23 — — 63 63 — Level 3 transfers in 125 3 128 20 165 98 263 188 Level 3 transfers out (104) (6) (109) (168) (139) — (139) (368) Purchases/originations (4) 965 452 1,416 305 441 327 768 127 Settlements/other decreases (47) ( 364) (411) (28) (293) (153) (446) ( 59) Sales (573) (17) ( 590) (321) (1,148) (301) (1,449) (245) Foreign exchange and other (3) (3) (6) (3) 2 1 3 1 At 31 December 1,658 394 2,052 609 1,388 335 1,723 894 Amounts recorded in the income statement in respect of balances held at year end - unrealised (93) (32) ( 126) (90) 129 (22) 107 (68) (1) There were £3 million net losses on trading ass ets and liabilities (2020 – £194 million net gain) recorded in income from trading activities. Net losses on other instruments of £29 million (2020 – £21 million net losses) were recorded in other operating income and interest income as appropriate. (2) Trading assets comprise assets held at fair value in trading portfolios. (3) Other financial assets comprise fair value through other comprehensive income, designated as at fair value through profit or loss and other fair value through profit or loss. (4) Movement in the period includes new loan originations classified as HTC&S under IFRS 9 and fair valued through other comprehensive income. 2021 purchases include a new leveraged finance loan of £450 million. As a result of its composition and illiquid nature, pricing is based on unobservable inputs and the judgment of valuation experts. Notes to the c onsolidated fi nancial statement s NatWest Group A nnual Repor t and Accou nts 2021 345 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 11 Financial instruments - valuation continued Fair value of financial instruments measured at amortised cost on the balance sheet The following table shows the carrying value an d fair value of financial instruments measu red at amortised cost on the balance sheet. Fair value hierarchy level Items where fair value approximates Carry ing Fair carrying value value value Level 1 Level 2 Level 3 2021 £bn £bn £bn £bn £b n £bn Financial assets Cash and balances at central banks 177.8 Settlement balances 2.1 Loans to banks 0.1 7.5 7.5 — 5.0 2.5 Loans to customers 359.0 354.1 — 28.0 326.1 Other financial assets - securities 8.6 8.6 4.4 0.7 3.5 2020 Financial assets Cash and balances at central banks 124.5 Settlement balances 2.3 Loans to banks 0.1 6.9 6.9 — 3.8 3.1 Loans to customers 360.5 359.2 — 25.2 334.0 Other financial assets - securities 9.8 10.1 5.9 1.2 3.0 2021 Financial liabilities Bank deposits 4.9 21.4 21.0 — 18.7 2.3 Customer deposits 442.4 37.4 37.6 — 18.1 19.5 Settlement balances 2.1 Other financial liabilities - debt sec urities in issue 47.7 48.6 — 41.4 7.2 Subordinated liabilities 7.7 8.3 — 8.2 0.1 Notes in circulation 3.0 2020 Financial liabilities Bank deposits 4.4 16.2 16.2 — 11.3 4.9 Customer deposits 371.7 60.0 60.1 — 10.1 50.0 Settlement balances 5.5 Other financial liabilities - debt sec urities in issue 43.4 44.6 — 34.7 9.9 Subordinated liabilities 9.2 9.8 — 9.7 0.1 Notes in circulation 2.7 The assumptions and methodol ogies underlying the calculation of fair values of financial instru ments at the balance sheet date are as follows: Short-term financial instruments For certain short-term financial instruments: c ash and balances at central banks, items in the course of colle ction from other banks, settlement balances, items in the c ourse of transmission to other banks, customer dema nd deposits and notes in circulation, carrying value is de emed a reasonable approximation of fair value. Loans to banks and customers In estimating the fair value of net loans to custo mers and banks measured at amortised cost, NatWest Group’s lo ans are segregated into appropriate portfolios reflecting the characteristics of the constituent loans. Two p rincipal methods are used to estimate fair value: (a) Contractual cash flows are discounted using a market discount rate that incorporates the cur rent spread for the borrower or where this is not obse rvable, the spread for borrowers of a similar credit standing. This met hod is used for portfolios where counterpar ties have external ratings: institutional and corporate lend ing. (b) Ex pected cash flows (una djusted for credit losses) are discounted at the current offer rate for the same or simil ar products. The current methodology caps all l oan values at par rather than modelling clients’ option t o repay loans early. This approach is adopted f or lending portfolios in Retail Banking, Ulster Bank RoI, Comme rcial Banking (SME loans) and Private Banking in order to reflect the homogeneous nature of these portfolios. Debt securities and subordinated liabili ties Most debt securities are valued using quoted prices in active markets or from quoted prices of similar financi al instruments in active markets. Fair values of the remaining po pulation are determined using market standard valu ation techniques, such as discounted cash flows, adjusting for own credi t spreads where appropriate. Bank and customer deposits Fair values of deposits are estimated using discounted cash flow valuation techniques. Where require d, methodologies can be revised as additional information and valuation inputs become available. Notes to the c onsolidated fi nancial statement s NatWest Group A nnual Repor t and Accou nts 2021 346 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 12 Financial instruments - maturity analy sis Remaining maturity This note shows the maturity profile of NatWes t Group’s financial assets and liabilities by contractual da te of maturity and contractual cash flows. The following table shows the r esidual maturity of financial instruments, based on c ontractual date of maturity. 2021 2020 Less than More than Less than More t han 12 months 12 months Total 12 months 12 months T otal £m £m £m £m £m £m Assets Cash and balances at central banks 177,757 — 177,757 124,489 — 124,489 Trading assets 40,263 18,895 59,158 42,037 26,953 68,990 Derivatives 34,538 71,601 106,139 46,244 120,279 166,523 Settlement balances 2,141 — 2,141 2,297 — 2,297 Loans to banks - amortised cost 7,425 257 7,682 6,835 120 6,955 Loans to customers - amortised cost 103,689 255,301 358,990 87,531 273,013 360,544 Other financial assets 11,151 34,994 46,145 8,901 46,247 55,148 Liabilities Bank deposits 13,715 12,564 26,279 12,315 8,291 20,606 Customer deposits 478,801 1,009 479,810 430,283 1,456 431,739 Settlement balances 2,068 — 2,068 5,545 — 5,545 Trading liabilities 41,664 22,934 64,598 45,037 27,219 72,256 Derivatives 34,593 66,242 100,835 47,361 113,344 160,705 Other financilal liabilities 16,060 33,266 49,326 12,403 33,408 45,811 Subordinated liabilities 1,375 7,054 8,429 365 9,597 9,962 Notes in circulation 3,047 — 3,047 2,655 — 2,655 Lease liabilities 238 1,025 1,263 185 1,513 1,698 Assets and liabilities by contractual cash flows up to 20 years The tables on the following page , show the contractual undiscounted cash flows receivable and payable, up to a period of 20 years, including future receipts and pay ments of interest of financial assets and liabilities by contractual maturity. The balances in the following tables do not agree direc tly with the consolidated balance sheet, as the t ables include all cash flows relating to principal and future coupon paymen ts, presented on an undiscounted basis. The table s have been prepared on the following basis: Financial assets have been reflected in the time b and of the latest date on which they could be repaid, unless e arlier repayment can be demanded by NatWest Group. Fi nancial liabilities are included at the earliest date on which the counterparty can require repay ment, regardless of whether or not such early repayment results in a pe nalty. If the repayment of a financial instrument is triggered by, or is subject to, specific criteria such as market price hurdles being reached, the asset is included in the time band that contains the latest date on which it can be repaid, regardles s of early repayment. The liability is included in the ti me band that contains the earliest possible date on which the condi tions could be fulfilled, without considering the probability of the con ditions being met. For example, if a structured no te is automatically prepaid when an equity index exceeds a certain level, the c ash outflow will be included in the less than three months period, wha tever the level of the index at the year end. The se ttlement date of debt securities in issue, issued by ce rtain securitisation vehicles consolidated by NatWest Group, depends on when cash flows are received from the securitised assets. Where these assets are prepayable, the timing of t he cash outflow relating to securities assumes that each asse t will be prepaid at the earliest possible date. As the repayments of asse ts and liabilities are linked, the repayment of assets in securi tisations is shown on the earliest date that the asset ca n be prepaid, as this is the basis used for liabilities. The principal amounts of financial assets and liabilities th at are repayable after 20 years or where the coun terparty has no right to repayment of the principal are excluded f rom the table, as are interest payments after 20 years. The maturity of guarantees and com mitments is based on the earliest possible date they would be drawn in o rder to evaluate NatWest Group’s liquidity position. MFVTPL assets of £165.6 billion (2 020 - £235.9 billion) and HFT liabilities of £165.3 billion (2020 - £2 32.8 billion) have been excluded from the following tables. Notes to the c onsolidated fi nancial statement s NatWest Group A nnual Repor t and Accou nts 2021 347 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 12 Financial instruments – maturity analy sis continued 0-3 months 3-1 2 months 1-3 years 3- 5 years 5- 10 years 10- 20 years 2021 £m £m £m £m £m £m Assets by contractual maturity up to 20 ye ars Cash and balances at central banks 177,757 — — — — — Derivatives held for hedging (23) (32) 72 15 10 17 Settlement balances 2,141 — — — — — Loans to banks - amortised cost 5,735 1,689 21 — — — Loans to customers - amortised cost 65,760 43,144 63,979 45,057 73,044 90,115 Other financial assets (1) 3,924 7,576 10,467 8,048 7,444 5,523 Finance lease 290 340 746 504 704 377 255,584 52,717 75,285 53,624 81,202 96,032 Liabilities by contractual maturity up to 20 ye ars Bank deposits 13,292 421 566 12,003 — — Customer deposits 473,123 5,440 1,155 73 4 19 Settlement balances 2,068 — — — — — Derivatives held for hedging (57) (31) 561 155 (152) (198) Other financial liabilities 6,967 9,293 16,953 10,062 7,905 292 Subordinated liabilities 66 1,604 3,481 2,170 1,496 563 Other liabilities- Notes in circulation 3,047 — — — — — Lease liabilities 74 161 220 167 281 251 498,580 16,888 22,936 24,630 9,534 927 Guarantees and commitments - notional amou nt Guarantees (2) 2,055 — — — — — Commitments (3) 118,536 — — — — — 120,591 — — — — — 2020 Assets by contractual maturity up to 20 ye ars Cash and balances at central banks 124,489 — — — — — Derivatives held for hedging 14 18 96 — 12 6 Settlement balances 2,297 — — — — — Loans to banks - amortised cost 5,600 1,245 — — 1 110 Loans to customers - amortised cost 47,507 46,718 65,138 58,680 81,544 88,155 Other financial assets (1) 4,019 5,919 12,592 10,791 11,855 5,774 Finance lease 48 366 840 671 895 545 183,974 54,266 78,666 70,142 94,307 94,590 Liabilities by contractual maturity up to 20 ye ars Bank deposits 11,217 1,078 3,241 5,038 — — Customer deposits 421,763 8,528 1,407 23 26 20 Settlement balances 5,545 — — — — — Derivatives held for hedging 36 (17) 94 3 64 (2) Other financial liabilities 4,716 8,144 15,558 11,470 7,358 254 Subordinated liabilities 73 685 4,387 3,444 923 562 Other liabilities- Notes in circulation 2,655 — — — — — Lease liabilities 51 135 294 245 429 497 446,056 18,553 24,981 20,223 8,800 1,331 Guarantees and commitments - notional amou nt Guarantees (2) 2,244 — — — — — Commitments (3) 121,922 — — — — — 124,166 — — — — — (1) Other financial assets excludes equity shares. (2) NatWest Group is on ly called upon to satisfy a guarantee when the guaranteed party fails to meet its obligations. NatWest Group expects most guarantees it provides to expire unused. (3) NatWest Group has given commitments to provide funds to customers under undrawn formal facilities, credit lines and other commitments to lend subject to certain conditions being met by the counterparty. NatWest Group does not expect a ll facilities to be drawn, and some may lapse before drawdown . Notes to the c onsolidated fi nancial statement s NatWest Group A nnual Repor t and Accou nts 2021 348 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 13 Trading assets and liabili ties Trading assets and liabilities comprise asse ts and liabilities held at fair value and classified as held-for-tradi ng. Financial instruments are classified as held for trading if they a re held for the purpose of se lling or repurchasing them in the short term , to make a spread between purchase and sale price or held to take advantage of movements in prices and yields. For accounting policy information se e Accounting policies note 10. 2021 2020 Assets £m £m Loans Reverse repos 20,742 19,404 Collateral given 12,047 18,760 Other loans 1,414 1,611 Total loans 34,203 39,775 Securities Central and local government - UK 6,919 4,184 - US 3,329 5,149 - other 10,929 16,436 Financial institutions and corporate 3,778 3,446 Total securities 24,955 29,215 Total 59,158 68,990 Liabilities Deposits Repos 19,389 19,036 Collateral received 17,718 23,229 Other deposits 1,553 1,804 Total deposits 38,660 44,069 Debt securities in issue 974 1,408 Short positions 24,964 26,779 Total 64,598 72,256 Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 349 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 14 Derivatives Derivative is a term covering a wide range of fina ncial instruments that derive their fair v alue from an underlying rate or price, for example interest rates or exchange rates ( the underlying). NatWest Group uses deriv atives as a part of its trading activities, to manage its own risks such as interest rate, foreign exchange, or credit risk and in cer tain customer transactions. This note shows contracted volumes of derivatives, how they are use d for hedging purposes and more specifically the ef fects of the application of hedge accounting. For accounting policy information se e Accounting policies note 10 and 15. 2021 2020 Notional Assets L iabilities Notional Ass ets Liabilities £bn £m £m £bn £m £m Exchange rate contracts 3,167 38,517 39,286 3,328 52,239 55,107 Interest rate contracts 8,919 67,458 61,206 10,703 114,115 105,214 Credit derivatives 14 154 343 15 161 376 Equity and commodity contracts — 10 — 1 8 8 106,139 100,835 166,523 160,705 NatWest Group applies hedge acc ounting to reduce the accounting mismatch caused in the inco me statement by using derivatives to hedge the following risks: in terest rate, foreign exchange and net investment in f oreign operations. NatWest Group’s interest rate he dging relates to the management of NatWest Group’s non- trading structural interest rate risk, caused by the mismatch be tween fixed interest rates and floating interes t rates on its financial instruments. NatWest Group manages this risk within approved limits. Residual risk positions are hedged with deri vatives, principally interest rate swaps. Suitable larger fixed rate financial instruments a re subject to fair value hedging; the remaining exposu re, where possible, is hedged by derivatives designated as cash flow hedges. Cash flow hedges of interest rate risk relate to exposu res to the variability in future interest payments and receipts due to the movement of benchmark interest rates on fo recast transactions and on financial assets and financial lia bilities. This variability in cash flows is hedged by interest rate swaps, whic h convert variable cash flows into fixed. For these cash flow hed ge relationships, the hedged items are actual and fo recast variable interest rate cash flows arising f rom financial assets and financial liabilities with interest rates linked to the relev ant benchmark rates, most notably LIBO R, EURIBOR, SONIA and the Bank of England Official Bank Rate. The v ariability in cash flows due to movements in the relevant benchmark rate is hedged; this risk component is identified usi ng the risk management systems of NatWest Group and enco mpasses the majority of cash flow variability risk. Fair value hedges of interest rate risk invol ve interest rate swaps transforming the fixed interest rate risk in fin ancial assets and financial liabilities to floating. The he dged risk is the risk of changes in the hedged item’s fair value att ributable to changes in the benchmark inte rest rate risk component of the hedged item. The significant benchmarks iden tified as risk components are LIBOR, EURIBO R and SONIA. These risk components are identified usin g the risk management systems of NatWest Group and encompass the majo rity of the hedged item’s fair value risk. NatWest Group hedges the exchange rate risk of its net investment in foreign currency denominated operations with currency borrowings and forw ard foreign exchange contracts. NatWest Group reviews the value of the investments’ net assets, executing hedges wher e appropriate to reduce the sensitivity of capital ratios to foreign exch ange rate movement. Hedge accounting relationships will be designated where required. Exchange rate risk also arises in NatWes t Group where payments are denominated in currencies other than the functional currency. Residual risk positions are hed ged with forward foreign exchange contracts, fixing the exch ange rate the payments will be settled in. The derivatives are documented as cash flow hedges. For all cash flow hedging and fair value hedge relationships, and net investment hedging, NatWest G roup determines that there is an adequate level of offs etting between the hedged item and hedging instrument at inception and on an ongoing basis. This is achieved by comparing movemen ts in the fair value of the expected highly probable forecast interest c ash flows/fair value of the hedged item attributable to the hed ged risk with movements in the fair value of the ex pected changes in cash flows from the hedging interest rate swa p. Hedge effectiveness is asse ssed on a cumulative basis over a time period management determines to be appropriate. NatWest Group uses either the actual ratio betwee n the hedged item and hedging instrument(s) or one that minimises hedge ineffectiveness to establish the hedge r atio for hedge accounting. Hedge ineffectivene ss is measured and recognised in the income statement as it arises. IBOR reform - NatWest Group in the year conti nued to apply, for relationships directly affected by interest rate benc hmark reform, Interest Rate Benchmark Reform Amen dments to IAS 39 and IFRS 7 issued September 201 9 (“Phase 1 relief”) and Interest Rate Benchmark Refor m – Phase 2 Amendments to IAS 39 and IFRS 7 issued August 202 0 (“Phase 2 relief”). Significant transitions in the year we re the GBP, JPY and CHF derivatives subject to cash flow and fair v alue hedging transitioned as part of the LCH ‘big b ang’ conversion in December 2021. The swaps were restructu red to reprice off the appropriate risk free rate from the next rep ricing date post 31 December 2021 plus a spread adjustment. All i mpacted hedge accounting relationships had their designations up dated to reflect this transition. USD cash flow and fair value he dges of interest rate risk that mature post 30 June 2023 c ontinue to be directly affected by interest rate benchmark reform. Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 350 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 14 Derivatives continued Included in the table below are derivatives held for hedging purposes as follows: 2021 2020 Changes in Changes in fair fair value used value used for for hedge hedge Notional Assets Liabilities ineffectivenes s (1) Notional Assets Liabilities ineffectiveness (1) £bn £m £m £m £bn £m £m £ m Fair value hedging Interest rate contracts 65.6 1,176 2,057 897 65.5 1,878 3,844 (875) Cash flow hedging Interest rate contracts 133.1 952 1,149 (931) 128.8 2,035 1,210 217 Exchange rate contracts 7.3 30 109 27 10.8 37 116 ( 55) Net investment hedging Exchange rate contracts 0.5 11 1 7 0.2 — 9 11 206.5 2,169 3,316 — 205.3 3,950 5,179 (702) IFRS netting/Clearing house settlements (2,125) (3,196) (3,857) (5,049) 44 120 93 130 (1) The change in fair va lue used for hedge ineffectiveness includes instruments that were decrecognised in the year. The notional of hedging instruments affected by interest rate benchmark reform is as follows : 2021 2020 £bn £bn Fair value hedging EURIBOR (1) — 13.6 GBP LIBOR — 11.2 USD LIBOR (2) 20.2 26.6 Other currency LIBOR — 1.1 Cash flow hedging EURIBOR (1) — 5.2 GBP LIBOR — 51.7 SOFR (3) 0.2 — USD LIBOR (2) 3.1 2.7 (1) In 2021 management concluded that E URIBOR is not expected to be significantly reformed further and therefore any uncertainty due to interest benchmark rate reform for EURIBOR has ended. (2) In 2021 the FCA declared that USD LIBOR will be non- representative post 30 June 2023; at the time of preparing the 2020 disclosures this date was expected to be 31 December 2021. (3) Hedge relationships subject to reform a re those where either the hedged item or the hedging instrument is subject to the IBOR reform. (4) Notional of £1 billion cross currency d erivative contracts in cash flow hedge relationships will convert to repricing off the relevant risk-free rate at the first repricing date post cessation. Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 351 Financial statements Strategic report Governance Risk and capital management Additional information Financial revie w Financial statements Strategic report Governance Risk and capital management Additional information Financial review 14 Derivatives continued The following table shows the period in which the notional of hedging contract ends: 0-3 3-12 1-3 3-5 5 -10 10-20 20+ months months years years years years years Total 2021 £bn £bn £bn £bn £bn £bn £b n £b n Fair value hedging Hedging assets - interest rate risk 0.9 2.5 5.5 5.7 6.2 4.9 4.5 30.2 Hedging liabilities - interest rate risk 1.1 4.2 11.8 9.3 8.4 0.6 0.0 35.4 Cash flow hedging Hedging assets Interest rate risk 5.4 8.1 14.3 24.5 11.4 — — 63.7 Average fixed interest rate (%) 1.40 1.19 1.35 0.65 0.82 — — 0.97 Hedging liabilities Interest rate risk 8.8 21.1 33.0 3.3 2.5 0.7 — 69.4 Average fixed interest rate (%) 0.50 0.24 0.41 0.47 1.01 4.55 0.44 Hedging assets Exchange rate risk — — — — — — — — Hedging liabilities Exchange rate risk 0.1 2.4 3.5 1.3 — — — 7.3 Net investment hedging Exchange rate risk 0.5 — — — — — — 0.5 2020 Fair value hedging Hedging assets - interest rate risk 1.2 2.3 6.3 7.4 8.9 5.1 4.2 35.4 Hedging liabilities - interest rate risk — 0.6 10.1 11.6 7.1 0.5 0.2 30.1 Cash flow hedging Hedging assets Interest rate risk 0.7 10.5 19.3 13.9 10.5 0.1 — 55.0 Average fixed interest rate (%) 1.28 1.22 1.51 1.06 0.92 3.12 — 1.23 Hedging liabilities Interest rate risk 1.6 28.9 36.8 3.4 2.4 0.7 — 73.8 Average fixed interest rate (%) 1.14 0.78 0.37 1.25 0.65 4.55 — 0.64 Hedging assets Exchange rate risk — — 0.1 — — — — 0.1 Hedging liabilities Exchange rate risk — 3.3 5.3 1.0 1.1 — — 10.7 Net investment hedging Exchange rate risk 0.1 0.1 — — — — — 0.2 For cash flow hedging of exchange rate risk, the a verage foreign exchange rates applicable a cross the relationships were as below for the main currencies hedged. 2021 2020 INR/GBP 106.58 95.29 USD/GBP 1.38 1.36 CHF/GBP 1.25 n/a JPY/GBP 132.93 132.93 JPY/EUR n/a 120.21 CNH/GBP 8.74 n/a For net investment hedging of e xchange rate risk, the average foreign exchange rates applicable were as below for the main currencies hedged. 2021 2020 SEK/GBP 11.74 11.15 DKK/GBP 8.85 8.28 NOK/GBP 12.12 12.73 AED/USD 3.67 n/a USD/GBP 1.32 n/a Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 352 Financial statements Strategic report Governance Risk and capital management Additional information Financial revie w Financial statements Strategic report Governance Risk and capital management Additional information Financial review 14 Derivatives continued The table below a nalyses asset s and liabilities subject to hedging derivatives. Impact on Changes in fa ir hedged items Carrying value Impact on value used as ceased to be of hedged hedged items a basis to adjusted f or assets and included in determine hedging liabilities carry ing value ineffectivenes s (1) gains or loss es 2021 £m £m £m £m Fair value hedging - interest rate Loans to banks and customers - amor tised cost 6,603 701 (478) 69 Other financial assets - securities 30,882 518 (1,576) — Total 37,485 1,219 (2,054) 69 Other financial liabilities - debt sec urities in issue 34,371 454 953 — Subordinated liabilities 6,235 (9) 255 — Total 40,606 445 1,208 — Cash flow hedging - interest rate Loans to banks and customers - amortised cost 63,025 1,984 Other financial assets - securities 714 26 Total 63,739 2,010 Cash flow hedging - interest rate Bank and customer deposits 68,383 (1,084) Other financial liabilities - debt sec urities in issue 1,006 (21) Total 69,389 (1,105) Cash flow hedging - exchange rate Loans to banks and customer - amortised cos t 21 — Other financial assets - securities 2 — Total 23 — Other financial liabilities - debt sec urities in issue 6,337 (5) Subordinated liabilities 742 (12) Other 200 (10) Total 7,279 (27) 2020 Fair value hedging - interest rate Loans to banks and customers - amor tised cost 6,858 1,228 323 77 Other financial assets - securities 35,754 2,268 1,568 — Total 42,612 3,496 1,891 77 Other financial liabilities - debt sec urities in issue 29,317 1,336 (746) — Subordinated liabilities 6,441 293 (268) 10 Total 35,758 1,629 (1,014) 10 Cash flow hedging - interest rate Loans to banks and customers - amor tised cost 53,335 (601) Other financial assets - securities 1,550 (16) Total 54,885 (617) Cash flow hedging - interest rate Bank and customer deposits 72,880 409 Other financial liabilities - debt securities in issue 1,014 13 Total 73,894 422 Cash flow hedging - exchange rate Loans to banks and customer - amortised cost 112 1 Other financial assets - securities 30 — Total 142 1 Cash flow hedging - exchange rate Other financial liabilities - debt sec urities in issue 6,272 20 Subordinated liabilities 4,194 36 Other 152 (2) Total 10,618 54 (1) The change in fair va lue used for hedge ineffectiveness includes instruments that were derecognised in the year . Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 353 Financial statements Strategic report Governance Risk and capital management Additional information Financial revie w Financial statements Strategic report Governance Risk and capital management Additional information Financial review 14 Derivatives continued The following risk exposures will be affec ted by interest rate benchmark reform (notional, he dged adjustment): 2021 2020 Hedged Hedged Notional adjustment Notional a djustment £bn £m £bn £m Fair value hedging EURIBOR (1) — — 15.1 27 GBP LIBOR — — 11.4 1,178 USD LIBOR (2) 21.8 7 28.1 (427) Other currency LIBOR — — 1.1 1 Cash flow hedging EURIBOR (1) — — 4.1 (76) GBP LIBOR — — 10.5 (473) USD LIBOR (2) 3.3 2 1 2.7 (61) BOE Base rate (3) — — 40.7 (156) ECB REFI rate (3) — — 1.2 — SONIA (3) — — 0.6 4 (1) In 2021 management concluded that E URIBOR is not expected to be significantly reformed further and therefore any uncertainty due to interest benchmark rate reform for EURIBOR has ended. (2) In 2021 the FCA declared that USD LIBOR will be non- representative post 30 June 2023; at the time of preparing the 2020 disclosures this date was expected to be 31 December 2021. (3) Hedge relationships subject to reform a re those where either the hedged item or the hedging instrument is subject to the IBOR reform. (4) Notional of £6.5 billion GBP LIBOR hedged item s in cash f low hedge relationships will convert to repricing off SONIA at the first repricing date post cessation. Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 354 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Financial statements Strategic report Governance Risk and capital management Additional information Financial review 14 Derivatives continued The following table shows an analysis of the pre-tax cash flow hedge reserve and foreign exchange hedge reserve. 2021 2020 Foreign Foreign Cash flow exchange Cash flow exchange hedge reserve hedge reserve hedge reserve hedge reserve £m £m £m £m Continuing Interest rate risk (295) — 695 — Foreign exchange risk 23 53 22 (13) De-designated Interest rate risk (297) — (424) — Foreign exchange risk 10 (759) (1) (775) Total (559) (706) 292 (788) 2021 2020 Foreign Foreign Cash flow exchange Cash flow exchange hedge reserve hedge reserve hedge reserve hedge reserve £m £m £m £m Amount recognised in equity Interest rate risk (700) 318 — Foreign exchange risk 13 88 3 (57) Total (687) 88 321 (57) Amount transferred from equity to earnings Interest rate risk to net interest income (181) — (19) — Interest rate risk to non-interest inco me (1) 20 — — — Foreign exchange risk to net interest inco me (4) 2 (35) — Foreign exchange risk to non-interest income 1 (2) — 2 Foreign exchange risk to operating expenses 3 — 4 — Total (161) — (50) 2 (1) There was £20 million reclassified from the cash flow reserve to earnings due to forecasted cash flows that are no longer expected to occur. Hedge ineffectiveness recognised in othe r operating income comprises: 2021 2020 2019 £m £m £m Fair value hedging (Losses)/gains on hedged items attributa ble to the hedged risk (846) 877 610 Gains/(losses) on the hedging instruments 897 (875) (585) Fair value hedging ineffectiveness 51 2 25 Cash flow hedging Interest rate risk (26) 22 23 Cash flow hedging ineffectiveness (26) 22 23 Total 25 24 48 The main sources of ineffectiveness for interest rate risk hedge accounting relationships a re:  The effect of the counterparty credit risk on the fair value of the interest rate swap which is not reflected in the fair value of the hedged item attributable to the change in inte rest rate (fair value hedge).  Differences in the repricing basis between the hedging i nstrument and hedged cash flows (cas h flow hedge); and  Upfront present values on the hedging derivative s where hedge accounting relationships ha ve been designated after the trade date (cash flow hedge and fair value hedge). Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 355 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 15 Loan impairment provisions Loan exposure and impairment metrics There is a r isk that customers and counterparties fail to meet their contractual obligation to settle outstanding amounts, kn own as expected credit losses (ECL). The calculation of ECL considers historic, current and forward-looking information to determine the amount we do not expect to recover. ECL is recognised o n current and potential exposures, and contingent liabilities. For a ccounting policy informa tion see Accounting policies n ote 11. Further d isclosures on credit risk and information o n ECL methodology are shown from page 197. The table below summarises loans and credit impai rment measures within the scope of IFRS 9 Expected credit losses framework. 2021 2020 £m £m Loans - amortised cost Stage 1 330,824 287,124 Stage 2 33,981 78,917 Stage 3 5,022 6,358 Of which: individual 1,215 2,292 Of which: collective 3,807 4,066 369,827 372,399 ECL provisions (1) - Stage 1 302 519 - Stage 2 1,478 3,081 - Stage 3 2,026 2,586 Of which: individual 363 831 Of which: collective 1,663 1,755 3,806 6,186 ECL provision coverage (2,3) - Stage 1 (%) 0.09 0.18 - Stage 2 (%) 4.35 3.90 - Stage 3 (%) 40.34 40.67 1.03 1.66 Continuing operations Impairment (releases)/losses ECL (release)/charge (3,4) (1,278) 3,131 Stage 1 (1,377) (89) Stage 2 (187) 2,601 Stage 3 286 619 Of which: individual 20 194 Of which: collective 266 425 Amounts written off 876 937 Of which: individual 455 191 Of which: collective 421 746 (1) Includes £5 million (2020 - £6 million) related to ass ets classified as FVOCI. (2) ECL provisions coverage is calculated as total ECL provisions divided by third party loans – amortised cost and FVOCI. (3) Includes a £3 million charge (2020 - £12 million cha rge) related to other financial assets, of which £2 million release (2020 - £2 million charge) related to assets classified as FVOCI; and £34 million release (2020 - £28 million charge) related to contingent liabilities. (4) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8. (5) The table shows gross loans only and excludes amounts that are outside the scope of the ECL framework. Refer to Financial instruments within the scope of the IFRS 9 ECL framework for further details. Other financial assets within the scope of the IFRS 9 ECL framework were cash and balances at central banks totalling £176.3 billion (2020 – £122.8 billion) and debt securities of £44.9 billion (2020 – £53.8 billion). Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 356 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 15 Loan impairment provisions continu ed Credit risk enhancement and mitigation For information on Credit risk enhance ment and mitigation held as security, refer to Risk and capital managemen t – Credit risk enhancement and mitigation section. Critical accounting policy: Loan impairment provisions Accounting policies note 11 sets out how the expected loss approach is applied. At 31 December 2021 , customer loan impairment provisions amounted to £3,806 million (2020 - £6,186 million). A loan is impaired when there is objec tive evidence that the cash flows wi ll not occur in the manner expected when the loan was advanced. Such evidence includes, changes in the credit rating of a borrower, the failure to make payments in accordan ce with the loan agreement, significant reduction in the valu e of any security, breach of limits or covenants, and observ able data about relevant macroeconomic measures. The impairment loss is the difference between the carrying value of the loan and the present value of e stimated future cash flows at the loan's original eff ective interest rate. The measurement of credit impairment unde r the IFRS expected loss model depends on management’s asse ssment of any potential deterioration in the creditworthiness of the borrower, its modelling of expected perfo rmance and the application of economic forecasts. All th ree elements require judgments that are potentially significan t to the estimate of impairment losses. For further information and sensitivi ty analysis, refer to Risk and capital managemen t – Measurement uncertainty and ECL sensitivity analysis section. IFRS 9 ECL model design principles Refer to Credit risk – IFRS 9 ECL model design pri nciples section for further details. Approach for multiple economic scenarios (MES) The base scenario plays a greater part in the calculation of ECL than the approach to MES. Ref er to Credit risk – Economic loss drivers - Probability weightings of scenarios s ection for further details. 16 Other financial assets Other financial assets consist of debt securities, equi ty shares and loans that are not held for trading. Balances consist of loc al and central government securities, a component part of Nat West Group’s liquidity portfolio. For accounting policy information se e Accounting policy 10. Debt securities Central and local g overnment Other Equity Other UK U S Other debt Total sh ares loans Total 2021 £m £m £m £m £ m £m £m £m Mandatory fair value through profit or loss — — — 6 6 13 298 317 Fair value through other comprehensive income (1) 11,938 10,086 5,604 9,058 36,686 312 268 37,266 Amortised cost 3,821 156 81 4,504 8,562 — — 8,562 Total 15,759 10,242 5,685 13,568 45,254 325 566 46,145 2020 Mandatory fair value through profit or loss — — — 88 88 14 338 440 Fair value through other comprehensive income (1) 17,458 11,742 6,802 8,591 44,593 294 15 44,902 Amortised cost 4,997 235 116 4,458 9,806 — — 9,806 Total 22,455 11,977 6,918 13,137 54,487 308 353 55,148 (1) Upon initial recognition, the Group occas ionally irrevocably designates some of its equity investments as equity instruments at FVOCI when they meet the definition of equity under IAS 32 Financial instruments: presentation, are not held for trading or they a re held for strategic purposes. Such classification is determined on an instrument by instrument basis. Gains and losses on these equity instruments are not recycled to the income statement and dividends are recognised in profit or loss except when they represent a recovery of part of the cost of the instrument, in which case such g ains are recorded in OCI. Equity instruments at FVOCI are not subject to an impairment assessment. Equity shares disposed during 20 20 included SABB (£383 million), VISA Inc. (£186 million), an d Vocalink (£16 million). Dividends on FVOCI equity shares include £4 million (2020: £5 million) in relation to the equity holding in OTC Derivative Limited and £1 million (2020: £2 million) for VISA Inc. Dividends received in relation to equity s hares disposed during the year were nil (2020: £15 million for NWG’s equity holding in SABB ). Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 357 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 17 Intangible assets Intangible assets, such as internally generated sof tware and goodwill generated on business combinations a re not physical in nature. This note presents the cost of the assets, which is the amount N atWest Group initially paid or incurred, additions an d disposals during the year, and any a mortisation or impairment. Amortisation is a cha rge that reflects the usage of the asset and impairment is a reduction in value arising f rom specific events identified during the ye ar. For accounting policy information se e Accounting policies notes 5 and 6. 2021 2020 Goodwill Other (1) Total Goodwill Other (1) Total Cost £m £m £m £m £m £m At 1 January 9,939 2,592 12,531 9,980 2,293 12,273 Currency translation and other adjustments — 29 29 — (1) (1) Additions — 479 479 — 348 348 Disposals and write - off of fully amortised assets — (50) (50) (41) ( 48) (89) At 31 December 9,939 3,050 12,989 9,939 2,592 12,531 Accumulated amortisation and impairment At 1 January 4,332 1,544 5,876 4,373 1,278 5,651 Currency translation and other adjustments — 31 31 — 1 1 Disposals and write-off of fully amortised ass ets — (28) (28) (41) ( 26) (67) Impairment of intangible assets 85 2 87 — 9 9 Amortisation charge for the year — 300 300 — 282 282 At 31 December 4,417 1,849 6,266 4,332 1,544 5,876 Net book value at 31 December 5,522 1,201 6,723 5,607 1,048 6,655 (1) Principally internally generat ed software. Intangible assets and goodwill are reviewed for i ndicators of impairment. In 2021 £85 million of goodwill was i mpaired due to a reduction in the recoverable value. NatWest Group’s goodwill acquired in business co mbinations analysed by reportable segment is in Note 4 Seg mental analysis. It is reviewed annually at 31 Dece mber for impairment. In 2021 goodwill in the Retail segment was impaired by £85 million. No other impairment was indicated at 31 December 2021 or 2020. Impairment testing involves the comparison of the carrying value of each cash-generating unit (CGU) wi th its recoverable amount. The carrying values of the segmen ts reflect the equity allocations made by manageme nt, which are consistent with NatWest Group’s capital targets. Recoverable amount is the high er of fair value less costs of disposal and value in use. Fair value is the price th at would be received to sell an asset in an orderly transaction be tween market participants. Value in use is the present value of expected future cash flows from the C GU. The recoverable amounts for all CGUs at 31 December 2021 were based on value in use, using managemen t's latest five- year revenue and cost forecasts . These are discounted cash flow projections over five years. T he forecast is then extrapolated in perpetuity using a long-term gr owth rate to compute a terminal value, which comprises the majority of the value in use. The long-term growth rates have been based on expected growth of the CGUs. T he pre-tax risk discount rates are based on those observed to be applied to businesses regarded as peers of the CGUs. Critical accounting policy: Goodwill Critical estimates Impairment testing involves a number of judg ments. The key judgments are the five-year cash flow forecas t, the long-term growth rate used to derive the terminal value, and the discount rate. Future value in use is primarily affe cted by changes in profitability and changes in discount rate. Adverse changes could lead to value in use falling below ca rrying value. The most likely cause for this would be a failure to meet bu dgets, including cost targets, or exter nal downgrades in the UK economy. Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 358 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 17 Intangible assets continu ed The impact of reasonably possible changes to the mo re significant variables in the value in us e calcula tions is presented belo w. This reflects the sensitivity of the VIU to each key assumption on its own. It is possible that mo re than one change may occur at the same time. Consequential impact of 1% adverse Consequential impact of 5% adverse Recoverable Assumptions amount movement movement Terminal Pre - tax Cost: exceeded Terminal growth discount income carrying Discount growth Forecas t Forecast Goodwill rate rate ratio (1) value rate rate Income cost 31 December 2021 £bn % % % £bn £bn £bn £b n £bn Retail Banking 2.6 1.6 13.9 51.6 6.8 (1.8) (0.8) (2.1) (1.0) Commercial Banking 2.6 1.6 13.9 52.3 6.3 (1.9) (0.8) (2.0) (1.0) RBS International 0.3 1.6 12.1 37.0 2.6 (0.6) (0.3) (0.4) (0.1) 31 December 2020 Retail Banking 2.7 1.6 13.7 48.3 5.9 (1.8) (0.8) (2.0) (0.9) Commercial Banking 2.6 1.6 13.7 53.7 1.5 (1.5) (0.5) (1.8) (0.9) RBS International 0.3 1.6 12.1 42.7 1.1 (0.4) (0.2) (0.3) (0.1) (1) Average Cost:income ratio % over the 5-year forecast period The following table gives the percentage chan ge in key assumptions that would reduce the headroom of CGUs to nil. 2021 2020 Terminal Pre- tax Pre- tax growth discount Forecast Forecast Terminal discount Forecast Forecast Change in key assumptions to re duce rate rat e income cost growth rate rate income cost headroom to nil (%) % % % % % % % % Retail Banking (139.2) 8.1 (16.1) 32.7 (25.4) 6.2 (14.6) 33.9 Commercial Banking (47.0) 6.6 (15.7) 32.8 (4.0) 1.3 (4.1) 8.2 RBS International (85.2) 10.3 ( 30.3) 87.2 (10.8) 4.4 (18.6) 52.8 18 Other assets Other assets are not financial as sets and reflect a grouping of assets that are not la rge enough to present separately on the balance sheet. 2021 2020 £m £m Interests in associates (1) 716 449 Property, plant and equipment (2) 4,230 4,418 Pension schemes in net surplus (Note 5) 602 723 Prepayments 360 328 Accrued income 248 2 16 Tax recoverable 190 192 Deferred tax (Note 7) 1,195 9 01 Acceptances 225 272 Other 476 3 91 Other assets 8,242 7,890 (1) Includes interest in Business Growth Fund £ 700 million (2020 - £442 million). (2) The estimated useful lives of NatW est Group’s property, plant and equipment are: freehold buildings and long leasehold 50 years, short leaseholds for unexpired period of lease, property adaptation costs 10 to 15 years, computer equipment up to 5 years and other equipment 4 to 15 years. 19 Other financial liabilities Other financial liabilities consist of customer deposits designated at fair value an d debt securities in issue cl assified as designated at fair value and amortised cost. For accounting policy information se e Accounting policies notes 10 and 14. 2021 2020 £m £m Customer deposits - designated as at fair value t hrough profit or loss 568 796 Debt securities in issue - designated as at fair value through profit o r loss 1,103 1,607 - amortised cost 47,655 43,408 Total 49,326 45,811 Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 359 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 20 Subordinated liabilities Subordinated liabilities are debt s ecurities that, in the event of winding up o r bankruptcy, rank below other liabilities for inte rest payments and repayment. The subordinated liabilities prese nted in the note are classified as designated at f air value and amortised cost. For accounting policy information se e Accounting policies notes 10 and 14. 2021 2020 £m £m Dated loan capital 8,051 8,530 Undated loan capital 259 1,287 Preference shares 119 145 8,429 9,962 Certain preference shares issu ed by the company are classified as liabilities; these s ecurities remain subject to the capi tal maintenance rules of the Companies Act 20 06. Capital 2021 2020 New issue treatment £m £m NatWest Group plc £1,000 million 3.622% dated notes 2030 (callable between May 20 25 to August 2025) Tier 2 — 996 US$850 million 3.032% dated notes 2 035 (callable November 2030 ) Tie r 2 — 634 £1000 million 2.105% dated notes 2031 (callable between August 2026 to Novembe r 2026) Tier 2 996 — €750 million 1.043% dated notes 2 032 (callable between June 2027 to September 2027) Tier 2 638 — 1,634 1,630 Redemptions NatWest Group plc US$2,250 million 6.13% dated notes 2 022 (partial redemption) Tier 2 226 499 US$1,000 million 6.10% dated notes 2 023 (partial redemption) Tier 2 57 358 US$2,000 million 7.5% dated notes 2020 Tier 2 — 1,528 US$762 million 7.648% undated notes (p artial redemption) Ineligible 45 497 US$106 million floating rate un dated notes (callable on any interest payment date) In eligible 77 — US$2,650 million 8.625% dated notes 2021 (callable August 2021) (1) Tier 2 1,914 — US$2,250 million 5.125% dated notes 2024 (partial redemption) Tier 2 729 — US$2,000 million 6% dated notes 2023 (partial redemption) Tier 2 436 — 3,484 2,882 NatWest Markets Plc US$125.6 million floating rate notes 202 0 Tie r 2 — 97 €145.6 million floating rate dated notes 202 3 (partial redemption) Tier 2 20 — £31 million 7.38% notes (partial redemption) Tier 2 29 — £19 million 5.63% notes (partial redemption) Tier 2 20 — 69 97 National Westminister Bank Plc £300 million 6.5% subordinated notes 20 21 (not callable) Tier 2 300 — €10 million floating rate notes (callable quarterly) Upper Tier 2 9 — €178 million floating rate notes (callable quarterly) Upper Tier 2 152 — US$193 million floating rate notes (callable semi- annually) Upper Tier 2 138 — US$229 million floating rate notes (callable semi- annually) Upper Tier 2 167 — US$285 million floating rate notes (callable semi- annually) Upper Tier 2 201 — £35 million 11.5% notes (callable December 2022) (p artial redemption) Upper Tier 2 3 — £140 million 9% cumulative pref erence shares of £1 (not callable) Tier 1 24 — 994 NWM N.V. and subsidiaries US$650 million 6.425% dated notes 2 043 (partial redemption) Ineligible 73 187 €15 million 6.00% notes 2020 Tier 2 — 11 73 198 (1) In July 2021, paid in equity reclassified t o liabilities as the result of a call in August 2021 of US$2.65 billion AT1 capital note s which were subsequently redeemed in August 2021. Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 360 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 21 Other liabilities Other liabilities are amounts due to third parties that are not financial liabilities including le ase liabilities, amounts due for goods and services that have been received but not in voiced, tax due to HMRC, and retiremen t benefit liabilities. Liabilities which have a level of uncertainty regarding their timing or the future cost to settle them are included in othe r liabilities as provisions for liabilities and charges. 2021 2020 Other liabilities £m £m Lease liabilities (Note 23) 1,263 1,698 Provisions for liabilities and charges 1,268 1,852 Retirement benefit liabilities (No te 5) 114 121 Accruals 1,508 990 Deferred income 319 361 Current tax 12 63 Deferred tax (Note 7) 359 291 Acceptances 225 272 Other liabilities (1) 729 740 5,797 6,388 (1) Other liabilities include liabilities of disposal grou ps of £5 million (2020: n il). See Note 8 for further information. Financial Litigation commitments Customer and other and redress (1) regulatory (4) Propert y (3) guarant ees Other (2) Total Provisions for liabilities and charges £m £m £m £m £m £m At 1 January 2021 749 365 271 178 289 1,852 Expected credit loss impairment release — — — (83) — (83) Currency translation and other movements (5) — 2 ( 2) (7) (12) Charge to income statements 173 307 113 — 196 789 Release to income statement (25) (86) (118) — (82) (311) Provisions utilised (418) (309) (37) — (203) (967) At 31 December 2021 474 277 231 93 193 1,268 (1) Includes payment protection insurance provision which reflects the estimated cost of PPI redress attributable to claims prior to the Financial Conduct Authority (FCA) complaint deadline of 29 August 2019. All pre-deadline complaints ha ve been processed which removes complaint volume estimation uncertainty from the provision estimate. NatWest Group continues to conclude remaining bank-identified closure work and conclude cases with the Financial Ombudsmen Service. (2) Other materially comprises provisions relating t o restructuring costs. (3) Property provision materially includes dilapidation provisions. Release in property provision includes the effect of purchase of freeholds for properties where the group was the primary leaseholder. (4) Majority of charge in the year and utilisat ion of litigation provisions relates to FCA investigation into money laundering. Provisions are liabilities of uncertain timing or amount and are recognised when there is a pres ent obligation as a result of a past event, the outflow of econ omic benefit is probable and the outflow can be estimated reliably . Any difference between the final outcome and the amounts provided will aff ect the reported results in the period when the matter is resolved. For accounting policy information se e Accounting policies note 8. Critical accounting policy: Provisions for liabilities The key judgment is involved in determining whet her a present obligation exists. There is often a high degree of unce r tainty and judgment is based on the specific f acts and circumstances relating to individual events in determining whethe r there is a present obligation. Judgment is also involved in esti mation of the probability, timing and amount of any outflows. W here NatWest Group can look to another pa rty such as an insurer to pay some or all of the expenditure required to se ttle a provision, any reimbursement is recognised w hen, and only when, it is virtually certain that it will be received. Estimates - Provisions are liabili ties of uncertain timing or amount and are recognised whe n there is a present obligation as a result of a past event, the outflow of economic benefit is probable and the outflow can be estimated reliably. Any difference between the final outcome and t he amounts provided will affect the reported results in the period when the matter is resolved.  Customer redress: Provisions refle ct the estimated cost of redress attributable to claims where it is dete rmined that a present obligation exists.  Litigation and other regulatory: NatWest G roup is engaged in various legal proceedings, both in the UK and in overseas jurisdictions, including the US. For fu rther information in relation to legal proceedings and discussion of the associated uncertainties, refer to Note 27.  Property: This includes provision for contractual costs such as rates associated with vacant properties.  Other provisions: These materially c omprise provisions for onerous contracts and restructuring costs. O nerous contract provisions comprise an es timate of the costs involved in fulfilling the terms and conditions of co ntracts net of any expected benefits to be rece ived. This includes provision for contractual costs such as rates associated with vacant properties. Redundancy and rest ructuring provisions comprise the estimated cost of rest ructuring, including redundancy costs whe re an obligation exists. Background information for all ma terial provisions is given in Note 27 . Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 361 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 22 Share capital and other equity Share capital consists of ordinary shares and preference sha res and is measured as the numb er of shares allotted and fully paid multiplied by the nominal value of a share. Other e quity includes paid-in equity, merger reserves , capital redemption reserve and own shares held. For accounting policy information se e Accounting policies note 14. Number of shares 2021 2020 2021 2020 Allotted, called up and fully pai d £m £m 000s 000s Ordinary shares of £1 11,468 12,129 11,467,982 12,129,165 Cumulative preference shares of £ 1 1 1 483 900 Non - cumulative preference shares of US$ 0.01 (1) — — 10 10 (1) No shares were redeemed in 2021 or 2020. The company announced on 1 February 2022 that it had given notice to holders of the redemption on 31 March 2022 of the Series U Non-cumulative dollar preference shares. Movement in allotted, called up and fully paid ordinary shares £m Number of shares 0 00s At 1 January 2020 12,094 12,093,909 Shares issued 35 35,256 At 1 January 2021 12,129 12,129,165 Shares issued 38 37,584 Shares redeemed (699) (698,767) At 31 December 2021 11,468 11,467,982 Ordinary shares There is no authorised share capital under the c ompany’s constitution. At 31 December 2021 , the directors had authority granted at the 2021 Annual General Meeting to is sue up to £608,328,288 nominal of ordina ry shares other than by pre- emption to existing shareholder s. This figure was reduced to £578,791,771 to reflect the reduction in issued sh are capital resulting from the off-market buyback announced on 19 March 2021. On 6 February 2019 the company held a Gene ral Meeting and shareholders approved a special resoluti on to give the company authority to make off-market purch ases of its ordinary shares from HM Treasury (or its nominee) a t such times as the directors may dete rmine is appropriate. Full details of the proposal are set out in the Circular and Notice of General Meeting. This authority was renewed a t the Annual General Meeting in 2021 and s hareholders will be asked to renew the authority at the Ann ual General Meeting in 2022. The company utilised the autho rity it obtained at the 2020 AGM to make an off-market purchas e of 590,730,325 ordinary shares (nominal value £590,7 30,325) in the company from HMT on 19 March 2021, at a price of 1 90.50p per ordinary share for the total consideration of £1,125 ,341,269, representing 4.86% of the company's issued ordinary share capital. The com pany cancelled 390,730,3 25 of the purcha sed ordinary sha res and held the remaining 200,000,00 0 ordinary shares in treasury. The company has used a total of 1 9,062,290 treasury shares to satisfy the exercise of options a nd the vesting of share awards under the employee share plans . At the Annual General Meeting in 202 1 shareholders authorised the company to make market purchases of up to 1,216,656,575 ordinary shares in the company . The directors utilised the authority obtained at the 2021 A GM to conduct a share buyback programme (the Prog ramme) of up to £750 million, as announced to the market on 30 Ju ly 2021. The Programme’s purpose is to reduce the ordinary share capital of N atWest Group. Taking into account the reduction in issue d ordinary share capital which occurred as a result of the off-m arket buyback announced on 19 Marc h 2021, the maximum number of ordinary shares that could be purchased by the company under the Programme was 1,157,5 83,542. The Programme commenced on 2 August 2021 and, as at 31 Dece mber 2021, 310,802,416 ordinary shares (n ominal value £310,802,416 ) had been purchased by the company at an avera ge purchase price of 217.5796p per ordinary share for the total consideration of £676,242,656. A further 29,735,044 ordinary shares ( nominal value £29,735,044) were purchased by the company from 1 January to 18 January 2022 at an average purchase price of 24 5.5264p per ordinary share for the total consideration of £73,007,3 75. All of the purchased ordinary shares were cancelle d, representing 2.93% of the company's issued o rdinary share capital. Shareholders will be aske d to renew the authorisation at the Annual General Meeting in 2 022. In 2021, the company issued 38 million ordina ry shares of £1 each in connection with employe e share plans. In 2021 NatWest Group paid an interi m dividend of £347 million, or 3.0p per ordinary share (2020 - nil). The company has announced that the di rectors have recommended a final dividend of £844.3 million, or 7.5p per ordinary share (2020 – £364 mi llion, or 3p) subject to shareholder approval at the An nual General Meeting on 28 April 2022. If approved, payment will be made on 4 May 20 22 to shareholders on the register at the close of busines s on 18 March 2022. The ex-dividend date will be 17 March 2022 . Cumulative preference shar es At the 2021 Annual General Meeting, shareholders au thorised the company to make an off-market purchase of preference shares in the company. The company announced on 15 December 2021 that it had utilised this autho rity to purchase 157,546 5.5% cumulative preference s hares (nominal value £157,546), representing 39.39% of the share class, at a purchase price of 102% for the total consideration of £16 0,697 and 259,314 11.00 % cumulativ e preference sha res (nominal value £259,314), representing 51.8 6% of the share class, at a purchase price of 155% for the total conside ration of £401,937. The company cancelled all of the purch ased preference shares. Non-cumulative preference shares Non-cumulative preference shares entitle their holders to periodic non-cumulative cash d ividends at specified fixed rates for each series payable out of distribut able profits of the company. The company may redeem some or all of the non-cumulative preference shares from time to time at the r ates detailed in the table on the next page plus dividends ot herwise payable for the then current dividend period to the date of rede mption. Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 362 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 22 Share capital and other equity continued Number of shares Redemption Redemption Non-cumulative preference shares classified as equity in issue Interest rate date on or after price per share Shares of US$0.01 - Series U 10,130 Floating 29 September 2017 US$100,000 (1) Preference shares where d istributions are discretionary are classified as equity. On a winding-up or liquidation of the company, the holders of the non-cumulative preference shares are entitled to receive, out of any surplus assets available f or distribution to the company's shareholders (after payment of a rrears of dividends on the cumulative preference shares up to the date of repayment) pari passu with the cumulative p reference shares and all other shares of the company ranking p ari passu with the non-cumulative preference shares as regards participation in the surplus assets of the company, a liquid ation distribution per share equal to the applicable redemption price det ailed in the table above, together with an amoun t equal to dividends for the then current dividend period accrued to the d ate of payment, before any distribution or paymen t may be made to holders of the ordinary shares as regards participation in the surplus assets of the company. Except as described above, the holders of the non-cumulative preference shares have no right to pa rticipate in the surplus assets of the company. Holders of the non-cumulative preference sha res are not entitled to receive notice of or attend general mee tings of the company except if any resolution is proposed fo r adoption by the shareholders of the compa ny to vary or abrogate any of the rights attaching to the non-cumulative preference sh ares or proposing the winding-up or liquidation of t he company. In any such case, they are entitled to receive notice of a nd to attend the general meeting of shareholders at which such resolutio n is to be proposed and are entitled to speak and vote on such resolution (but not on any other resolution). In addition, in the event that, prior to any general meeting of shareholders, the company has failed to pay in full the mos t recent dividend payment due on the series U non-cumulative dollar preference shares, the holders shall be entitled to receive notice of, attend, speak and vote at such meeting on all matte rs together with the holders of the ordinary shares. In thes e circumstances only, the rights of the holders of the non-cumulative preference shares so to vote shall continue until the company shall have resumed the payment in full of the dividends in arrears. Paid-in equity - comprises equity instruments issue d by the company other than those lega lly constituted as shares. Additional Tier 1 instruments iss ued by NatWest Group plc having the legal form of debt are classified as equity un der IFRS. The coupons on these ins truments are non-cumulative and payable at the company’s discretion. In the event N atWest Group’s CET1 ratio falls below 7% any ou tstanding instruments will be converted into ordinary shares at a fixed p rice Capital recognised for regulatory purposes canno t be redeemed without Prudential Regulation Autho rity consent. This includes ordinary shares, preference shares and addition al Tier 1 instruments. 2021 2 020 2019 £m £m £ m Additional Tier 1 notes US$2.0 billion 7.5% notes callable August 20 20 (1) — — 1,277 US$1.15 billion 8% notes callable August 20 25 (1) 735 735 735 US$2.65 billion 8.625% notes callable August 202 1 (2) — 2,046 2,046 US$1.5 billion 6.000% notes callable December 2025 - June 2026 (3) 1,220 1,220 — GBP£1.0 billion 5.125% notes callable May - November 2027 (4) 998 998 — GBP£0.4 billion – March 2021 is suance (5) 399 — — US$0.75 billion – June 2021 is suance (6) 538 — — 3,890 4,999 4,058 (1) Issued in August 2015. In the e vent of conversion, converted into ordinary shares at a price of $3.606 nominal per £1 share. (2) Issued in August 2016. In the e vent of conversion, converted into ordinary shares at a price of $2.284 nominal per £1 share. In July 2021, paid-in equity reclassified to liabilities as the result of a call in August 2021 of US$2.65 billion AT1 Capital notes. (3) Issued in June 2020. In the event of conversion, converted into ordinary shares at a price of £1.754 (translated at applicable exchange rate) per £1 share. (4) Issued in November 2020. In the event of conversion, converted into ordinary shares at a price of £1.754 nominal per £1 share. (5) Issued in March 2021. In the event of conversion, converted into ordinary shares at a price of £1.754 nominal per £1 share. (6) Issued in June 2021. In the event of conversion, converted into ordinary shares at a price of £1.754 (translated at applicable exchange rate) per £1 share. Merger reserve - the merger rese rve comprises the premium on shares issued to acquire NatWe st Bank Plc less goodwill amortisation charged under previous GAAP. Capital redemption reserve - under UK companies legisla tion, when shares are redeemed or purchased wholly o r partly out of the company's profits, the amoun t by which the company's issued share capital is diminishe d must be transferred to the capital redemption reserve. The capital maintenance provisions of UK companies legislation apply to the capi tal redemption reserve as if it were part of the company’s paid up sh are capital. On 15 June 2017, the Court of Ses sion approved a reduction of NatWest plc capital so that the am ounts which stood to the credit of the capital redemp tion reserve were transferred to retained earning s. The nominal value of the shares bought back from HM Treasury in March 2021 and via the Programme during 2021 have been transfer red to the Capital redemption reserve. Own shares held - at 31 December 2021, 15 million ordina ry shares of £1 each of the comp any (2020 - 16 million) were held by employee share trusts in respect of sha re awards and options granted to employees. During the ye ar, the employee share trusts purchased no ordinary shares and delive red 1 million ordinary shares in satisfaction of the exercise of options and the vesting of share awards u nder the employee share plans. The company retains the fle xibility to use newly issued shares, shares purchased by the NatWest Group E mployee Share Ownership Trust and any available t reasury shares to satisfy obligations under its employee share plans. The company does not use performance conditions o r targets based on earnings per share (EPS), total shareholde r return (TSR), and net asset value (NA V) in connection with its employee share plans. As part of the shares bought back from HM T reasury in March 2021, the company transferred 2 00 million ordinary shares to treasury. The company has used a total of 1 9,062,290 treasury shares to satisfy the exercise of options and the vesti ng of share awards under the employee share plans. The balance of ordinary shares held in treasury as at 31 December 202 1 was 180,937,710. NatWest Group plc optimises capital efficie ncy by maintaining reserves in subsidiaries, including regulated entities. Cer tain preference shares and subordinated debt are also included within regulatory capital. The re mittance of reserves to the company or the redemption of shares or subo rdinated capital by regulated entities may be subject to maint aining the capital resources required by the relevant regulato r. UK law prescribes that only the rese rves of the company are taken into account for the purpos e of making distributions and in determining permissible applications of the share premium account. Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 363 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 23 Leases A lease is a contract or part of a contract whereby t he lessor (the legal owner of an asse t) conveys to the lessee (the user of the asset) the right to use an asset for an agreed period of time in exchange for a payme nt or series of payments. This note presents the income, e xpenses, assets, liabilities and cash flows of NatWest Group in the capacity of both lessee and lessor. Lessee NatWest Group is party to lease contracts as les see to support its operations. The following ta ble provides information in respect of those lease contracts as lessee. 2021 2020 £m £m Amount recognised in consolid ated income statement Interest payable (38) (42) Depreciation (1) (167) (209) Rental expenses on short term leases — (1) Income from subleasing right to use assets 4 4 2021 2020 £m £m Amount recognised on balance shee t Right of use assets include pro perty, plant and equipment (2),(3) 733 955 Additions to right of use assets 70 80 Lease liabilities (3),(4) (1,263) (1,698) The total cash outflow for leases is £ 195 million (2020: £220 million), including payment of p rincipal amount of £164 million (202 0: £179 million) which are included in the operating ac tivities in the cash flow statement. (1) Includes impairment of right of use assets of £52 million (2020: £89 million). (2) Includes right of use asset for p lant and equipment of £9 millio n (2020 : £8 million) and depreciation of £4 million (2020: £2 million). (3) Includes the effect of the purchas e of freeholds for properties where the Group was the primary leaseholder. (4) Contractual cashflows of lease liabilities are shown in Note 12. Lessor Acting as a lessor, NatWest Group provides asse t finance to its customers. It purchase s plant, equipment and intellectual pro perty, renting them to customers under lease arrangemen ts that, depending on their terms, qualify as either operating or finance le ases. 2021 2020 £m £m Amount included in consolidated income state ment Finance leases Finance income on the net investment in lease s 298 289 Operating leases Lease income 169 168 The following table shows the r econciliation of undiscounted finance lease receiva bles to net investment in fin ance leases: 2021 2020 £m £m Amount receivable under finance le ases Within 1 year 3,272 3,156 1 to 2 years 2,044 2,231 2 to 3 years 1,443 1,609 3 to 4 years 757 952 4 to 5 years 429 492 After 5 years 1,423 1,688 Lease payments total 9,368 10,128 Unguaranteed residual values 225 232 Future drawdowns (21) (22) Unearned income (891) (1,081) Present value of lease payments 8,681 9,257 Impairments (150) (196) Net investment in finance leases 8,531 9,061 Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 364 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 23 Leases continued The following tables show undiscounted lease rece ivables from operating leases: 2021 2020 £m £m Amount receivable under operating leases Within 1 year 131 143 1 to 2 years 92 112 2 to 3 years 50 79 3 to 4 years 23 34 4 to 5 years 11 14 After 5 years 9 11 Total 316 393 2021 2020 £m £m Nature of operating lease assets on the balance shee t Transportation 282 327 Car and light commercial vehicl es 21 28 Other 223 245 526 600 Fair value of investment properties under operating lease are £838 million (2020: £840 million) and had lease income of £59 million (2020: £60 million). The following table shows undisc ounted lease receivables from invest ment properties: 2021 2020 £m £m Amount receivable under inves tment properties Within 1 year 63 67 1 to 2 years 62 127 2 to 3 years 58 54 3 to 4 years 56 76 4 to 5 years 51 88 After 5 years 304 142 Total 594 554 Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 365 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 24 Structured entities A structured entity (SE) is an e ntity that has been designed such that voting or simila r rights are not the dominant fac tor in deciding who controls the entity , for example when any voting rights relate to ad ministrative tasks only and the relevant activities are directed by means of contractual arr angements. SEs are usually established for a specific, limited purpose. They do not carry out a business or trade and typically have no employee s. They take a variety of legal forms - trusts, partnerships and compa nies - and fulfil many different functions where thes e can be a medium for a single transaction o r portfolio of similar transactions. SEs are established as investment or funding vehicles, wit hin the NatWest Group and fo r client transactions. Consolidated structured entities Securitisations In a securitisation, assets, or interests in a pool of asse ts, are transferred generally to an SE which then is sues liabilities to third party investors. The majority of se curitisations are supported through liquidity facilities or other c redit enhancements. NatWest Group arranges securitisations to facilitate client transactions an d undertakes own-asset securitisations to sell or to fund portfolios of f inancial assets. NatWest Group also acts as an underwriter and depositor in securitisation transactions in bo th client and proprietary transactions. NatWest Group involvement in client securitisations takes a number of forms. It may: sponsor or adminis ter a securitisation programme; provide liquidity facilities or program me-wide credit enhancement; and purchase se curities issued by the vehicle. Other credit risk transfer securitisati ons NatWest Group also transfers credit risk on originate d loans and mortgages without the transf er of assets to a SE. As part of this, NatWest Group enters i nto credit derivative and financial guarantee contracts with co nsolidated SEs. At 31 December 2021, debt securities i n issue by such SEs (and held by third parties) were £867 million (202 0 - £772 million). The associated loans and mortgages at 31 Decembe r 2021 were £7,137 million (2020 - £1 0,027 million). At 31 December, ECL in relation to non-defaulted assets was reduced by £28 million (2020 - £183 million) as a result of financial guarantee contracts with consolidated SEs. Covered debt programme Group companies have assigned loans to customers and debt investments to bankruptcy remote limited liability par tnerships to provide security for issues of debt securities. N atWest Group retains all of the risks and rewards of thes e assets and continues to recognise them. The partne rships are consolidated by NatWest Group and the related covered bonds included within other financial liabilities. A t 31 December 2021, £8,965 million (2020 - £10,758 million) of loans to customers and nil (2020 - £318 million) of debt inv estments provided security for debt securities in issue and other bo rrowing of £3,512 million (2020 - £4,105 million). Lending of own issued securities NatWest Group has issued, retained, and le nt debt securities under securities lending arrange ments. Under standard terms in the UK and US markets, the recipient has a n unrestricted right to sell or repledge collateral, subject to re turning equivalent securities on maturity of the transaction. NatWest Group retains all of the risks and rewards of own issue d liabilities lent under such arrangements and does not recognise them. At 31 December 2021, £1,494 million (2020 - £1,893 million) of secured own issued liabilities have been re tained and lent under securities lending arrangemen ts. At 31 December 2021, £1,564 million (2020 - £2 ,029 million) of loans and other debt instruments provided security for secured own is sued liabilities that have been retained and lent unde r securities lending arrangements . Unconsolidated structured entities NatWest Group’s interest in unconsolida ted structured entities is analysed below. 2021 2020 Asset Asset backed Investment backed Investment securitisation funds and securitisation funds and vehicles others Total vehicles others Total £m £m £m £m £m £m Trading assets and derivatives Trading assets 490 117 607 319 46 365 Derivative assets 251 18 269 441 16 457 Derivative liabilities (170) (1) (171) (319) (21) (340) Total 571 134 705 441 41 482 Non trading assets Loans to customers 1,692 361 2,053 1,400 497 1,897 Other financial assets 3,645 379 4,024 3,892 170 4,062 Total 5,337 740 6,077 5,292 667 5,959 Liquidity facilities/loan commitments 1,403 135 1,538 1,482 204 1,686 Maximum exposure 7,311 1,009 8,320 7,215 912 8,127 Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 366 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 25 Asset transfers This note provides an overview of asse t transfers which do not qualify for derecognition and t herefore continue to be recogni sed in NatWest Group’s balance sheet. For accounting policy information se e Accounting policies note 4. Transfers that do not qualify for derecognition NatWest Group enters into securities repurchase , lending and total return transactions in accordance with no rmal market practice which includes the provision of additional coll ateral if necessary. Under standard terms in the UK a nd US markets, the recipient has an unrestricted right to sell or repledge collateral, subject to returning equivalent securities on settlement of the transaction. Securities sold under repurchase transactions and transactions with the substance of securities repurc hase agreements are not derecognised if NatWest Group retains substa ntially all the risks and rewards of ownership. The fair value (and ca rrying value) of securities transferred under s uch transactions included on the balance sheet, are set out below. All of these securities could be sold or repledged by the holder. 2021 2020 The following assets have failed derecognition (1) £m £m Trading assets 13,084 20,526 Loans to bank - amortised cost 38 5 Loans to customers - amortised cost 1,837 39 Other financial assets 11,746 11,542 Total 26,705 32,112 (1) Associated liabilities were £24,747 million (2020 – £31,932 million). Assets pledged as collateral NatWest Group pledges collateral with its counte rparties in respect of derivative liabilities an d bank and stock borrowings. 2021 2020 Assets pledged against liabilitie s £m £m Trading assets 23,601 28,728 Loans to banks - amortised cost 62 49 Loans to customers - amortised cost 20,108 15,939 Other financial assets (1) 3,624 4,966 Total 47,395 49,682 (1) Includes assets pledged for pens ion derivatives and stock borrowings. As part of the covered debt programme £8 ,965 million of loans to customers and other debt in struments (2020 – £11,076 million) have been transferred to bankruptcy remote limi ted liability partnerships within the Na tWest Group to provide collateral for issue s of debt securities and other borrowing by t he NatWest Group of £3 ,512 million (2020 – £4,105 million). See St ructured Entities Note. Own asset securitisations In own-asset securitisations, the pool of assets held by the SE is either origin ated by NatWest Group or, in the case of whole l oan programmes, purchased from third parties. The table below analyses the ass et categories for those own-asset securitisations whe re the transferred assets continue to be recorded on NatWest Group’s balance she et. 2021 2020 Debt Securities in issue Debt Securities in issue Held by Held by Held by Held by third NatWest third NatWrst Assets parties Group (1) Total Assets parties Group (1) Tota l Asset Type £m £m £m £m £m £m £m £m Mortgages - Rol 1,244 — 1,314 1,314 1,921 243 1,848 2,091 Cash deposits 42 146 1,286 2,067 (1) Debt securities retained by NatW est Group may be pledged with central banks. Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 367 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 26 Capital resources NatWest Group’s regulatory capital is assessed against minimum requirements that are set o ut under the Capital Requirements Regulation to determine the strength of its capital base. This note shows a reconciliation of shareholders’ equi ty to regulatory capital. PRA transitional basis 2021 2020 £m £m Shareholders’ equity (excluding non-controlling i nterests) Shareholders’ equity 41,796 43,860 Preference shares - equity (494) (494) Other equity instruments (3,890) (4,999) 37,412 38,367 Regulatory adjustments and deductions Own credit 21 (1) Defined benefit pension fund adjustment (465) (579) Cash flow hedging reserve 395 (229) Deferred tax assets (761) (760) Prudential valuation adjustments (274) (286) Goodwill and other intangible assets (6,312) (6,182) Foreseeable ordinary dividends (846) (364) Foreseeable charges (825) — Foreseeable pension contributions (365) (266) Adjustment under IFRS 9 transitional arrangements 621 1,747 Other regulatory adjustments (5) — (8,816) (6,920) CET1 capital 28,596 31,447 Additional Tier 1 (AT1) capital Qualifying instruments and related sh are premium 3,875 4,983 Qualifying instruments and related sh are premium subject to phase out 571 690 Qualifying instruments issued by su bsidiaries and held by third parties subject to phase out — 140 AT1 capital 4,446 5,813 Tier 1 capital 33,042 37,260 Qualifying Tier 2 capital Qualifying instruments and related sh are premium 4,935 4,882 Qualifying instruments issued by su bsidiaries and held by third parties 314 1,191 Other regulatory adjustments 457 400 Tier 2 capital 5,706 6,473 Total regulatory capital 38,748 43,733 It is NatWest Group policy to maintain a strong capi tal base, to expand it as appropriate and to utilise it efficiently throughout its activities to optimise the return to sha reholders while maintaining a prudent relationship betwee n the capital base and the underlying risks of the busine ss. In carrying out this policy, NatWest Group has regard to the supervisory requirements of the PRA. The PRA us es capital ratios as a measure of capital adequacy in the UK banking se ctor, comparing a bank's capital res ources with its risk-weighted assets (the assets and off-balance sheet exposures are weighted to reflect the inherent credit and othe r risks); by international agreement, the Pillar 1 capital ratios sh ould be not less than 8% with a Common Equity Tier 1 component of not less than 4.5%. NatWest Group has complied wi th the PRA’s capital requirements throughout the yea r. A number of subsidiaries and sub-groups within Nat West Group, principally banking entities , are subject to various individual regulatory capital requirements in t he UK and overseas. Furthermore, the payment of dividends by subsidiaries and the ability of members of NatWest Group to lend money to other members of NatWest Group may be subject to restrictions such as l ocal regulatory or legal requirements, the availability of rese rves and financial and operating performance. Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 368 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 27 Memorandum items Contingent liabilities and commitments NatWest Group provides its cus tomers with a variety of services to support their businesses, such as guarantees. Thes e are reported as commitments. Con tingent liabilities are possible obligations dependent o n a future event or present obligations which are either not probable or cann ot be measured reliably. For accounting policy information se e Accounting policies note 8. The amounts shown in the table below are intended only to provide an indication of the volu me of business outstanding at 31 December 2021. Although NatWest G roup is exposed to credit risk in the event of a custo mer’s failure to meet its obligation s, the amounts shown do not, and are not intended to, provide any indication of NatWest Group's expectation of future losses. More than More than 2021 2020 1 year but 3 years but Less than less than less than Over 1 year 3 years 5 years 5 years £m £m £m £m £m £m Guarantees 993 321 195 546 2,055 2,244 Other contingent liabilities 1,005 435 43 521 2,004 2,321 Standby facilities, credit lines and other co mmitments 60,029 26,775 27,136 7,368 121,308 124,167 Contingent liabilities and commitments 62,027 27,531 27,374 8,435 125,367 128,732 (1) The maturity of contingent liabilities and commitment is based on the expiry of the agreement between NatWest Group and the customer. Banking commitments and contingent obligations, whic h have been entered into on behalf of customers and fo r which there are corresponding obligations from customers, are no t included in assets and liabilities. NatWes t Group's maximum exposure to credit loss, in the event of its obligation c rystallising and all counterclaims, collateral or security proving valuele ss, is represented by the contractual nominal amoun t of these instruments included in the table above. These commitments and contingent obligations are subject to N atWest Group's normal credit approval process es. Guarantees – NatWest Group gives guarantees on behalf of customers. A financial guarantee represents an irrevocable undertaking that NatWest Group will meet a cus tomer's specified obligations to third party if the custome r fails to do so. The maximum amount that NatWest Group coul d be required to pay under a guarantee is its principal amount as disclosed in the table above. NatWest Group expects most guaran tees it provides to expire unused. Other contingent liabilities - the se include standby letters of credit, supporting customer debt issues and contin gent liabilities relating to customer trading activities su ch as those arising from performance and customs bonds, w arranties and indemnities. Standby facilities and credit line s - under a loan commitment, NatWest Group agrees to make funds available to a customer in the future. Loan commitments, which are usually f or a specified term, may be unconditionally cancellable o r may persist, provided all conditions in the lo an facility are satisfied or waived. Commitments to len d include commercial standby facilities and credit lines, liquidit y facilities to commercial paper conduits and unutilised overdraft facilities. Other commitments - these include documen tary credits, which are commercial letters of credit providing for p ayment by NatWest Group to a named benef iciary against presentation of specified documents, forward ass et purchases, forward deposits placed and undrawn note issuance and rev olving underwriting facilities, and other short-ter m trade related transactions. Contractual obligations for future expenditure not provided for in the accounts The following table shows contractual obligations fo r future expenditure not provided for in the accounts at the year end. 2021 2020 £m £m Capital expenditure on property, plant and equip ment 16 15 Contracts to purchase goods or services (1) 682 729 698 744 (1) Of which due within 1 year: £301 million (2020 – £267 million). Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 369 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 27 Memorandum items continued Trustee and other fiduciary activi ties In its capacity as trustee or oth er fiduciary role, NatWest Group may hold or place assets on behalf of individuals, trusts, companies, pension schemes and others. T he assets and their income are not included in Nat West Group's financial statements. NatWest Group earned fe e income of £280 million (2020 - £245 million; 201 9 - £250 million) from these activities. The Financial Services Compensation Scheme The Financial Services Compensation Scheme ( FSCS), the UK's statutory fund of last resort for customers of authorised financial services firms, pays compensa tion if a firm is unable to meet its obligations. The FSCS f unds compensation for customers by raising management expenses levies and compensation levies on the indu stry. In relation to protected deposits, each deposit-taking institution contributes to wards these levies in proportion to the ir share of total protected deposits on 31 December of the y ear preceding the scheme year (which runs from 1 April to 3 1 March), subject to annual maxima set by the Prudential Re gulation Authority. In addition, the FSCS has the power to rais e levies on a firm that has ceased to participate in the sche me and is in the process of ceasing to be authorised for the costs that it would have been liable to pay had the FSCS made a levy in the financial year it ceased to be a participant in the s cheme. Litigation and regulatory matters NatWest Group plc and certain members of Nat West Group are party to legal proceedings and involved in regulatory matters, including as the subject of inves tigations and other regulatory and governmental action (Matt ers) in the United Kingdom (UK), the United States (US), the Eur opean Union (EU) and other jurisdictions. NatWest Group recognises a provision for a liability in relation to these Matters when it is probable tha t an outflow of economic benefits will be required to settle an oblig ation resulting from past events, and a reliable es timate can be made of the amount of the obligation. In many of these Matters, it is n ot possible to determine whether any loss is probable, or to estimate reli ably the amount of any loss, either as a direct consequence of the relev ant proceedings and regulatory matters or as a result of adverse impacts or restrictions on NatWest Group’s reputation, businesses and operations. Numerous leg al and factual issues may need to be resolved, including through p otentially lengthy discovery and document production exercises a nd determination of important factual matters, and by addressing novel or unsettled legal questions relevant to the proceedin gs in question, before a liability can reasonably be esti mated for any claim. NatWest Group cannot predict if, how, o r when such claims will be resolved or what the eventual settlement, damages, fine, penalty or other relief , if any, may be, particularly for claims that are at an ea rly stage in their development or where claimants see k substantial or indeterminate damages. There are situations where NatWest Group may pu rsue an approach that in some instances le ads to a settlement agreement. This may occur in order to avoid the expense, management distraction or reputational implic ations of continuing to contest liability, or in order to take account of the risks inherent in defending claims or regulato ry matters, even for those Matters for which NatWest Group believes it has credible defences and should prevail on the meri ts. The uncertainties inherent in all such Matters affect the amount and timing of any potential outflows for both M atters with respect to which provisions have been es tablished and other contingent liabilities. It is not practicable to provide an aggregate es timate of potential liability for our legal proceedings and regula tory matters as a class of contingent liabilities . The future outflow of resources in respect of any Matter may ultimately prove to be substantially greater th an or less than the aggregate provision that NatWest G roup has recognised. Where (and as far as) liability cannot be re asonably estimated, no provision has been recognised. NatWes t Group expects that in future periods, additional provisions, se ttlement amounts and customer redress payments will be nece ssary, in amounts that are expected to be substantial in some inst ances. Please refer to Note 21 for information on ma terial provisions. Material Matters in which NatWest Group is cu rrently involved are set out below. We have provided information on the procedural history of certain Matters, where we belie ve appropriate, to aid the understanding of the Mat ter. For a discussion of certain risks associated with NatWest Group’s litigation and regulatory matters, see the Risk fac tor relating to legal, regulatory and governmental actions and investigations set out on page 425. Litigation Residential mortgage-backed securities (RMBS) litigation in the US NatWest Group companies continue to def end RMBS-related claims in the US in which the plaintiff, the Feder al Deposit Insurance Corporation (FDIC), alleges that cer tain disclosures made in connection with the rele vant offerings of RMBS contained materially false or misle ading statements and/or omissions regarding the underwriting standa rds pursuant to which the mortgage loans und erlying the RMBS were issued. In Q4 2021, NWMSI settled RMBS cl aims by the State of New Mexico for an amount that was covered by an existi ng provision. In addition, NWMSI previously agreed to settle a purported RMBS class action entitled New Jersey Carpenters Health Fund v. Novastar Mortgage Inc. et al. fo r US$55.3 million. This was paid into escrow pendi ng court approval of the settlement, which was granted in March 2019, but which remains the subject of an appeal by a class mem ber who does not want to participate in the se ttlement. London Interbank Offered Rate (LIBOR) and other rates litigation NWM Plc and certain other members of NatWes t Group, including NatWest Group plc, are defendants in a number of class actions and individual claims pendin g in the United States District Court for the Southern District of New Yo rk (SDNY) with respect to the setting of LI BOR and certain other benchmark interest rates. The complaints allege th at certain members of NatWest Group and other panel banks viola ted various federal laws, including t he US commodities and antitrust laws, and state statuto ry and common law, as well as contracts, by manipulating LIBO R and prices of LIBOR-based derivatives in various markets through various means. Several class actions relating to USD LIBO R, as well as more than two dozen non-class actions concernin g USD LIBOR, are part of a co-ordinated proceeding in the SDNY. In December 2021, the United States Court of Appeals for the Second Ci rcuit (US Court of Appeals), reversing a Dece mber 2016 decision of the SDNY, held that plaintiffs in these cases have adequately asserted the court’s personal jurisdiction ove r NWM Plc and other non-US banks, including with respec t to antitrust class action claims on behalf of over-the-counter plain tiffs and exchange-based purchaser plaintiffs. Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 370 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 27 Memorandum items continued Litigation and regulatory matters In the same decision, the appellate court affi rmed the SDNY’s prior decision that plaintiffs who purchased LIBOR-b ased instruments from third parties (as opposed to the defendants) lack antitrust standing to pursu e such claims. The appellate court remanded these matters to the SDNY f or further proceedings in light of its rulings. A se parate appeal concerning the SDNY’s dismissal of a fraud c lass action on behalf of lender plaintiffs remains pending in the US Court of Appeals. In March 2020, NatWest Group companies finalised a settlement resolving the class action on behalf of bondholde r plaintiffs (those who held bonds issued by non-defendants o n which interest was paid from 2007 to 20 10 at a rate expressly tied to USD LIBOR). The amount of the settlement (which was covered by an existing provision) has bee n paid into escrow pending court approval of the settlement. The non-class claims filed in th e SDNY include claims that the FDIC is asserting on behalf of certain failed US banks. In July 2017, the FDIC, on behalf of 39 of those failed US banks, commenced substantially similar claims against Nat West Group companies and others in the High Court of Justice of E ngland and Wales. The action alleges collus ion with regard to the setting of USD LIBOR and that the defendants b reached UK and European competition law, as well as asserting com mon law claims of fraud under US law. T he defendant banks consented to a request by the FDIC for discontinuance of the claim in respect of 20 failed US banks, leaving 19 failed US banks as claimants. The UK pr oceedings are at the disclosure stage. In addition, there are two class actions rela ting to JPY LIBOR and Euroyen TIBOR. The first class action, which rela tes to Euroyen TIBOR futures contracts, was dismisse d by the SDNY in September 2020 on jurisdictional and other grounds, and the plaintiffs have commenced an appeal to the US Court of Appeals. The second class action, which rela tes to other derivatives allegedly tied to JPY LIBOR and Euroyen TIBOR, was dismissed by the SDNY in relation to NWM Plc and other NatWest Group companies in Septembe r 2021. That dismissal may be the subject of a future appeal . In addition to the above, five other class ac tion complaints were filed against NatWest Group companies in the S DNY, each relating to a different reference rate. In Febru ary 2017, the SDNY dismissed the case relating to Eu ribor for lack of personal jurisdiction and in Augus t 2019, the SDNY dismissed the case relating to Pound Sterl ing for various reasons. Plaintiffs’ appeals in both cases remain pendi ng. In July 2019, the SDNY dismissed the case re lating to the Singapore Interbank Offered Rate and Singapore Swap Off er Rate (‘SIBOR / SOR’) but in March 2021, the US Court of Appeals reversed the SDNY’s decision, such that the case has retu rned to the SDNY, where it is the subject of a further motion to dismiss. In the class action relating to the Australian Bank Bill S wap Reference Rate, the SDNY in Fe bruary 2020 declined to dismiss the amended complaint as against NWM Plc an d certain other defendants, but dismissed it as to other members of NatWest Group (including NatWest Group plc). The clai ms against non- dismissed defendants (including NWM Plc) are now p roceeding in discovery. In June 2021, NWM Plc and the plaintiff s in the Swiss Franc LIBOR class action finalised a settlement resolving that case. The amount of the se ttlement (which was covered by an existing provision) has bee n paid into escrow pending court approval of the settlement. NWM Plc is also named as a def endant in a motion to certify a class action relating to LIBOR in the Tel Aviv Dis trict Court in Israel. NWM Plc filed a motion for cancellatio n of service outside the jurisdiction, which was g ranted in July 2020. The claimants appealed that decision and in Nove mber 2020 the appeal was refused and the claim dismissed by t he Appellate Court. The claim could in future be recom menced depending on the outcome of an appeal to Isr ael’s Supreme Court in respect of dismissal of the substantive case against banks that had a presence in Israel. In January 2019, a class action antitrust complaint was filed in the SDNY alleging that the defendants (USD ICE LIBOR p anel banks and affiliates) have conspired to supp ress USD ICE LIBOR from 2014 to the present by submitti ng incorrect information to ICE about their borrowing costs. The Na tWest Group defendants are NatWest Group plc, NWM Plc, N WMSI and NWB Plc. The defendants made a motion to dismiss this case, which was granted by the court in March 2020. One plaintiff sought to appeal the dismissal, but on 14 Feb ruary 2022, the US Court of Appeals dismissed the appeal because that plaintiff lacks standing to maintain the appeal. In August 2020, a complaint was f iled in the United States District Court for the Northern District of California by several United States consumer borrowers against the USD IC E LIBOR panel banks and their affiliates, alleging that the normal process of setting USD ICE LIBO R amounts to illegal price- fixing, and also that banks in the United States have ille gally agreed to use LIBOR as a component of price in variable consumer loans. The NatWest Group defendants a re NatWest Group plc, NWM Plc, NWMSI and NWB Plc. The pl aintiffs seek damages and to prevent the enf orcement of LIBOR-based instruments through injunction. Defe ndants have filed a motion to dismiss, which remains pending. FX litigation NWM Plc, NWMSI and/or NatWe st Group plc are defendants in several cases relating to NWM Plc’s foreign exc hange (FX) business. In 2015, NWM Plc pai d US$255 million to settle the consolidated antitrust class acti on filed in the SDNY on behalf of persons who entered into over-the-counte r FX transactions with defendants or who traded FX inst ruments on exchanges. In 2018, some members of the settlement class who opted out of that class action settlement filed their own non-class complaint in the SDNY asserting antitrust claims a gainst NWM Plc, NWMSI and other banks. Those opt-out claims are proceeding in discovery. In April 2019, some of the sam e claimants in the opt-out case described above, as well as othe rs, served proceedings (which are ongoing) in the High Court of Ju stice of England and Wales, asserting competition claims ag ainst NWM Plc and several other banks. The claim was transferred from the High Court of Justice of England and Wales in December 2021 an d registered in the Competition Appeal Trib unal in January 2022. An FX-related class action, on behalf of ‘consu mers and end- user businesses’, is proceeding in the SDNY against N WM Plc and others. Plaintiffs have filed a motion fo r class certification, which defendants are opposing . In May 2019, a cartel class action was filed in the Fede ral Court of Australia against NWM Plc and four other ba nks on behalf of persons who bought or sold currency through FX spots o r forwards between 1 January 200 8 and 15 October 2013 with a total transaction value exceeding AUD $0.5 millio n. The claimant has alleged that the banks, including NWM Plc, contravened Australian competition law by sh aring information, coordinating conduct, widening s preads and manipulating FX rates for certain currency pairs during this period. Nat West Group plc and NWMSI have been named in the action as ‘o ther cartel participants’, but are not respondents. The claim was served in June 2019 and, after a number of interlocu tory Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 371 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 27 Memorandum items continued Litigation and regulatory matters pleading disputes, NWM Plc is preparing its defence . In July and December 2019, two se parate applications seeking opt-out collective proceedings orders we re filed in the UK Competition Appeal Tribunal against NatWes t Group plc, NWM Plc and other banks. Both appli cations have been brought on behalf of persons who, between 18 December 2007 and 31 January 2013, entered into a re levant FX spot or outright forward transaction in the EEA with a relevant fin ancial institution or on an electronic communica tions network. A hearing to determine class certif ication and which of the applications should be permitted to represent the class took place in July 2021 and judgment is awaited. In November 2020, proceedings were iss ued in the High Court of Justice of England and Wales against NWM Plc by a cl aimant who sought an account of profits and/or da mages in respect of alleged historical FX trading misc onduct. The claim was served on NWM Plc in March 2021 and discontinued in December 2021. Two motions to certify FX-relat ed class actions were filed in the Tel Aviv District Court in Israel i n September and October 2018, and were subsequently consolidated into one motion. The consolidated motion to certify, which n ames The Royal Bank of Scotland plc (now NWM Plc) and several other banks as defendants, was served on NW M Plc in May 2020. NWM Plc has filed a motion challenging the pe rmission to serve the consolidated motion outside the Israeli juris diction, which remains pending. In December 2021, a claim was issued in the Netherlands against NatWest Group plc, NWM Plc and NWM N. V. by Stichting FX Claims, seeking a declar ation from the court that anti-competitive FX market conduct descri bed in decisions of the European Commission of 16 May 2 019 is unlawful, along with unspecified damages. The c laimant has indicated that it may seek to amend its claim to also refer to the Dece mber 2021 decision by the EC (described below under “F oreign exchange related investigations” ). A hearing is scheduled for June 2022. Certain other foreign exchange transaction related claims have been or may be threatened. Na tWest Group cannot predict whether all or any of these claims will be pu rsued. Government securities antitrust litigation NWMSI and certain other US broke r-dealers are defendants in a consolidated antitrust class ac tion pending in the SDNY on behalf of persons who transacte d in US Treasury securities or derivatives based on such instruments, including futu res and options. The plaintiffs allege that defendants rig ged the US Treasury securities auction bidding process to deflate prices at which they bought such securities and colluded to inc rease the prices at which they sold such se curities to plaintiffs. The complaint was dismissed in Ma rch 2021. Plaintiffs have filed an amended complaint, which defe ndants are again seeking to have dismissed . Class action antitrust claims commenced in Ma rch 2019 are pending in the SDNY against NWM Plc, NW MSI and other banks in respect of Euro-denominated bonds issued by European central banks (EGBs). The complaint alleges a co nspiracy among dealers of EGBs to widen the bid-ask spreads they quoted to customers, thereby increasing the prices customers paid for the EGBs or decreasing the p rices at which customers sold the bonds. The class consists of those wh o purchased or sold EGBs in the US between 20 07 and 2012. The defendants filed a motion to dismiss this m atter, which was granted by the court in respect of NWM Plc and NWMSI in July 2 020. Plaintiffs have filed an amended complai nt which defendants are seeking to have dismissed. Swaps antitrust litigation NWM Plc and other members of NatWest Group, inclu ding NatWest Group plc, as well as a number of other interes t rate swap dealers, are defendants in several cases pen ding in the SDNY alleging violations of the US antitrust l aws in the market for interest rate swaps. There is a consolid ated class action complaint on behalf of persons who entered in to interest rate swaps with the defendants, as well as non-class acti on claims by three swap execution facilities (Te raExchange, Javelin, and trueEx). The plaintiffs allege that the swa p execution facilities would have successfully e stablished exchange-like trading of interest rate swaps if the defen dants had not unlawfully conspired to prevent that from happening through boycotts and other means. Discovery in these cases is complete, and the plaintiffs’ motion for class certification remains pen ding. In June 2021, a class action antitrust complaint w as filed against a number of credit default swap dealers in Ne w Mexico federal court on behalf of persons who, fr om 2005 onwards, settled credit default swaps in the United States by reference to the ISDA credit default swap auction protocol. The com plaint alleges that the defendants conspired to manipul ate that benchmark through various means in violation of t he antitrust laws and the Commodity Exch ange Act. The defendants include several NatWest Group companies, includin g NatWest Group plc. Defendants are seeking dismiss al. Odd lot corporate bond trading antitrust litigation In October 2021, the SDNY gra nted defendants’ motion to dismiss the class action antitrust com plaint alleging that from August 2006 onwards various sec urities dealers, including NWMSI, conspired artificially to widen sp reads for odd lots of corporate bonds bought or sold in the United Sta tes secondary market and to boycott electronic trading platfor ms that would have allegedly promoted pricing competitio n in the market for such bonds. Plaintiffs have com menced an appeal of the dismissal. Spoofing litigation In December 2021, three substantially s imilar class actions complaints were filed in federal court in the United S tates against NWM Plc and NWMSI alle ging Commodity Exchange Act and common law unjust enrichment clai ms arising from manipulative trading known as spoofing. The complaints refer to NWM Plc’s December 2021 spoofing-rela ted guilty plea (described below under “US inv estigations relating to fixed- income securities”) and purport to asser t claims on behalf of those who transacted in US Treasury se curities and futures and options on US Treasury securities between 20 08 and 2018. The three complaints are pending in the United St ates District Court for the Northern District of Illinois. Madoff NWM N.V. is a defendant in two actions f iled by the trustee for the bankruptcy estates of Bernard L. Mad off and Bernard L. Madoff Investment Securities L LC, in bankruptcy court in New York, which together seek to clawback more than U S$298 million that NWM N.V. allegedly received fro m certain Madoff feeder funds and certain swap counterpa rties. The claims were previously dismissed, but as a re sult of an August 2021 decision by the US Court of Appeals, the y will now proceed in the bankruptcy court subject to NWM N.V.’s legal and factu al defences. Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 372 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 27 Memorandum items continued Litigation and regulatory matters EUA trading litigation NWM Plc was a named defendant in civil p roceedings before the High Court of Justice of England an d Wales brought in 2015 by ten companies (all in liquidation) (the ‘L iquidated Companies’) and their respective l iquidators (together, ‘the Claimants’). The Liquidated Companies previously traded in European Union Allowances (E UAs) in 2009 and were alleged to be VAT defaulting traders within (or otherwise connected to) EUA supply chains of which N WM Plc was a party. In March 2020, the court held that NWM Plc and Me rcuria Energy Europe Trading Limited (‘Mercuria’) were liable f or dishonestly assisting and knowingly being a party to fraudulen t trading during a seven business day pe riod in 2009. In October 2020, the High Court quantified tot al damages against NWM Plc and Mercuria at £45 million plus interest and costs, and permitted the defendants to appeal to the Court of Appeal. In May 2021 the Court of A ppeal set aside the High Court’s judgment and ordered that a retrial t ake place before a different High Court judge. The claimants have soug ht permission from the Supreme Court to appeal. The Cou rt of Appeal also dismissed an appeal by Mercu ria against the finding by the High Court that N WM Plc and Mercuria were both vicariously liable. Mercuria has sought pe rmission from the Supreme Court to appeal that decision. Offshoring VAT assessments HMRC issued protective tax asse ssments in 2018 against NatWest Group plc totalling £143 million relating to un paid VAT in respect of the UK branches of two NatWest Group companies registered in India. NatWest G roup formally requested reconsideration by HMRC of their asse ssments, and this process was completed in November 2020. HMRC upheld their original decision and, as a result, NatWest Group plc lodged an appeal with the Tax Tribunal and an applic ation for judicial review with the High Court of Justice of England and Wales, both in December 2020 . In order to lodge the appeal with the Tax Tribunal, NatWest Group plc was requi red to pay the £143 million to HMRC, and payment was made in December 2020. The appeal and the application for judici al review have both been stayed pending resolution of a separate case involving another bank. US Anti-Terrorism Act litigation NWB Plc is a defendant in lawsuits filed in the Uni ted States District Court for the Eastern District of Ne w York by a number of US nationals (or their estates, survivors, o r heirs) who were victims of terrorist attacks in Isr ael. The plaintiffs allege that NWB Plc is liable for damages arising from those attacks pursuant to the US Anti-Terrorism Act because NWB Plc previously maintained bank accounts and tra nsferred funds for the Palestine Relief & Development Fund, an or ganisation which plaintiffs allege solicited funds for Hamas, t he alleged perpetrator of the attacks. In March 2019, the trial court granted summary judg ment in favour of NWB Plc. In April 2021 , the US Court of Appeals affirmed the trial court’s judgme nt in favour of NWB Plc. In September 2021, the plaintiffs filed a petition seeking discretionary review by the United States Su preme Court, and that petition remains pending. NWM N.V. and certain other financial institu tions are defendants in several actions filed by a number of US nationals (or their estates, survivors, or he irs), most of whom are or were US military personnel, who were killed or injured in attacks in Iraq between 2003 and 2011. NWM Plc is also a defendant in some of these cases. According to the plaintiffs’ allegations, the def endants are liable for damages arising from the attacks because they allegedly conspired with Iran and certain Iranian banks to assist Iran in transferring money to Hezbollah and the Iraqi te rror cells that committed the attacks, in violation of the US Anti-Ter rorism Act, by agreeing to engage in ‘stripping’ of transac tions initiated by the Iranian banks so that the I ranian nexus to the transactions would not be detected. The first of these actions was filed in the United S tates District Court for the Eastern District of New York in Nove mber 2014. In September 2019, the district court dismissed t he case, finding that the claims were def icient for several reasons, including lack of sufficient allegations as to the alleged conspiracy and causation. The plaintiff s are appealing the decision to the US Court of Appeals. Another action, filed i n the SDNY in 2017, was dismissed in March 2019 on similar grounds, but remains subject to appeal to the US Cou rt of Appeals. Other follow-on actions that are subst antially similar to the two that have now been dismisse d are pending in the same courts. Securities underwriting litigation NWMSI is an underwriter defen dant in securities class actions in the US in which plaintiffs gene rally allege that an issuer of public securities, as well as the underwriters of the sec urities (including NWMSI), are liable to purchasers for misrepresentations and omissions made i n connection with the offering of such securities. 1MDB litigation A claim for a material sum has been issued, but not served, recently in Malaysia by 1MDB against Cout ts & Co Ltd for alleged losses in connection wit h the 1MDB fund. Coutts & Co Ltd is a company registered in Switzerland and is in wind-down following the announced sale of its business asse ts in 2015. Regulatory matters (including investigations and customer redress programmes) NatWest Group’s businesses and financial condition c an be affected by the actions of various governmental and regulatory authorities in the UK, the US, the EU and else where. NatWest Group has engaged, and will continue to eng age, in discussions with relevant governmental an d regulatory authorities, including in the UK, the US, the EU and else where, on an ongoing and regular basis, and in response to infor mal and formal inquiries or investigation s, regarding operational, systems and control evaluations and issues including those related to compliance with applicable laws and regulations, including consumer protection, inves tment advice, business conduct, competition/anti-trust, VAT recovery, anti- bribery, anti-money laundering and sanctions regimes . NWM Group in particular has been providing infor mation regarding a variety of matters, including, fo r example, offering of securities, the setting of benchmark rates and related derivatives trading, conduct in the foreign e xchange market, product mis-selling and various issue s relating to the issuance, underwriting, and sales and trading of fixed-i ncome securities, including structured products and government securi ties, some of which have resulted, and oth ers of which may result, in investigations or proceedings. Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 373 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 27 Memorandum items continued Litigation and regulatory matters Any matters discussed or identif ied during such discussions and inquiries may result in, among other things, further inquiry or investigation, other action bein g taken by governmental and regulatory authorities, increased costs being i ncurred by NatWest Group, remediation of systems and controls, public or private censure, restriction of NatWest Group’s business activities and/or fines. Any of the events or circums tances mentioned in this paragraph or below could have a material adverse effect on NatWest Group, its business, au thorisations and licences, reputation, results of operations o r the price of securities issued by it, or lead t o material additional provisions being taken. NatWest Group is co-operating f ully with the matters described below. Investigations US investigations relating to fixed-income securities In December 2021, NWM Plc pl ed guilty in the United States District Court for the District of Connecticut to one cou nt of wire fraud and one count of secu rities fraud in connection with historical spoofing conduct by former empl oyees in US Treasuries markets between January 2008 and May 20 14 and, separately, during approximately three months in 2018. The 2018 trading occurred duri ng the term of a non- prosecution agreement (NPA) be tween NWMSI and the United States Attorney's Office for the District of Conne cticut (USAO CT), under which non-prosecution was co nditioned on NWMSI and affiliated companies not en gaging in criminal conduct during the term of the NPA. The relevant t rading in 2018 was conducted by two NWM traders in Singapore an d breached that NPA. The plea agreement reached with the US Dep artment of Justice and the USAO CT resolves both the spoofing conduct and the breach of the NPA. As required by the resolution a nd sentence imposed by the court, NWM Plc is subject to a three-year period of probation and has paid a US$25.2 million criminal fine, a pproximately US$2.8 million in criminal forfeiture and app roximately US$6.8 million in restitution out of exist ing provisions. The plea agreement also imposes an ind ependent corporate monitor. In addition, NWM Plc has committed to co mpliance programme reviews and improvements and agreed to reporting and co- operation obligations. Other material adverse collateral consequence s may occur as a result of this matter, as furthe r described in the Risk factor relating to legal, regulatory and governmental actions and investigations set out on page 425. Foreign exchange related investigations In recent years, NWM Plc paid significant penal ties to resolve investigations into its FX business by the FCA, the Commodity Futures Trading Commission, the US Dep artment of Justice, the Board of Governors of the Fede ral Reserve System, the European Commission (EC) and others. In Decembe r 2021, the EC announced that a settlement had been re ached with NatWest Group plc, NWM Plc and other banks in relation to its investigation into past breaches of competition law regarding spot foreign exchange trading. NatWest Group plc and NWM Plc were fined EUR 32.5 million in total relating t o conduct that took place between 2011 and 201 2. The fine was covered by existing provisions. This concludes the EC’s investigations into NatWest Group’s past spot foreign exchange trading activity. FCA investigation into NatWest Group’s compliance with the Money Laundering Regulations 2007 Following an FCA investigation, commenced in 201 7, into potential breaches of the UK Money Laundering Regul ations 2007 (‘MLR 2007 ’), NWB Plc pled guilty in October 2021 to three offences under regulation 45 (1) of the MLR 2007 for failure to comply with regulation 8(1) between 7 Nove mber 2013 and 23 June 201 6, and regulat ions 8(3) and 14 (1) between 8 November 2012 and 23 June 20 16. These regulations required the firm to determine, conduct and demons trate risk sensitive due diligence and ongoing monit oring of its relationships with its customers f or the purposes of preventing money laundering. The offences relate to operational weaknesses between 2012 and 2 016, during which period NWB Plc did not adequately monitor the accoun ts of a UK incorporated customer. In December 2021, NWB Plc w as fined £264.8 million, incurred a confiscation order and w as ordered to pay costs. This was met by NWB Plc fro m existing provisions, with a small additional provisio n taken in Q4 2021. Other material adverse collateral consequence s may occur as a result of this matter, as furthe r described in the Risk factor relating to legal, regulatory and governmental actions and investigations set out on page 425. Systematic Anti-Money Laundering Programme assessment In December 2018, the FCA commenced a Systematic A nti- Money Laundering Programme assessment of NatWest Group. In August 2019, the FCA instru cted NatWest Group to appoint a Skilled Person under section 166 of the Financial Services and Markets Act 2000 to provide assurance on financi al crime governance arrangements in relation to two financial c rime change programmes. The Skilled Person’s final re port was received in January 2022. Customer redress programmes FCA review of NatWest Group’s treatment of SMEs In 2014, the FCA appointed an independen t Skilled Person under section 166 of the Financial Services a nd Markets Act 2000 to review NatWest Group’s treatment of SME customers whose relationship was managed by NatWest Group’s Global Restructuring Group (GRG) in the period 1 January 2008 to 31 December 2013. In response to the Skilled Person’s final report and update in 2016, NatWest Group annou nced redress steps for SME customers in the UK and the Repu blic of Ireland that were in GRG between 2008 an d 2013. These steps were (i) an automatic refund of certain complex fees; and (ii) a new complaints process, overseen b y an independent third party. Both processes have now been completed. Accordingly, NatWest Group retains only a small residual pro vision at December 2021. Investment advice review In October 2019, the FCA notifi ed NatWest Group of its intention to appoint a Skilled Pe rson under section 166 of the Financial Services and Markets Ac t 2000 to conduct a review of whether NatWest Group’s past busi ness review of investment advice provided during 2010 to 20 15 was subject to appropriate governance and accountability and led to appropriate customer outcomes. T he Skilled Person’s review has concluded and, after discuss ion with the FCA, NatWest Group is now conducting additional review / remediation work. Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 374 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 27 Memorandum items continued Litigation and regulatory matters Review and investigation of treatment of tracker mortgage customers in Ulster Bank Ireland DAC In December 2015, correspondence was received fro m the CBI setting out an industry examination framework i n respect of the sale of tracker mortgages from approxi mately 2001 until the end of 2015. The redress and compensation ph ase has concluded, although an appeals process is c urrently anticipated to run until the end of 2022. NatWest Grou p has made provisions totalling €358 million (£3 00 million), of which €335 million (£281 million) had been utilised by 31 December 2021. UBIDAC customers have lodged tracker mortgage co mplaints with the Financial Services and Pensions Ombu dsman (FSPO). UBIDAC is challenging three FSPO adjudic ations in the Irish High Court. The outcome and impact of that challen ge on those and related complaints is uncertain but may be material. UBIDAC has identified further legacy business is sues and these remediation programmes are ongoing. Nat West Group has made provisions of €188 million (£1 58 million), of which €156 million (£131 million) had been utilised by 31 December 2021 for these programmes. 28 Analysis of the net investment in business interests and intangible assets This note shows cash flows relating to obtainin g or losing control of associates or subsidi aries and net assets and liabilities purchased and sold. These cash f lows are presented as investing activities on the cash flow st atement. 2021 2020 2019 £m £ m £m Fair value given for businesses acquired (1) — — (55) Additional investment in associates (51) (40) — Net assets/liabilities purchased (3,128) — — Net outflow of cash in respect of acquisitions (3,179) (40) (55) Sale of interests in associates — 27 — Net assets/liabilities disposed 114 288 351 Profit on disposal 55 3 — Net inflow of cash in respect of disposals 169 318 351 Cash expenditure on intangible assets (479) (348) (380) Net outflow of cash (3,489) (70) (84) (1) 2019 includes the purchase of Free agent. Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 375 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 29 Analysis of changes in finan cing during the year This note shows cash flows an d non-cash movements relating to the f inancing activities of the Group. These ac tivities reflect movements in share capital, share premiu m, paid-in equity, subordinated liabilities and MR ELs. Share capita l, share premium, and paid - in equity Subordinated liabilities MRELs 2021 2020 2019 2021 2020 2019 2021 2020 2019 £m £m £ m £m £m £m £m £m £m At 1 January 18,239 17,246 17,134 9,962 9,979 10,535 20,873 19,249 16,821 Ordinary shares issued — — 17 Issue of paid-in equity 937 2,218 — Issue of subordinated liabilities 1,634 1,631 577 Redemption of subordinated liabilities (4,765) (3,502) (1,108) Interest on subordinated liabilities (321) (510) (533) Issue of MRELs 3,383 1,309 3,640 Maturity/redemption of MRELs — (2) (1,285) Interest on MRELs (647) (671) (428) Net cash inflow/(outflow) from financin g 937 2,218 17 (3,452) (2,381) (1,064) 2,736 636 1,927 Ordinary shares issued 87 52 95 — — — — — — Share cancellation (698) — — — — — — — — Effects of foreign exchange — — — (18) (234) (315) (190) (514) (683) Changes in fair value of subordinated liabilities and MRELs (434) 133 317 (649) 829 539 Paid in equity reclassified to subordina ted liabilities (2,046) (1,277) — 1,915 1,632 — Loss on sale of subordinated liabilities and MRELs 145 324 — — — — Interest on subordinated liabilities and MRELs 311 509 506 653 673 645 At 31 December 16,519 18,239 17,246 8,429 9,962 9,979 23,423 20,873 19,249 30 Analysis of cash and cash equivalents In the cash flow statement, cash and cash equiv alents comprises c ash, loans to banks and treasury bills with an o riginal maturity of less than three months that are readily conve rtible to known amounts of cash and subject to insignificant risk of change in value. 2021 2020 2019 £m £ m £m At 1 January - cash 124,489 80,993 91,368 - cash equivalents 14,710 19,595 17,568 139,199 100,588 108,936 Net increase/(decrease) in cash and c ash equivalents 51,507 38,611 (8,348) At 31 December 190,706 139,199 100,588 Comprising: Cash and balances at central banks 177,757 124,489 80,993 Trading assets 7,137 9,220 12,578 Other financial assets 16 173 459 Loans to banks - amortised cost (1) 5,796 5,317 6,558 Cash and cash equivalents 190,706 139,199 100,588 (1) Includes cash collateral posted with bank counterpart ies in respect of derivative liabilities of £4,293 million (2020 - £7,592 million; 2019 - £7,570 million). Certain members of NatWest Group are required by law or regulation to m aintain balances with the central banks in the jurisdictions in which they operate. Natwest M arkets N.V. had mandatory reserve deposi ts with De Nederlandsche Bank N.V. of €60 million (2020 - €81 million, 201 9 €47 million). The Royal Bank of Scotland Inte rnational (Holdings) Limited had balances with Central Bank of Luxembourg of € 123 million (2020 - €59 million, 2019 €58 million) Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 376 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 31 Directors' and key management remuneration Directors and key management are remunerated for services rendered in the peri od. The executive directors may pa rticipate in the company's long-term incentive plans, execu tive share option and sharesave schemes and details of their interests in the company's shares arising from their participation a re given in the directors' remuneration rep ort. Details of the remuneration received by each director are also given in the di rectors' remuneration report . Key management comprises me mbers of the NatWest Group plc and NWH L td Boards, members of the NatWest Group plc a nd NWH Ltd Executive Committee s, and the Chief Executives of NatWest Markets Plc and RBS International (Holdings) Limited. T his is on the basis that these individuals have been identified as Persons Discharging Man agerial Responsibilities of NatWest Group plc under the new governance struc ture. 2021 2020 Directors' remuneration £000 £000 Non-executive directors emoluments 1,641 1,708 Chairman and executive directors emoluments 4,688 4,349 6,329 6,057 Amounts receivable under long-term incentive plans and share option plans 549 609 Total 6,878 6,666 No directors accrued benefits under defined bene fit schemes or defined contribution schemes d uring 2021 and 2020. Compensation of key management The aggregate remuneration of directors and o ther members of key management during the year was as follows: 2021 2020 £000 £000 Short-term benefits 18,124 18,718 Post-employment benefits 380 474 Share - based payments 2,491 3,249 20,995 22,441 32 Transactions with directors and key management This note presents information relating to any transactions with directors and key manageme nt. Key management comprises directors of the company and Persons Discharging Man agerial Responsibilities (PDMRs) of Na tWest Group plc. For the purposes of IAS 24 Related pa rty disclosures, key management comp rise directors of the company and PDMRs of NatWest Group plc. Key management have banking rela tionships with NatWest Group entities which are entered i nto in the normal course of business and on substantially the same terms, including interest rates and security, as f or comparable transactions with other persons of a similar standing or, where a pplicable, with other employees. T hese transactions did not involve more than the no rmal risk of repayment or present other unfavour able features. Amounts in the table below are attributed t o each person at their highest level of N atWest Group key management. 2021 2020 £000 £000 Loans to customers - amortised cost 9,128 5,165 Customer deposits 51,018 45,747 At 31 December 2021, amount s outstanding in relation to transactions, arrangemen ts and agreements entered into by authorised institutions in NatWest Group, as defined in UK legislation, were £7,0 23,190 in respect of loans to seven persons who were directors of the company at any time during the financial period. Notes to the c onsolidated fi nancial statement s continued NatWest Group A nnual Repor t and Accou nts 2021 377 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 33 Related parties A related party is a person or entity that is rela ted to the entity that is preparing its financial st atements. Transactions between an entity and any related party ar e disclosed in the financial statements to ensure readers are aware of how financial statements may be affected by these transactions . UK Government The UK Government through H M Treasury is the ultimate controlling party of The NatWes t Group plc. The UK Government’s shareholding is managed by UK Government Investments Limited, a compan y wholly owned by the UK Government. As a result the UK Government and U K Government controlled bodies are related pa rties of the Group. At 31 December 2021, HM Treasury’s holding in the company’s ordinary shares was 52.96%. NatWest Group enters into tran sactions with many of these bodies. Transactions include the payment of: taxes – principally UK corporation tax (Note 7) and value a dded tax; national insurance contributions; local autho rity rates; and regulatory fees and levies (including the bank levy (No te 3) and FSCS levy (Note 27) - together with banking transactio ns such as loans and deposits undertaken in the nor mal course of banker- customer relationships. Bank of England facilities NatWest Group may participate in a nu mber of schemes operated by the Bank of England in the no rmal course of business. Members of NatWest Group that are UK aut horised institutions are required to maintain non-interest be aring (cash ratio) deposits with the Bank of Engla nd amounting to 0.406% of their average eligible liabilities in excess of £600 million. They also have access to Bank of England reserve acc ounts: sterling current accounts that earn interest at the Bank of En gland Base rate. NatWest Group provides guarantees for certain subsi diaries liabilities to the Bank of England. Other related parties  In their roles as providers of fin ance, NatWest Group companies provide development and other type s of capital support to businesses. These investments are made in the normal course of business. In some instances , the investment may extend to ownership or con trol over 20% or more of the voting rights of the investee company.  NatWest Group recharges NatWes t Group Pension Fund with the cost of administration servi ces incurred by it. The amounts involved are not material to NatWest Group.  In accordance with IAS 24, transactions or balances between NatWest Group entitie s that have been eliminated on consolidation are not report ed.  The captions in the primary fin ancial statements of the parent company include amounts attributable to subsidiaries. These amounts have bee n disclosed in aggregate in the relevant notes to the financial statements. Other net income/(expenses) represents the s hare of post- tax results of associates and joint ventures, p rofit (or loss) on disposal of subsidiaries, associates and joint ventures, and gains on acquisitions. 34 Post balance sheet events A post balance sheet event is an event that takes place between 31 December 2021 (reportin g date) and 17 February 2022 (date of approval of these financial statements). Significan t events are included in the financial state ments either to provide new information about conditions that existe d at 31 December 2021, including esti mates used to prepare the financial statements (known as an adjusting event) or to provide new i nformation about conditions that did not exist at 31 December 2021 (non- adjusting events). This note provides infor mation relating to material non-adjusting events. On 27 January 2022, NatWest Group announced that we will create a new franchise, Comme rcial and Institutional, bringing together our Commercial, NatWes t Markets and RBS International businesses to fo rm a single franchise, with common objectives, to best support our customers across the f ull non-personal customer lifecycle. O ur reporting will follow this new structure from Q1 2022. Regulatory calls were announce d as a result of the PRA determination that certai n instruments can no longer be included as part of Tier 1 capital on a solo and/or consolida ted basis after 31 December 2021: On 11 February 2022, NatWest Group plc gave no tice to noteholders of the redemption of its €1.5 billion Fixed to Floating Rate notes due 8 March 2023. The notes will be redee med on the optional redemption date of 8 M arch 2022. Payment of principal and accrued interest will be settled upon redemption at par. The call is because the note will cease to be MREL eligible from 8 March 2022. Other than as disclosed in the accounts, there h ave been no other significant events be tween 31 December 2021 and the d ate of approval of these accounts whic h would require a change or additional disclosure.  On 1 February 2022, NatWest Group plc gave notice of redemption to holders of the USD Series U N on-Cumulative Dollar Preference Shares (ISIN US3905 7AA62). The notional outstanding of $1,01 3 m illion plus dividends for the current period to, but excluding the redemption date of 31 March 2022 will be paid to noteholders at par.  On 1 February 2022, NatWest Group plc gave notice of redemption to holders of the $1,200 m illion 7.648% dollar Perpetual Regulatory Tier One Security (ISIN US7800 97AH44). The notional outstanding of $ 67.5 million plus interest for the current period will be paid to noteholders at a make whole price calculated at least one business d ay prior to the redemption date of 3 March 2022. Parent com pany financi al statement s and notes NatWest Group A nnual Repor t and Accou nts 2021 378 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Balance sheet as at 31 December 2021 Note 2021 2020 £m £m Assets Derivatives with subsidiaries 974 1,580 Amounts due from subsidiaries 4 29,962 26,910 Other financial assets 668 579 Investments in Group undertakings 9 48,835 46,229 Other assets 38 117 Total assets 80,477 75,415 Liabilities Amounts due to subsidiaries 4 378 723 Derivatives 704 1,102 Other financial liabilities 23,600 21,056 Subordinated liabilities 8 7,740 7,944 Other liabilities 150 151 Total liabilities 32,572 30,976 Owners’ equity 47,905 44,439 Total liabilities and equity 80,477 75,415 Owners’ equity includes a total comprehensive p rofit for the year, dealt with in the accoun ts of the parent company, of £7,14 1 million (2020 - £9,598 million loss ). This is primarily due to a VIU write back on subsidia ries and intercompany dividends that eliminate on consolidation. As permitted by section 408(3) of the Companies Act 200 6, the primary financial statements o f the company do not include an income statement or a statement of co mprehensive income. The accompanying notes on pages 38 1 to 394 form an integral part of these financial stateme nts. The accounts were approved by the Board of di rectors on 17 February 2022 and signed on it s behalf by: Howard Davies Alison Rose-Slade Katie Murray NatWest Group plc Chairman G roup Chief Executive Off icer Group Chief Financial Officer Registered No. SC45551 Parent company financial s tatements and n otes continued NatWest Group A nnual Repor t and Accou nts 2021 379 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Statement of changes in equity for the year ended 31 December 2021 2021 2020 2019 £m £m £ m Called-up share capital - at 1 January 12,129 12,094 12,049 Ordinary shares issued 37 35 45 Share cancellation (1,3) (698) — — At 31 December 11,468 12,129 12,094 Paid - in equity - at 1 January 4,979 4,047 4,047 Redeemed — (1,277) — Reclassified (2) (2,037) Securities issued during the period 933 2,209 — At 31 December 3,875 4,979 4,047 Share premium - at 1 January 1,111 1,094 1,027 Ordinary shares issued 50 17 67 At 31 December 1,161 1,111 1,094 Cash flow hedging reserve - at 1 January 42 67 83 Amount recognised in equity 8 4 18 Amount transferred from equity to earnings (12) (33) (39) Tax (2) 4 5 At 31 December 36 42 67 Capital Redemption reserve - at 1 January — — — Share cancellation 698 — — At 31 December 698 — — Own Shares held - at 1 January — — — Shares issued under employee share schemes 37 — — Own shares acquired (385) — — At 31 December (348) — — Retained earnings - at 1 January 26,178 36,485 37,181 Profit/(Loss) attributable to ordinary shareh olders and other equity owners 7,147 (9,573) 2,728 Equity preference dividends paid (19) (26) (39) Ordinary dividend paid (693) — (3,018) Paid-in equity dividends paid (299) (355) ( 367) Unclaimed dividend — 2 — Shares issued under employee share schemes (1) — — Shares repurchased during the ye ar (1,423) — — Redemption/reclassification of paid-in equity 125 (355) — At 31 December 31,015 26,178 36,485 Owners’ equity at 31 December 47,905 44,439 53,787 (1) In March 2021, there was an agreement with HM Treasury to buy 591 million ordinary shares in the Company from UK Government Investments Ltd (UKGI), at 190.5p per share for the total consideration of £1.13 billion. NatWest Group cancelled 391 million of the purchased ordinary shares, amounting to £744 million excluding fees, and held the remaining 200 million in own shares held, amounting to £381 million excluding fees. T he nominal value of the share cancellation has been transferred to the capital redemption reserve. (2) In July 2021, paid-in equity reclassified to liabili ties as th e result of a call in August 2021 of US$2.65 billion AT1 Capital notes. (3) In line with the announcement in July 2021 , NatWest Group plc repurchased and cancelled 310.8 million shares for total consideration of £676.2 million excluding fees. Of the 310.8 million shares bought back, 2.8 million sha res were settled and cancelled in January 2022. The nominal value of the share cancellations has been transferred to the capital redemption reserve with the share premium element to retained earnings. (4) The total distributable rese rves for the Bank i s £31 ,015 million (2020 – 26,178 million). The accompanying notes on pages 38 1 to 394 form an integral part of these financial stateme nts . Parent company financial s tatements and n otes continued NatWest Group A nnual Repor t and Accou nts 2021 380 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Cash flow statement for the year ended 31 December 2021 2021 2020 2019 £m £m £ m Operating profit/(loss) before tax from continuing operations 7,133 (9,698) 2,799 Adjustments for: Impairment releases on intercompany loans to bank (6) — — Net impairment (reversals)/charges of invest ments in Group undertakings (2,600) 9,606 1,489 Change in fair value taken to profit or loss on o ther financial liabilities and subordinated liabilities (440) 672 221 Elimination of foreign exchange diff erences (14) (540) ( 526) Other non - cash items (12) (31) (23) Dividends receivable from subsi diaries (4,872) (485) (5,596) Loss on sale of investments in Group undertakings 22 — 1,739 Interest payable on MRELs and subordina ted liabilities 447 537 513 Loss on sale of MRELs and subordinated liabilities 113 324 — Charges and releases on provisions (3) (8) (25) Net cash flows from trading act ivities (232) 377 591 Decrease/(increase) in derivative assets with subsi diaries 614 (598) ( 436) (Increase)/decrease in amounts due from subsi diaries (1,825) (792) 863 Increase in other financial assets (89) (302) (36) Decrease/(increase) in other asse ts 2 (2) 113 (Decrease)/increase in amounts due to subsidi aries (347) 289 ( 193) (Decrease)/increase in derivative liabilities with subsidi aries (398) 391 266 Increase/(decrease) in other financial li abilities — 2 (1) Decrease in other liabilities (2) (33) — Change in operating assets and liabilities (2,045) (1,045) 576 Income taxes received 97 40 15 Net cash flows from operating activi ties (1) (2,180) (628) 1,182 Net movement in business interests (29) (27) ( 442) Dividends received from subsidiaries 4,872 485 3,751 Net cash flows from investing activities 4,843 458 3,309 Movement in MRELs 1,531 (147) ( 142) Movement in subordinated liabilities (2,256) (1,972) (709) Ordinary shares issued 87 109 17 Share cancellations (1,808) — — Dividends paid (1,011) (381) (3,424) Issue of paid - in equity 933 2,209 — Net cash flows from financing activities (2,524) (182) (4,258) Effects of exchange rate changes on cash and cash equivalents 4 1 (1) Net increase/(decrease) in cash and c ash equivalents 143 (351) 232 Cash and cash equivalents at 1 January 188 539 307 Cash and cash equivalents at 31 December (2) 331 188 539 (1) Includes interest received of £183 million (2020 - £344 million, 2019 - £371 million) and interest paid of £551 million (2020 - £816 million, 2019 - £988 million). (2) Cash and cash equivalents comprise intragroup loans and advan ces with a maturity of less than 3 months for 2021, 2020 and 2019. Parent company financial s tatements and n otes continued NatWest Group A nnual Repor t and Accou nts 2021 381 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 1. Presentation of financial statements The financial statements are pre pared on a going concern basis based on the directo rs’ assessment that the parent company will continue in operational existence for a period of twelve months from the date the financial s tatements are approved (refer to the Report of the directors page 184). The accounting policies applied to the parent company financial st atements are the same as those applied in the consolidated financial statemen ts on pages 300 to 377 . The parent company is incorpora ted in the UK and registered in Scotland. The fin ancial statements are prepared on the hist orical cost basis except for derivatives and certain financi al instruments which are stated at fair value. Re cognised financial assets and financial liabilities of fair value hedges are adjusted for changes in fair value in respect of the risk that is hedged. The accounting policies that ar e applicable to the parent company are included in NatWest Group plc’s accounting policies which are set out on pages 307 to 312 of the consolidated fin ancial statements, except that it has no policy reg arding consolidation. 2. Critical accounting policies and sources of estimation u ncertainty The reported results of the parent company are sensitive to the accounting policies, assu mptions and estimates that underlie the preparation of its financial statements. The judg ments and assumptions involved in the parent company’s accounting polici es that are considered by the Board to be the most important to the portrayal of its financial co ndition are those involved in assessing the impairment, if any, in its investments in grou p undertakings, refe r to Note 9. Future accounting developments International Financial Reporting Standards A number of IFRSs and amendments to IFRS we re in issue at 31 December 2021. The parent company is assessing the effect of adopting these standards and amendments on its financial statemen ts but does not expect the eff ect to be material. 3 Derivatives with subsidiaries – designated h edges Fair value hedging is used to hedge loans and other fi nancial liabilities, and cash flow hed ging is used to hedge other financial liabilities and subordinated liabilities. For accounting policy information se e accounting policies notes 10 and 15. Derivatives held for hedging purposes a re as follows: 2021 2020 Notional Assets Liabilities Notional Assets L iabilities £bn £m £m £bn £m £m Fair value hedging - interest rate contracts 22.2 825 167 25.0 1,537 359 Cash flow hedging - exchange rate contracts 4.9 8 — 5.8 7 3 Total 833 167 1,544 362 Parent company financial s tatements and n otes continued NatWest Group A nnual Repor t and Accou nts 2021 382 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 4 Financial instruments – classification The following tables analyse NWG plc’s financial asse ts and liabilities in accordance with the categories of financial instruments on an IFRS 9 basis. For accounting policy information se e accounting policies 10, 12 , 13 and 14. Amortised Other MFVTPL FVOCI cost assets Total Assets £m £m £m £m £m Derivatives with subsidiaries 974 974 Amounts due from subsidiaries 16,189 — 13,773 — 29,962 Other financial assets 665 3 — 668 Investment in Group undertakings 48,835 48,835 Other assets 38 38 31 December 2021 17,828 3 13,773 48,873 80,477 Derivatives with subsidiaries 1,580 1,580 Amounts due from subsidiaries 15,506 — 11,404 — 26,910 Other financial assets 576 3 — 579 Investment in Group undertakings 46,229 46,229 Other assets 117 117 31 December 2020 17,662 3 11,404 46,346 75,415 Held - for - Amortised Other trading DFV cost liabilities Total Liabilities £m £m £m £m £m Amounts due to subsidiaries 252 — 113 13 378 Derivatives with subsidiaries 704 704 Other financial liabilities — 6,624 16,976 23,600 Subordinated liabilities — 7,740 7,740 Other liabilities 150 150 31 December 2021 956 6,624 24,829 163 32,572 Amounts due to subsidiaries 542 — 111 70 723 Derivatives with subsidiaries 1,102 1,102 Other financial liabilities — 3,987 17,069 21,056 Subordinated liabilities — 7,944 7,944 Other liabilities 151 151 31 December 2020 1,644 3,987 25,124 221 30,976 Amounts due from/to subsidiaries 2021 2020 £m £m Assets Loans to banks and customers - amortised cost 13,773 11,404 Other financial assets 16,189 15,506 Amounts due from subsidiaries 29,962 26,910 Derivatives (1) 974 1,580 Liabilities Bank and customer deposits 252 542 Other liabilities 13 70 Subordinated liabilities 113 111 Amounts due to subsidiaries 378 723 Derivatives (1) 704 1,102 (1) Intercompany derivatives are included within derivative classification on the balance sheet. Parent company financial s tatements and n otes continued NatWest Group A nnual Repor t and Accou nts 2021 383 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 5 Financial instruments Interest rate benchmark reform The total amount of exposure for NatWest Gr oup plc at 31 December 2021 subject to conver sion provisions is £1.6 billion derivative notionals. Rates subject t o IBOR reform GBP LIBOR USD IBOR (1) Other IBOR (2) Total 2021 £m £m £m £m Amounts due from subsidiaries — 9,338 — 9,338 Other financial assets — 665 — 665 Amounts due to subsidiaries — — — — Other financial liabilities 1,320 7,055 97 8,472 Subordinated liabilities — 604 — 604 Derivatives notional - with subsidiaries (£bn) — 20.4 — 20.4 Rates subject to IBOR reform GBP LIBOR USD IBOR (1) EURIBOR (2) Other IBOR Total 2020 £m £m £m £m £m Amounts due from subsidiaries 1,422 15,444 4,557 38 21,461 Other financial assets — 577 — — 577 Other financial liabilities 1,376 9,540 4,187 108 15,211 Subordinated liabilities — 767 — — 767 Derivatives notional - with subsidiaries (£bn) 4.1 23.7 9.8 0.1 37.7 (1) In 2021 the FCA declared that USD IBOR will be non-representative post 30 June 2023; at the time of preparing the 2020 Annual Report and Accounts this date was expected to be 31 December 2021. (2) In 2021 management concluded that E URIBOR is not expected to be significantly reformed further and therefore any uncertainty due to interest benchmark rate reform for EURIBOR has ended. December 2020 data includes EURIBOR exposure as subject to reform AT1 issuances As part of its capital management activities NatWest Group has acquired certain equity ins truments issued by its subsidiaries which contain reset clauses linked to IBOR rates subject to reform reported in investment in group u ndertakings. These are outlined below: 31 December 2021 31 December 2020 £m £m USD$2 billion 8.0169% 1,581 1,581 £300 million 6.597% 300 300 USD$2.65 billion 7.9916% 1,161 2,095 USD$950 million 7.9604% 749 749 USD$200 million 5.540% 155 155 6 Financial instruments - fair value of financial in struments not carried at fair value The following table shows the carrying value an d fair value of financial instruments ca rried at amortised cost on the balance shee t. 2021 2020 Carrying Carrying value Fair value value Fair value £bn £bn £bn £bn Financial assets Amounts due from subsidiaries (1) 13.8 13.9 11.4 11.7 Financial liabilities Amounts due to subsidiaries (2) 0.1 0.2 0.1 0.1 Other financial liabilities - debt sec urities in issue (3) 17.0 17.5 17.1 17.7 Subordinated liabilities (3) 7.7 8.2 7.9 8.6 (1) Fair value hierarchy level 2 - £5.9 billion (2020 - £6.4 b illion) and level 3 - £8.1 billion (2020 - £5.3 billion). (2) Fair value hierarchy level 2 (2020 – level 3). (3) Fair value hierarchy level 2. Parent company financial s tatements and n otes continued NatWest Group A nnual Repor t and Accou nts 2021 384 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 7 Financial instruments - maturity analysis Remaining maturity The following table shows the r esidual maturity of financial instruments based on cont ractual date of maturity. 2021 2020 Less than More than Less than More th an 12 months 12 months Total 12 months 12 months Tota l £m £m £m £m £m £m Assets Derivatives with subsidiaries 49 925 974 3 1,577 1,580 Amounts due from subsidiaries 8,276 21,686 29,962 5,591 21,319 26,910 Other financial assets — 668 668 — 579 579 Liabilities Amounts due to subsidiaries (1) 254 111 365 543 110 653 Derivatives with subsidiaries 1 703 704 38 1,064 1,102 Other financial liabilities 3,709 19,891 23,600 203 20,853 21,056 Subordinated liabilities 1,018 6,722 7,740 36 7,908 7,944 (1) Amounts due to subsidiaries relating t o non-financial instruments of £13 million (2020 - £70 million) have been excluded from the table. Financial liabilities: contractual maturity The following table shows undiscounted cash flo ws payable up to 20 years from the b alance sheet date, including future inte rest payments. Held-for-trading liabilities amounting to £0.8 billion (2020 - £1.3 billion) have been excluded fro m the tables. 2021 0-3 months 3-12 months 1-3 years 3-5 years 5-10 years 10-20 years £m £m £m £m £m £m Liabilities by contractual maturity Amounts due to subsidiaries (1) — 9 18 18 44 89 Derivatives held for hedging 28 22 73 17 31 — Other financial liabilities 1,484 2,662 8,866 5,406 7,060 — Subordinated liabilities 20 1,274 3,277 2,199 1,567 544 1,532 3,967 12,234 7,640 8,702 633 2020 Liabilities by contractual maturity Amounts due to subsidiaries (1) — 7 18 18 44 88 Derivatives held for hedging 47 73 187 46 30 — Other financial liabilities 222 420 9,884 5,623 6,522 — Subordinated liabilities 22 361 3,728 3,444 907 674 291 861 13,817 9,131 7,503 762 (1) Amounts due to subsidiaries relating t o non-financial instruments have been excluded from the tables. Parent company financial s tatements and n otes continued NatWest Group A nnual Repor t and Accou nts 2021 385 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 8 Subordinated liabilities 2021 2020 £m £m Dated loan capital 7,689 7,768 Undated loan capital 51 175 Preference shares — 1 7,740 7,944 (1) Excludes amounts due to NatWest Group subsidiaries of £113 million (2020 - £11 1 million). Redemptions in the period are disc losed in Note 20 to the consolidated accounts. For accounting policy information se e Accounting policies notes 10 and 14. Certain preference shares issu ed by the company are classified as liabilities; these s ecurities remain subject to the capital maintenance rules of the Companies Act 20 06. Capital 2021 2020 Dated loan capital treatment £m £m US$2,250 million 6.13% dated notes 2 022 Tier 2 986 1,234 US$650 million 6.425% dated notes 2 043 (callable January 2034) (1) Ineligible 554 593 US$2,000 million 6.00% dated notes 2 023 T ier 2 1,073 1,574 US$1,000 million 6.10% dated notes 2 023 T ier 2 354 419 US$2,250 million 5.13% dated notes 2 024 T ier 2 956 1,778 US$750 million 3.754% dated notes 2 029 Tier 2 558 551 US$850 million 3.032% dated notes 2 035 (callable November 2030 ) Tier 2 584 606 £1,000 million 3.622% dated notes 2030 (callable between May 20 25 to August 2025) Tier 2 995 1,013 £1000 million 2.105% dated notes 2031 (callable between August 2026 to Novembe r 2026) T ier 2 999 — €750 million 1.043% dated notes 2 032 (callable between June 2027 to September 2027) Tier 2 630 — 7,689 7,768 (1) The call is on the underlying security in th e partnership, rather than the internal issued debt . Undated loan capital Capital 2021 2020 treatment £m £m US$106 million floating rate notes (callable semi- annually) Ineligible — 78 US$762 million 7.648% notes (callable Septem ber 2031) (1) Ineligible 51 97 51 175 (1) The company can satisfy interest pa yment obligations by issuing sufficient ordinary shares to appointed trustees to enable them, on selling these shares, to settle the interest payment . Capital 2 021 2020 Preference shares (1) treatment £m £m £0.5 million 11% and £0.4 million 5.5 % cumulative preference shares of £1 (not callable) Ineligible — 1 (1) Further details of the cont ractual terms of the preference shares are given in Note 22 to the consolidated accounts. The following table analyses intercompany subo rdinated liabilities: Capital 202 1 2020 Undated loan capital treatment £m £m US$150 million 8.00% undated notes 201 2 Tier 2 113 112 Parent company financial s tatements and n otes continued NatWest Group A nnual Repor t and Accou nts 2021 386 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 9 Investments in Group undertakings Critical accounting policy: Investments in Group undertakings At each reporting date, the company assesse s whether there is any indication that its investment in its G roup undertakings is impaired. If any such indication e xists, the company undertakes an impairment test by com paring the carrying value of the investment in its Group undertakings with its es timated recoverable amount. The key judg ment is in determining the recoverable amount. The recoverable amount of a n investment in its Group undertakings is the higher of its fair value less cost to sell and its value in use, being an assessment of the discounted futu re cash flows of the entity. Impairment testing in herently involves a number of judgments: the five-y ear cash flow forecast, the choice of appropriate discoun t and growth rates, and the estimation of fair value. For accounting policy information se e Accouting policies note 16. Investments in Group undertakings a re carried at cost less impairment losses. Move ments during the year were as follows: 2021 2020 £m £m At 1 January 46,229 55,808 Additional investments in Group undertakings 940 27 Disposals of investments in Group undertakings (934) — Impairment of investments (1) 2,600 (9,606) At 31 December 48,835 46,229 (1) Net of impairment reversals. The recoverable amount of inves tments in Group undertakings is the higher of net asset value as a proxy for fair value less cost to sell or value in use. Where recoverable value is based on net asset value, the fair value measu rement is categorised as Level 3 of the fair value hierarchy. The carrying value of Investments in Group undertakings at 31 Dece mber 2021 is supported by the respective recoverable values of the entities. In August 2021 the company issued £9 41 million of contingent convertible AT1 notes to NWH L td and redeemed £934 million of contingent convertible AT1 notes issued to NWH Ltd. In 2020 the company invested additio nal capital of £27 million in its subsidiaries, NWM Plc and RBS AA Holdings. In 2021, Impairment of investme nts includes a £5,250 million reversal of an e arlier impairment of the company's investment i n NatWest Holdings Limited as improved five -year cash flow forecasts increased the value in us e and a £2,650 million impairment of the company's investment in NatWest Markets Plc due to a decline in its net asset value mainly driven by dividends paid during the year and losses incurred by the business. T he impairment in 2020 was mainly related to Nat West Holdings Limited. The impact of reasonably possible changes to the mo re significant variables in the value in us e calcula tions for Natwest Holdings Limited are presented below. This reflects the sensitivi ty of the value in use to each variable o n its own. It is possible that more than one change may occur at the same time. The v alue in use calculations use 10% as a discount rate and 1.6 % as a long term growth rate. The value in use model shows the f ollowing sensitivities: Potential VIU movement 2021 2020 £bn £bn 1% adverse movement in discount rate (4.4) (4.0) 1% adverse movement in terminal growth rate (2.0) (1.5) £250 million adverse movement in ope rating profit before tax (2.1) (2.2) The principal subsidiary undertakings of the com pany are shown below. Their capital consist s of ordinary shares, preference shares and additional Tier 1 notes which a re unlisted with the exception of certain p reference shares listed by NWB Plc. All of these subsidiaries are included in NatWes t Group’s consolidated financial statements and have an a ccounting reference date of 31 December. Nature of business Country of incorporation and principal area of operation Group interest National Westminster Bank Plc (1,3) Banking Great Britai n 100% The Royal Bank of S cotland plc (3) Banking Great Britai n 100% Coutts & Company (2, 3) Banking Great Britai n 100% Ulster Bank Irela nd Designated Act ivity Company (3) Banking Republic of Ireland 100% NatWest Markets Pl c Banking Great Britai n 100% NatWest Markets N.V . (4) Banking Netherlands 100% The Royal Bank of S cotland Internati onal Limited (5) Financial Institution Jersey 100% (1) The company does not hold any of the p reference shares in issue. (2) Coutts & Company is incorporat ed with unlimited liability. (3) Owned via NatWest Holdings Limited. (4) Owned via NatWest Markets Plc. (5) Owned via The Royal Bank of Scotland Int ernational (Holdings) Limited. For full information on all related undertakings, refe r to Note 12. Parent company financial s tatements and n otes continued NatWest Group A nnual Repor t and Accou nts 2021 387 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 10 Analysis of changes in finan cing during the year Share capita l, share premium, and paid-in equity S ubordinated liabilities MRELs 2021 2020 2019 2021 2020 2019 2021 2020 2019 £m £m £m £m £m £m £m £m £m At 1 January 18,219 17,235 17,123 8,055 7,763 8,059 6,655 6,440 6,785 Ordinary shares issued 87 52 17 Issue of paid-in equity 933 2,209 — Issue of subordinated liabilities 1,634 1,631 577 Redemption of subordinated liabilities (3,598) (3,207) (855) Interest on subordinated liabilities (292) (396) (431) Issue of MRELs 598 (3) 1,178 Maturity/redemption of MRELs 1,082 (2) (1,285) Interest on MRELs (149) (142) ( 35) Net cash inflow/(outflow) from financin g 1,020 2,261 17 (2,256) (1,972) (709) 1,531 (147) (142) Issue of ordinary shares — — 95 Effects of foreign exchange 44 (264) (264) (54) (275) (261) Changes in fair value of subordinated liabilities and MRELs (309) 173 268 (131) 499 ( 46) Paid in equity reclassified to subordina ted liabilities (2,037) (1,277) — 1,915 1,632 — Loss on sale of subordinated liabilities and MRELs 114 324 — Interest on subordinated liabilities and MRELs 290 399 409 157 138 104 Other (698) — — — — — — — — At 31 December 16,504 18,219 17,235 7,853 8,055 7,763 8,158 6,655 6,440 11 Directors’ and key managemen t remuneration Directors’ remuneration is disclosed in Note 31 to the consolidated accounts. The directors had no othe r reportable related party transactions or balances with the company. Parent company financial s tatements and n otes continued NatWest Group A nnual Repor t and Accou nts 2021 388 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 12 Related undertakings Legal entities and activities at 31 December 2021 In accordance with the Companies Act 2006, the company’s related undertakings and the ac counting treatment for each are listed below. All undertakings are wholly-owned by the com pany or subsidiaries of the company an d are consolidated by reason of contractual control (Section 1162(2) CA 2006), unless otherwise indicated. NatWest Group interest refers to or dinary shares of equal values and voting rights unless further analysis is provided in the notes. Activities are classif ied in accordance with Annex I to the Capital Requirements Directive (CR D IV) and the definitions in Article 4 of the Capital Req uirements Regulation. The following table details active related undertakings incorporated in the UK which are 100% owned by NatWest Group and fully consolidated for accounting purposes Regulatory Entity name Activity trea tment Notes 280 Bishopsgate Finance Ltd INV FC (1) Caledonian Slee pers Rail Lea sing Ltd BF FC ( 1) Care Homes 1 Lt d BF FC ( 1) Care Homes 2 Lt d BF FC ( 1) Care Homes 3 Lt d BF FC ( 1) Care Homes Hol dings Ltd BF FC ( 1) Churchill Manag ement Ltd BF FC ( 1) Coutts & Comp any CI FC ( 17) Coutts Finance Co mpany BF FC (17) Desertlands En tertainment Ltd BF FC ( 1) Distant Planet P roductions Lt d BF FC ( 1) Esme Loans L td BF FC ( 1) FreeAgent Cen tral Ltd SC FC (33) FreeAgent Hold ings Ltd SC FC (33) G L Trains Ltd BF FC (21) Gatehouse Way Developments Ltd INV DE (1) ITB2 Ltd BF FC ( 3) KUC Properties Ltd BF DE (3) Land Options ( West) Ltd INV DE (3) Lombard & Ul ster Ltd BF FC (16) Lombard Busin ess Finance Ltd BF FC ( 1) Lombard Busin ess Leasing Lt d BF FC ( 1) Lombard Corpor ate Finance (6) Ltd BF FC ( 1) Lombard Corpor ate Finance (7) Ltd BF FC ( 1) Lombard Corpor ate Finance (11) Ltd BF FC ( 1) Lombard Corpor ate Finance (15) Ltd BF FC ( 1) Lombard Corpor ate Finance (D ecember 1) L td BF FC ( 1) Lombard Corpor ate Finance (D ecember 3) L td BF FC ( 1) Lombard Corpor ate Finance (Ju ne 2) Ltd BF FC ( 1) Lombard Discoun t Ltd BF FC ( 1) Lombard Fina nce Ltd BF FC ( 1) Lombard Indus trial Leasing Lt d BF FC ( 1) Lombard Lease Finance Ltd BF FC ( 1) Lombard Leasi ng Company Lt d BF FC ( 1) Lombard Leasi ng Contracts L td BF FC ( 1) Lombard Lessor s Ltd BF FC ( 1) Lombard Mariti me Ltd BF FC ( 1) Lombard North Central Leasin g Ltd BF FC ( 1) Lombard North Central PLC BF FC ( 1) Lombard Prop erty Facilities Lt d BF FC ( 1) Lombard Tec hnology Servic es Ltd BF FC ( 1) Mettle Venture s Ltd OTH FC (1) Nanny McPhee Productions Ltd BF FC ( 1) National West minster Bank Plc CI FC (1) National West minster Home Loa ns Ltd BF FC ( 1) NatWest Corpo rate Investmen ts BF FC ( 1) NatWest Holdi ngs Ltd INV FC (1) NatWest Invoi ce Finance Ltd OTH FC (1) NatWest Mark ets Plc CI FC ( 28) NatWest Mark ets Secretarial Se rvices Ltd SC FC ( 1) NatWest Mark ets Secured Fun ding LLP BF FC (20) NatWest Prope rty Investment s Ltd INV DE (1) Entity name Activity Regulatory Notes treatment NatWest Truste e and Depositary Services Ltd INV FC ( 1) NatWest Ventur es Investment s Ltd BF FC ( 1) P of A Produc tions Ltd BF FC ( 1) Patalex Product ions Ltd BF FC ( 1) Patalex V Produ ctions Ltd BF FC ( 1) Pittville Leasing L td BF FC ( 1) Premier Audit Co mpany Ltd BF FC ( 1) Price Productio ns Ltd BF FC ( 1) Priority Sites Inv estments Ltd BF DE (1) Priority Sites L td INV DE (1) Property Ventur e Partners Ltd INV FC ( 3) R.B. Capital L easing Ltd BF FC ( 1) R.B. Equipment L easing Ltd BF FC ( 1) R.B. Leasing (Ap ril) Ltd BF FC ( 1) R.B. Leasing (Se ptember) Ltd BF FC ( 1) R.B. Leasing Co mpany Ltd BF FC ( 3) R.B. Quadran gle Leasing Ltd BF FC ( 1) R.B.S. Special Investments Ltd BF FC ( 1) RB Investment s 3 Ltd OTH FC (1) RBOS (UK) Ltd BF FC ( 1) RBS AA Holdings (UK) Ltd BF FC ( 1) RBS Asset Mana gement Hol dings BF FC (17) RBS Collective Investment Fund s Ltd BF FC (11) RBS HG (UK) Ltd BF FC ( 1) RBS Invoice Finance Ltd BF FC ( 1) RBS Manage ment Services (UK) Ltd SC FC (1) RBS Mezzanin e Ltd BF FC ( 3) RBS Property De velopments L td INV FC ( 3) RBS Property V entures Investm ents Ltd BF FC ( 3) RBS SME Inves tments Ltd BF FC ( 1) RBSG Collective Investment s Holdings Ltd BF FC (11) RBSG Internatio nal Holdings Lt d BF FC ( 3) RBSM Capital Lt d BF FC ( 3) RBSSAF (2) Lt d BF FC ( 1) RBSSAF (8) Lt d BF FC ( 1) RBSSAF (12) L td BF FC ( 1) RBSSAF (25) L td BF FC ( 1) RoboScot Equity Ltd BF FC ( 3) Royal Bank Inv estments Ltd BF FC ( 3) Royal Bank Lea sing Ltd BF FC ( 3) Royal Bank of S cotland (Indus trial Leasing) Lt d BF FC ( 3) Royal Bank Ve ntures Investme nts Ltd BF FC ( 3) Royal Scot Lea sing Ltd BF FC ( 3) RoyScot Trust P lc BF FC ( 1) SIG 1 Holdings L td BF FC ( 3) SIG Number 2 Ltd BF FC ( 3) The One Accoun t Ltd BF FC ( 1) The Royal Ban k of Scotland Grou p Independent Fi nancial Servic es Ltd BF FC ( 3) The Royal Ban k of Scotland pl c CI FC (28) Ulster Bank Ltd CI FC (16) Parent company financial s tatements and n otes continued NatWest Group A nnual Repor t and Accou nts 2021 389 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 12 Related undertakings continued Regulatory Entity name Activity trea tment Notes Ulster Bank Pen sion Trustees Lt d TR DE (16) Voyager Leasin g Ltd BF FC ( 1) Walton Lake D evelopments Lt d INV DE (1) West Register (Ho tels Number 3) Ltd INV DE (3) Regulatory Entity name Activity treatment Notes West Register (Pro perty Invest ments) Ltd BF DE (3) West Register (Re alisations) L td INV DE (3) Winchcombe Fi nance Ltd BF FC (1) World Learning Li mited BF FC (29) The following table details active related undertakings incorporated outside the UK which are 100% owned by NatWest Group and fully consolidated for accounting purposes Regulatory Entity name Activity treatment Notes AA Merchant S ervices B.V. BF FC (13) Airside Propertie s AB BF FC ( 2) Airside Propertie s ASP Denma rk AS BF FC (12) Airside Propertie s Denmark AS BF FC (12) Alcover A.G. BF DE (72) Alternative Inv estment Fund B. V. BF FC (13) Arkivborgen KB BF FC ( 2) Artul Koy BF FC ( 4) Backsmedjan KB BF FC ( 2) BD Lagerhus AS BF FC ( 5) Bilfastighet i A kalla AB BF FC ( 2) Bioenergie Wie senburg GmbH & Co. KG INV DE (62) Brödmagasinet KB BF FC ( 2) C.J. Fiduciarie s Ltd BF FC (15) Candlelight Acqu isition LLC BF FC ( 6) Coutts & Co ( Cayman) Ltd BF FC (19) Coutts & Co Lt d CI FC ( 70) Coutts General Pa rtner (Cayma n) V Ltd BF FC (64) Eiendomssels kapet Apteno La AS BF FC ( 5) Espeland Naer ing AS BF FC ( 5) Eurohill 4 KB BF FC ( 2) Fab Ekenäs Fo rmanshagen 4 BF FC ( 4) Fastighets AB Flöj ten I Norrkö ping BF FC (10) Fastighets AB Sto ckmakaren BF FC (18) Fastighets Aktie bolaget Sambi blioteket BF FC ( 2) Fastighetsbola get Holma I Höör AB BF FC (10) Financial Asset S ecurities Corp. BF FC ( 6) First Active Ltd BF FC ( 7) Forskningshöjde n KB BF FC ( 2) Förvaltningsbo laget Dalkyrkan K B BF FC (10) Förvaltningsbo laget Klöverba cken Skola KB BF FC (10) Fyrsate Fastigh ets AB BF FC (10) Gredelinen KB BF FC ( 2) Grinnhagen K B BF FC ( 2) Hatros 1 AS BF FC ( 5) Horrsta 4:38 KB BF FC ( 2) IR Fastighets A B BF FC ( 2) IR IndustriRentin g AB BF FC ( 2) Kallebäck Institu tfastigheter AB BF FC (10) Kastrup Commut er K/S BF FC (12) Kastrup Hanga r 5 K/S BF FC (12) Kastrup V & L Buil ding K/S BF FC (12) KB Eurohill BF FC ( 2) KB Lagermann en BF FC ( 2) KB Likriktare n BF FC ( 2) KEB Investor s, L.P. BF FC (54) Koy Espoon Ent resse II BF FC ( 4) Koy Helsingin M echelininkatu 1 BF FC ( 4) Koy Helsingin Osmontie 34 BF FC ( 4) Koy Helsingin P anuntie 6 BF FC ( 4) Koy Helsingin P anuntie 11 BF FC ( 4) Koy Iisalmen Kihl avirta BF FC ( 4) Regulatory Entity name Activity treatment Notes Koy Jämsän Ke skushovi BF FC (4) Koy Jasperintie 6 BF FC (24) Koy Ko kkolan Kaarlenportti F ab BF FC (4) Koy Ko uvolan Oikeus ja Poliisit alo BF FC (4) Koy Lohjan Oja monharjuntie 6 1 BF FC (4) Koy Millennium BF FC (4) Koy Nummelan Po rtti BF FC (4) Koy Nuo lialan päiväkoti BF FC (4) Koy Pennalan Joh totie 2 BF FC (4) Koy Peltolantie 27 BF FC (24) Koy Porkkanak atu 2 BF FC (24) Koy Puo tikuja 2 Vaasa BF FC (4) Koy Raision Kih lakulma BF FC (4) Koy Ravattulan K auppakeskus BF FC (4) Koy Tapiolan Louh i BF FC (4) Koy Vantaan Ras ti IV BF FC (4) Koy Vapaalan Se rvice-Cente r BF FC (4) Kvam Eiendom AS BF FC (5) Läkten 1 KB BF FC (2) Leiv Sand Eiendo m AS BF FC (5) LerumsKrysset K B BF FC (2) Limstagården KB BF FC (2) Lombard Fina nce (CI) Ltd BF FC (15) Lothbury Insur ance Company L td BF DE (67) Lundbyfilen 5 A B BF FC (18) Maja Finance S .R.L. BF FC (50) Narmovegen 455 AS BF FC (5) National West minster Interna tional Holdings B.V . BF FC (77) NatWest Ger many GmbH OTH FC (34) NatWest Innovatio n Services I nc. OTH FC (6) NatWest Mark ets Group Holdin gs Corporat ion BF FC (6) NatWest Mark ets N.V. CI FC (23) NatWest Mark ets Securities In c. INV FC (6) NatWest Mark ets Securities Japan Ltd INV FC (14) NatWest Service s (Switzerlan d) Ltd SC FC (61) Nordisk Renting AB BF FC (2) Nordisk Renting AS BF FC (58) Nordisk Renting OY BF FC (4) Nordisk Renting Facilities Mana gement AB BF FC (18) Nordisk Special invest AB BF FC (2) Nordiska Strate gifastigheter Hol ding AB BF FC (2) NWM Services I ndia Private Ltd SC FC (39) Nybergflata 5 AS BF FC (5) Optimus KB BF FC (2) R.B. Leasing B DA One Ltd BF FC (74) Random Proper ties Acquisition Co rp. III INV FC (6) RBS (Gibraltar) L td BF FC (63) RBS AA Holdings (Netherland s) B.V. BF FC (13) RBS Acceptance Inc. BF FC (6) RBS Americas P roperty Corp. SC FC (6) RBS Asia Finan cial Services Lt d BF FC (14) RBS Asia Futures Ltd BF FC (14) Parent company financial s tatements and n otes continued NatWest Group A nnual Repor t and Accou nts 2021 390 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 12 Related undertakings continued Regulatory Entity name Activity treatment Notes RBS Assessoria Ltd SC FC (43) RBS Asset Mana gement (Dubli n) Ltd BF FC (66) RBS Commerci al Funding Inc. BF FC ( 6) RBS Deutschla nd Holdings Gmb H BF FC (34) RBS Employme nt (Guernsey) Ltd SC FC (69) RBS Financial P roducts Inc. BF FC ( 6) RBS Group (Aus tralia) Pty Ltd BF FC (30) RBS Holdings I II (Australia) Pty Ltd BF FC (30) RBS Holdings N. V. BF FC (23) RBS Holdings USA Inc. BF FC ( 6) RBS Hollandsch e N.V. BF FC (23) RBS Internatio nal Depositary S ervices S.A. CI FC ( 46) RBS Investment s (Ireland) Ltd BF FC ( 7) RBS Netherlan ds Holdings B. V. BF FC (13) RBS Nominees ( Hong Kong) L td BF FC (14) RBS Nominees ( Ireland) Ltd BF FC ( 7) RBS Nominees (N etherlands) B.V. BF FC (13) RBS Polish Finan cial Advisory Services Sp. Z o.o. BF FC (59) RBS Prime Servi ces (India) Priva te Ltd OTH FC ( 37) RBS Services I ndia Private Ltd SC FC (48) Rigedalen 44 Ei endom AS BF FC ( 5) Ringdalveien 20 A S BF FC ( 5) Sandmoen Naer ingsbygg AS BF FC ( 5) Regulatory Entity name Activity treatment Notes SFK Kommunfa stigheter AB BF FC ( 2) Sjöklockan KB BF FC ( 2) Skinnarängen K B BF FC ( 2) Sletta Eiendom II AS BF FC ( 5) Snipetjernveie n 1 AS BF FC ( 5) Solbänken KB BF FC ( 2) Solnorvika AS BF FC ( 5) Strand European Holdings AB BF FC (18) Svenskt Fastig hetskapital AB BF FC ( 2) Svenskt Energik apital AB BF FC ( 2) Svenskt Fastig hetskapital Holdi ng AB BF FC ( 2) The RBS Group Ireland Retire ment Savings Trustee Ltd TR FC (7) The Royal Ban k of Scotland I nternational (Holdings) Ltd BF FC (15) The Royal Ban k of Scotland I nternational Ltd CI FC (15) Tygverkstaden 1 KB BF FC ( 2) Ulster Bank (Irel and) Holdings Unlimited Com pany INV FC ( 7) Ulster Bank Dubli n Trust Compa ny Unlimited Co mpany TR FC (7) Ulster Bank Holdi ngs (ROI) Lt d BF FC ( 7) Ulster Bank Ir eland Designate d Activity C ompany CI FC (7) Ulster Bank Pen sion Trustees (R I) Ltd TR FC (7) The following table details related undertakings which are 1 00% owned by NatWest Group ownership but are not consolidated for accounting purposes Regulatory Entity name Activity treatment Notes RBS Capital LP II BF DE (76) RBS Capital Trus t II BF DE ( 44) RBS Internatio nal Employee s' Pension BF DE (15) Trustees Ltd Regulatory Entity name Activity treatment Notes RBSG Capital Cor p. BF DE (6) West Granite Homes Inc. INV DE (41) The following table details active related undertakings incorporated in the UK where NatWest Group ownership is less than 100% Activity Accounting Regulatory Group Notes Entity name treatment treatment % BGF Group Plc BF AHC P C 25 (21) Falcon Wharf Lt d OTH EAJV PC 50 (32) GWNW City Dev elopments Ltd BF EAJV DE 50 (32) Higher Broug hton (GP) Ltd BF AHC PC 41 (60) Higher Broug hton Partnershi p LP BF AHC DE 41 (55) Jaguar Cars Fi nance Ltd BF FC FC 50 (1) JCB Finance (L easing) Ltd BF FC FC 75 (26) JCB Finance Ltd BF FC FC 75 (26) Landpower Le asing Ltd BF FC FC 75 (26) London Rail Lea sing Ltd BF EAJV PC 50 (49) Accounting Regulatory Group Entity name Act ivity treatment trea tment % Notes Natwest Covere d Bonds (LM) Lt d BF IA PC 20 (20) Natwest Covere d Bonds LLP BF FC FC 73 (21) Natwest Mark ets Secured Funding (LM) Lt d BF FC PC 20 (20) Oaxaca Ltd OTH IA IA 24 (80) Pollinate Interna tional Ltd OTH AHC DE 30 (79) RBS Sempra Co mmodities LLP BF FC FC 51 (3) Silvermere Hol dings Ltd BF FC FC 95 (11) Vizolution Ltd OTH AHC PC 5 (65) Parent company financial s tatements and n otes continued NatWest Group A nnual Repor t and Accou nts 2021 391 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 12 Related undertakings continued T he following table details related undertakings incorporated outside the UK where NatWest Group ownership is less than 100%. Accounting Regulatory Group Entity name Activity treatment treatment % Notes Ardmore Securi ties No.1 DAC BF FC DE 0 (22) Ardmore Securi ties No.2 DAC BF FC DE 0 (22) CITIC Capital C hina BF IA PC 33 (51) Mezzanine Ltd Dunmore Se curities No.1 DAC BF FC DE 0 (22) Eris Finance S. R.L. BF IA PC 45 (50) German Public S ector Finance B.V. BF EAJV PC 50 (56) Herge Holding B.V. BF IA PC 63 (73) Lunar Funding V III Ltd BF FC FC 0 (8) Lunar Luxembour g SA BF FC DE 0 (78) Lunar Luxembour g Series BF FC DE 0 (78) 2019- 04 Lunar Luxembour g Series BF FC DE 0 (78) 2019- 05 Lunar Luxembour g Series BF FC DE 0 (78) 2019- 06 Lunar Luxembour g Series BF FC DE 0 (78) 2020- 01 Accounting Regulatory Group Entity name Activity treatment treatment % Notes Lunar Luxembour g Series BF FC DE 0 (78) 2020- 02 Natwest Secur ed Funding DAC BF FC FC 0 (47) Nightingale CRE 2 018-1 Ltd BF FC DE 0 (9) Nightingale L F 2021-1 Ltd BF FC DE 0 (9) Nightingale Proj ect Finance BF FC DE 0 (9) 2019 1 Ltd Nightingale S ecurities 2017-1 Lt d BF FC DE 0 (9) Nightingale UK Co rp BF FC DE 0 (9) 2020 2 Ltd Pharos Estates Ltd OTH AHC DE 49.49 (42) Sempra Energy Trading LLC BF FC FC 51 (6) Spring Allies Je rsey Ltd BF IA DE 49 (9) Thames Asse t Global BF FC FC 0 (36) Securitization No .1 Inc. The Drive4Gro wth Company Lt d OTH IA DE 20 (52) Wiöniowy Ma nagement sp. Z.o. o. SC AHC DE 25 (59) The following table details related undertakings that are not active (active ly being dissolved). Accounting Regulatory Group Entity name treatment treatment % Notes Belfast Bankers' C learing Company Ltd AHC DE 25 (53) Celtic Reside ntial Irish Mortga ge Securitisation No 1 0 Plc F C DE 0 (25) Celtic Reside ntial Irish Mortga ge Securitisation No 1 1 Plc F C DE 0 (25) Celtic Reside ntial Irish Mortga ge Securitisation No 1 4 DAC FC DE 0 (31) Celtic Reside ntial Irish Mortga ge Securitisation No 1 5 DAC FC DE 0 (31) Lombard Corpor ate Finance (13) Ltd FC FC 100 ( 1) Lombard Ireland Group Holdings Unlimit ed FC FC 100 (81) Lombard Ireland Ltd FC FC 100 (81) Lombard Manx L easing Ltd FC FC 100 (27) Accounting Regulatory Group Entity name treatment treatment % Notes Lombard Manx L td FC FC 100 (27) Morar ICC Insu rance Ltd FC DE 100 (68) NatWest Nomin ees Ltd FC FC 100 (1) NatWest Capital Finance Ltd F C FC 100 (1) Northern Isles F erries Ltd FC FC 100 (1) RBSSAF (6) Lt d F C FC 100 (1) RBS Asset Finan ce Europe Lt d FC FC 100 (1) Redlion Investme nts Ltd FC FC 100 (19) Redshield Holdin gs Ltd FC FC 100 (19) Royhaven Secr etaries Ltd FC FC 100 (19) RoyScot Fina ncial Services Ltd FC FC 100 (1) Style Financial S ervices Ltd FC FC 100 (3) UB SIG (ROI) L td FC FC 100 (25) West Register Hotels (Holding s) Ltd FC FC 100 (3) Parent company financial s tatements and n otes continued NatWest Group A nnual Repor t and Accou nts 2021 392 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 12 Related undertakings continued The following table details related undertakings that are dormant Accounting Regulatory Group Entity name treatment treatment % Notes Adam & Comp any (Nominees) L td FC FC 100 (11) Atlas Nominees Ltd FC FC 100 (14) British Overseas Bank Nominee s Ltd FC FC 100 (1) Buchanan Hol dings Ltd FC FC 100 (1) Custom House Do cks Basem ent Management No. 2 Ltd IA DE 25 (57) Dixon Vehicle S ales Ltd FC FC 100 (1) Dunfly Trustee L td FC FC 100 (1) FIT Nominee 2 Ltd FC FC 100 (1) FIT Nominee L td FC FC 100 (1) Freehold Mana gers (Nominee s) Ltd FC FC 100 (1) HPUT A Ltd NC DE 100 (1) HPUT B Ltd NC DE 100 (1) ITB1 Ltd FC FC 100 (3) JCB Finance Pe nsion Ltd FC DE 88 (16) Marigold Nomin ees Ltd FC FC 100 (1) Mulcaster Stre et Nominees L td FC FC 100 (15) N.C. Head Offic e Nominees Lt d FC FC 100 (3) National West minster Bank No minees (Jersey) Ltd FC FC 100 (38) NatWest FIS No minees Ltd FC FC 100 (1) NatWest Group S ecretarial FC FC 100 (3) Services Ltd Accounting Regulatory Group Entity name treatment treatment % Notes NatWest Pensio n Trustee Ltd NC DE 100 (1) NatWest PEP No minees Ltd FC FC 100 ( 1) Nextlinks Ltd FC FC 100 ( 1) Nordisk Renting A/S FC FC 100 (75) Nordisk Renting HB FC FC 100 ( 2) Project & Expo rt Finance (No minees) Ltd FC FC 100 ( 1) R.B. Leasing (M arch) Ltd FC FC 100 ( 1) RBOS Nominee s Ltd FC FC 100 ( 1) RBS Investment Ex ecutive Ltd NC DE 100 (3) RBS Retiremen t Savings Trust ee Ltd FC FC 100 ( 1) RBSG Collective Investment s Nominees Ltd FC FC 100 (11) RoosterMoney UK Limited FC FC 100 29 Sixty Seven No minees Ltd FC FC 100 ( 1) Strand Nomi nees Ltd FC FC 100 (17) Syndicate Nomi nees Ltd FC FC 100 ( 1) TDS Nomine e Company Ltd FC FC 100 ( 3) Tilba Ltd BF FC 100 (40) The Royal Ban k of Scotland ( 1727) Ltd FC FC 100 ( 3) The Royal Ban k of Scotland Grou p Ltd FC FC 100 ( 1) W G T C Nomin ees Ltd FC FC 100 ( 1) The following table details overseas branches of NatWest Group Subsidiary Geographic location Coutts & Co Lt d Switzerland National West minster Bank Plc Germany Germany, Hong Kong, Japan, Singapore NatWest Mark ets Plc T urkey, United A rab Emirates Subsidiary Geographic location France, Germ any, Italy Republic of Ireland, Spain, Sweden NatWest Mark ets N.V. United Kingdom The Royal Ban k of Gibraltar, Guernsey, Isle o f Man Scotland Intern ational Ltd Luxembourg, United Kingdom Parent company financial s tatements and n otes continued NatWest Group A nnual Repor t and Accou nts 2021 393 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 12 Related undertakings continued Key: BF Banking an d financial ins titution CI Credit institution INV Investment (shar es or prope rty) holding compa ny SC Service company TR Trustee OTH Other DE Deconsolidated FC Full consoli dation PC Pro- rata consolidatio n AHC Associa te held at cost EAJV E quity accounting – Joint venture IA Investment a ccounting NC Not consolid ated Notes Registered addresses Country of incorporation (1) 250 Bishopsgate, Lo ndon, EC2M 4AA UK (2) Care of Nordisk Renting AB, J akobsbergsga tan 13, 8th Floo r, Box 14044, S tockholm, SE -111 44 Sweden (3) RBS Gogarburn, 1 75 Glasgow Roa d, Edinburgh, E H12 1HQ UK (4) c/o Epicenter, M ikonkatu 9, 6th Floor, Helsinki, 0 0100 Finland (5) c/o Advokatfirma et Wiershol m AS, Postboks 1400, 0115 Oslo Norway (6) 251, Little Falls Drive, Wilmington, DE, 19808 USA (7) Ulster Bank He ad Office, Bloc k B Central P ark, Leopardsto wn, Dublin 18, D 18 N153 RoI (8) Grand Pavilion Co mmercial C entre, 802 West B ay Road, P.O. Box 31119 Cayman Island s (9) 44 Esplanade, St Helier, JE4 9W G Jersey (10) c/o Nordisk R enting AB, Jako bsbergsgatan 13, 8 storey, Box 14044, SE-111 44, Stockhol m Sweden (11) 6-8 George St reet, Edinbu rgh, EH2 2P F UK (12) C/O Visma S ervices Danma rk A/S, Ly skaer 3C-3D, 2730 Herlev Denmark (13) Claude Debu ssylaan 94, A msterdam, 1082 M D Netherlands (14) Level 54, Hope well Centre, 1 83 Queen 's Road East Hong Kong (15) Royal Bank House, 71 Bat h Street, St Helier, JE4 8PJ Je rsey (16) 11-16 Don egall Square Ea st, Belfast, Co Antrim, BT1 5U B UK (17) 440, Strand, Lo ndon, WC2R OQ S UK (18) C/O Nordisk R enting AB, Box 1 4044, SE-104 4 0 Stockholm Sweden (19) Estera Trust (Cay man) Limi ted,Clifton Hou se, 75 Fort Stre et, PO Box 13 50, Grand C ayman, KY1- 1108 Cayman Island s (20) 1 Bartholome w Lane London EC 2N 2AX UK (21) 1 Princes Str eet, London, E C2R 8BP UK (22) 3rd Floor, Flem ing Court, Fleming's Pl ace, Dublin 4, D04 N4X 9 RoI (23) 94, Claude D ebussylaan, Am sterdam, 1082 M D Netherlands (24) c/o Nordisk R enting Oy, Miko nkatu 9, 0010 0, Helsinki Finland (25) One Spencer Do ck, Dublin, D01 X9R7 RoI (26) The Mill, High S treet, Roces ter, Staffords hire, ST14 5JW UK (27) 2 Athol Stre et, Douglas, IM1 1 JA Isle Of Man (28) 36 St Andrew Square, Edin burgh, EH2 2YB UK (29) 64 New Cave ndish Street, Lo ndon, W1G 8TB UK (30) Ashurst Australia, So uth Tow er, 80 Co llins Street, M elbourne Australia (31) Block A Georg es Quay Plaza, Georges Qu ay, Dublin 2 RoI (32) Gate House, T urnpike Roa d, High Wyco mbe, Buckingham shire, HP12 3NR UK (33) One Edinbu rgh Quay, 133 Fou ntainbridge, E dinburgh, EH 3 9QG UK (34) Roßmarkt 10, Frankfurt am Main, 60311 Germany (35) Ulster Bank G roup Centre, G eorge's Quay , Dublin 2 RoI (36) 114 West 47t h Street, New Yo rk, 10036 USA (37) 12/14 Veer Nari man Road, Brady House 4th floor, Fort, Mumbai, 400001 India (38) 16 Library Pla ce, St. Helier Jersey (39) 1st floor, T ower A, Building No. 1, Candor Te chspace, IT/ITE S SEZ, Sector 21, Gurugra m, Haryana, 122 016 India (40) 2 Athol Stre et, Douglas, IM99 1AN Isle Of Man (41) 200, Bellevue P arkway, Su ite 210, Wilmington, DE 19809 USA (42) 24 Demosthe ni Severi, 1st Floo r, Nicosia, 1080 Cyprus (43) 254, 13 Floor, Rua Boa Vis ta, Sao Paul o, 01014-907 Brazil (44) 301, Bellevue P arkway, 3rd Floor, Wilmin gton, DE, 19809 USA (45) 4 Atlantic Quay , 70 York Str eet, Glasgo w, G2 8JX UK (46) 40, Avenue J.F K ennedy, Kirchberg, L1855 Luxembourg (47) 5 Harbourma ster Place, Dub lin 1, D01 E7E8 RoI (48) 6th Floor, Bui lding 2, To wer A, GIL IT/IT ES SEZ, Candor Te chSpace, S ector 21, Gurug ram, Haryana, 122016 India (49) 99 Queen Victor ia Street, Lo ndon, EC4V 4EH UK (50) Via Vittorio Alfi eri 1, Conegli ano TV, IT -TN 31015 Italy (51) Boundary Hall, Cricket Squa re, 171 Elgin Ave nue, Grand C ayman, KY1- 1104 Cayman I slands (52) c/o Denis Cro wley & Co Cha rtered Accou ntants, Unit 6 Ri verside Grove, Riv erstick, P43 W 221 RoI (53) C/o Pinsent Ma sons Llp, Th e Soloist, 1 Lanyo n Place, B elfast, Co. Antrim, BT1 3LP UK (54) Clarendon House, Two Chur ch Street, Suite 104, Reid Str eet, Hamilton, HM 11 Bermuda (55) Cornwall Buil dings, 45-51 N ewhall Str eet, Birmingham, West Midlands, B 3 3QR UK (56) De entree 99 - 197, 1101HE Amsterdam Zui doost Net herlands Parent company financial s tatements and n otes continued NatWest Group A nnual Repor t and Accou nts 2021 394 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 12 Related undertakings continued Notes Registered addresses Country of incorporation (57) First Floor, 1 Ex change Pla ce, Dublin 1, D01 R8W8 RoI (58) H. Heyerdahls gate 1, Postbok s 2020 Vika, O slo, 0125 Norway (59) ul. Ilzecka 26, bu ilding E, 02-13 5, Warsa w Poland (60) Inpartnership Lt d, 35 St Paul' s Square, Birming ham, West Midl ands, B3 1QX UK (61) Lerchenstras se 18, Zurich, C H 8022 Switzerland (62) Liszt Straße 1 0, Regensburg, D- 93053 Germany (63) Madison Buildi ng, Midtown, Qu eensway Gibraltar (64) Maples Corpora te Services Limited, P.O. Box 309, 121 Sout h Church Str eet, George Tow n, Grand Cayma n, KY1-1104 Cayman Island s (65) Office Block A, Bay Studios Business P ark, Fabian Way , Swansea, SA1 8Q B UK (66) One Dockland Central, Guil d Street, IF SC, Dublin 1 RoI (67) PO Box 230, H eritage Hall, L e Marchant S treet, St Peter Po rt, GY1 4JH Guernsey (68) PO Box 384, T he Albany, Sou th Esplanade, St Peter Port, Guernsey, GY1 4 NF Guernsey (69) Regency Cour t, Glategny Es planade, St Pe ter Port, GY1 3AP Guernsey (70) Schuetzenga ssse 4, CH-8001 Zurich Switzerla nd (71) The Chestnu ts Brewers En d, Takeley, Bishop's Stortford, C M22 6QJ UK (72) Tirolerweg 8, Zu g, CH- 6300 Sw itzerla nd (73) Verlengde Po olseweg 16, Br eda, 4818 CL Netherlands (74) Victoria Place, 5 th Floor, 31 Vi ctoria Street, H amilton, HM 1 0 Bermuda (75) c/o Adv Jan-Eri k Svensson, HC Andersens Bo ulevard 12, Ko penhaum V, 1 553 Denmark (76) 1209, Orang e Street, Wilmin gton, New Cast le County, DE, 19801 USA (77) Kokermole n 16, Houten, 399 4 DH Net herlands (78) 46A, Avenue J. F Kennedy,L 18 55 Luxembourg (79) 2nd Floor 120 Old Broad Str eet, London, EC2N 1AR UK (80) 5 Little Portl and Street, Lon don W1W 7JD UK (81) 13 - 18 City Qu ay, Dublin Doc kland, Dublin 2, D02 ED70 RoI Non-IFRS fi nancial me asures NatWest Group A nnual Repor t and Accou nts 2021 395 Financial statements Strategic report Governance Risk and capital management Additional information Financial review NatWest Group prepares its financial statements in accordance with generally accepted acc ounting principles (GAAP). This document contains a number of adjusted or alternati ve performance measures, also know n as non-GAAP or non-IFRS performance measures. These measures are adjusted for notable and other defined items whi ch management believe are not representative of the underlying perfo rmance of the business and which distort period-on-pe riod comparison. The non-IFRS measures provide users of the financial s tatements with a consistent basis for comparing busi ness performance between financial periods and information on elements of pe rformance that are one-off in nature. The no n-IFRS measures also include the calculation of metrics that are u sed throughout the banking industry. These non-IFRS measu res are not measures within the sc ope of IFRS and are not a substitute for IFRS measures. Non-IFRS financial measures 1. Adjustment for notable items Go-forward group income excl uding notable items is calculated as total income exclu ding Ulster Bank RoI total income and excluding notable items. UK an d RBSI retail and commercial busines ses total income excluding notable items comprises income in the Retail Banking, Commercial Banking, Private Banking and RBS International ope rating segments excluding notable items . The exclusion of notable items aims to remove the impact of one-offs which may distort period-on-period com parisons. Refer to page 83 for further details. 2021 2020 2019 Continuing operations Total income (1) 10,512 10,508 13,987 Less Ulster Bank RoI total income (228) (222) (301) Go-forward group income 10,284 10,286 13,686 Less notable items (210) 384 (2,115) Go-forward group total income excluding not able items 10,074 10,670 11,571 Total income Retail Banking 4,445 4,181 4,866 Private Banking 816 763 777 Commercial Banking 3,875 3,958 4,318 RBS International 548 497 610 UK and RBSI retail and commercial businesse s income 9,684 9,399 10,571 Less notable items (2) (64) 87 (33) UK and RBSI retail and commercial businesse s income excluding notable items 9,620 9,486 10,538 (1) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8 to the consolidated financial statements. (2) For details of UK and RBSI reta il and commerci al businesses notab le items refer to page 84. 2. Adjustment for asset disposals/strategic risk reductions and own credit adjustments NWM total income excluding asset disposals/strategic risk reductions and own credit adjust ments (OCA) is calculated as total income of the NWM business le ss asset disposals/strategic risk reductions and OCA. This aims to show underlying inc ome generation in NWM excluding the impact of disposal losses and OCA. Refer to pages 83 and 92 for further details. 2021 2020 2019 NWM total income 415 1,123 1,342 Less asset disposals/strategic risk reduction 64 83 — Less OCA (6) 24 80 NWM total income excluding asset disposals/ strategic risk reductions and OCA 473 1,230 1,422 Non-IFRS financial m easure s continued NatWest Group A nnual Repor t and Accou nts 2021 396 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 3. Operating expenses - management vie w The management analysis of o perating expenses shows strategic costs and litigation and conduct costs in separate lines. Depreciation and amortisation, and other administr ative expenses attributable to these costs are included in strategic costs and litigation and conduct costs lines f or management analysis. These amounts are included in st aff, premises and equipment and other administrative expenses in the statu tory analysis. Other expenses excludes strate gic costs and litigation and conduct costs, which are more volatile and may distor t comparisons with prior periods. Refer to page 300 for further details. Non-statutory analysis Year ended 31 December 2021 Litigation Statutory Strategic and conduct Other operating Operating expenses costs costs expenses expenses Continuing operations Staff expenses 411 — 3,265 3,676 Premises and equipment 103 — 1,030 1,133 Other administrative expenses 133 466 1,427 2,026 Depreciation and amortisation 140 — 783 923 Total 787 466 6,505 7,758 31 December 2020 (1) Litigation Statutory Strategic and conduct Other operating Operating expenses costs costs expenses expenses Continuing operations Staff expenses 462 — 3,416 3,878 Premises and equipment 233 — 989 1,222 Other administrative expenses 197 113 1,535 1,845 Depreciation and amortisation 121 — 792 913 Total 1,013 113 6,732 7,858 31 December 2019 (1) Litigation Statutory Strategic and conduct Other operating Operating expenses costs costs expenses expenses Continuing operations Staff expenses 451 — 3,525 3,976 Premises and equipment 239 — 1,019 1,258 Other administrative expenses 295 895 1,638 2,828 Depreciation and amortisation 396 — 822 1,218 Total 1,381 895 7,004 9,280 (1) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8. 4. Other expenses excluding operating lease depreciation (OLD) and Ulster Bank RoI direct costs Our cost target for 2021 is based on this measure and we track progress against this. Refer to page 83 for further details. 2021 2020 (1) 2019 (1) Continuing operations Total operating expenses 7,758 7,858 9,280 Less strategic costs (787) (1,013) (1,381) Less litigation and conduct costs (466) (113) (895) Other expenses 6,505 6,732 7,004 Less OLD (140) (145) (138) Other expenses excluding OLD 6,365 6,587 6,866 Less Ulster Bank RoI direct costs (273) (239) (247) Other expenses excluding OLD and Ulster Bank R oI direct costs 6,092 6,348 6,619 (1) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8 to the consolidated financial statements. Non-IFRS financial m easure s continued NatWest Group A nnual Repor t and Accou nts 2021 397 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 5. Cost:income ratio The cost:income ratio is calculated as total ope rating expenses less OLD divided by total income le ss OLD. This is a common metric used to compare profitability across the banking industry. Refer to pages 87 to 92 for furthe r details. Go - forward group Total Central excluding Retail Pr ivate Commercial RBS Nat West items Ulster Ulster NatWest Banking Banking Banking International Markets & other Bank RoI Bank RoI Group Year ended 31 December 2021 £m £m £m £m £m £m £m £m £m Continuing operations Operating expenses (2,513) (520) (2,354) (242) (1,161) (486) (7,276) (482) (7,758) Operating lease depreciation — — 140 — — — 140 — 140 Adjusted operating expenses (2,513) (520) (2,214) (242) (1,161) (486) (7,136) (482) (7,618) Total income 4,445 816 3,875 548 415 185 10,284 228 10,512 Operating lease depreciation — — (140) — — — (140) — (140) Adjusted total income 4,445 816 3,735 548 415 185 10,144 228 10,372 Cost:income ratio 56.5% 63.7% 59.3% 44.2% 279.8% nm 70.3% nm 73.4% Year ended 31 December 2020 (1) Continuing operations Operating expenses (2,540) (455) (2,430) (291) (1,310) (391) (7,417) (441) ( 7,858) Operating lease depreciation — — 145 — — — 145 — 145 Adjusted operating expenses (2,540) (455) (2,285) (291) (1,310) (391) (7,272) (441) ( 7,713) Total income 4,181 763 3,958 497 1,123 (236) 10,286 222 10,508 Operating lease depreciation — — (145) — — — (145) — (145) Adjusted total income 4,181 763 3,813 497 1,123 (236) 10,141 222 10,363 Cost:income ratio 60.8% 59.6% 59.9% 58.6% 116.7% nm 71.7% nm 74.4% Year ended 31 December 2019 (1) Continuing operations Operating expenses (3,618) (486) (2,600) (264) (1,418) (384) (8,770) (510) ( 9,280) Operating lease depreciation — — 138 — — — 138 — 138 Adjusted operating expenses (3,618) (486) (2,462) (264) (1,418) (384) (8,632) (510) ( 9,142) Total income 4,866 777 4,318 610 1,342 1,773 13,686 301 13,987 Operating lease depreciation — — (138) — — — (138) — (138) Adjusted total income 4,866 777 4,180 610 1,342 1,773 13,548 301 13,849 Cost:income ratio 74.4% 62.5% 58.9% 43.3% 105.7% nm 63.7% nm 66.0% (1) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8 to the consolidated financial statements. Non-IFRS financial m easure s continued NatWest Group A nnual Repor t and Accou nts 2021 398 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 6. NatWest Group return on tangible equity Return on tangible equity comprises annualised profit or loss for the period attribut able to ordinary shareholders divided by average tangible equity. Average tangible equity is a verage total equity excluding non-cont rolling interests (NCI) less average intangible assets and average other owners’ e quity. Go-forward group return on tangible equity is calcul ated as annualised profit or loss fo r the period less Ulster Bank RoI loss f rom continuing operations and less profit from discontinued operations divided by go-fo rward group total tangible equity. This measure shows the return NatWest Group generates on tangible equity deployed. It is us ed t o determine relative perfor mance of banks and used widely across the sector. Refer to pages 83 and 87 for further details. Year ended or as at 31 December 31 December NatWest Group return on tangible e quity 2021 2020 Profit/(loss) attributable to ordinary shareholders (£ m) 2,950 (753) Average total equity (£m) 42,727 43,774 Adjustment for other owners equity and int angibles (£m) (11,395) (11,872) Adjusted total tangible equity ( £m) 31,332 31,902 Return on tangible equity (%) 9.4% (2.4%) Go-forward group return on tangible equity Profit/(loss) attributable to ordinary shareholders (£ m) 2,950 (753) Less Ulster Bank RoI loss from continuing opera tions (£m) 255 495 Less profit from discontinued o perations (£m) (276) (121) Go - forward group profit/(loss ) attributable to ordinary shareh olders (£m) 2,929 (379) Average total equity (£m) 42,727 43,774 Adjustment for other owners equity and int angibles (£m) (11,395) (11,872) Adjusted total tangible equity ( £m) 31,332 31,902 Go-forward group RWAe applying factor (%) 93% 93% Go-forward group total tangible equity (£m) 29,139 29,669 Return on tangible equity (%) 10.0% (1.3%) Non-IFRS financial m easure s continued NatWest Group A nnual Repor t and Accou nts 2021 399 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 7. Segmental return on equity Segmental return on equity comp rises segmental operating profit or loss, adjusted fo r preference share dividends and tax, divided by average notional tangible eq uity, allocated at an operating segment specific rate of the period average segmental risk- weighted assets, incorporating the effe ct of capital deductions (RWAes). This measure shows the return generated by operating segments on equi ty deployed. Refer to pages 87 to 92 for furthe r details. Retail Private Commercial RBS NatWest Year ended 31 December 2021 Banking Banking Banking Internationa l Markets Operating profit/(loss) (£m) 1,968 350 2,594 358 (711) Preference share cost allocation (£m) (79) (21) ( 154) (20) (63) Adjustment for tax (£m) (529) (92) ( 683) (59) 217 Adjusted attributable profit/(loss ) (£m) 1,360 237 1,757 279 (557) Average RWAe (£bn) 36.0 11.2 69.5 7.8 28.4 Equity factor 14.5% 12.5% 11.5% 16.0% 15.0% RWAe applying equity factor (£bn) 5.2 1.4 8.0 1.2 4.3 Return on equity 26.1% 17.0% 22.0% 22.5% (13.1%) Year ended 31 December 2020 Operating profit/(loss) (£m) 849 208 (399) 99 (227) Preference share cost allocation (£m) (88) (22) ( 153) (20) (68) Adjustment for tax (£m) (213) (52) 155 (11) 83 Adjusted attributable profit/(loss ) (£m) 548 134 (397) 68 (212) Average RWAe (£bn) 37.2 10.4 76.4 7 .0 37.3 Equity factor 14.5% 12.5% 11.5% 16.0% 15.0% RWAe applying equity factor (£bn) 5.4 1.3 8.8 1 .1 5.6 Return on equity 10.2% 10.3% (4.5%) 6.1% (3.8%) Year ended 31 December 2019 Operating profit/(loss) (£m) 855 297 1,327 344 (25) Adjustment for tax (£m) (236) (83) ( 372) (48) 7 Preference share cost allocation (£m) (74) (18) ( 163) (11) (64) Adjustment for Alawaal bank m erger gain (£m) — — — — (150) Adjusted attributable profit/(loss ) (£m) 545 196 792 285 (232) Average RWAe (£bn) 37.7 9.8 78.2 6.9 48.0 Equity factor 15.0% 13.0% 12.0% 16.0% 15.0% RWAe applying equity factor (£bn) 5.7 1.3 9.4 1 .1 7.2 Return on equity 9.6% 15.4% 8.4% 25.7% (3.2%) 8. Tangible equity Tangible equity is ordinary shareholders’ interest less int angible assets. TNAV per ordinary sh are is calculated as tangible equity divided by the number of ordinary shares in iss ue. This is a measure used by external an alysts in valuing the bank and the star ting point for calculating regulatory capital. Refer to page 83 for further details. Year ended 31 December 31 December 2021 2020 Ordinary shareholders’ interests (£m) 37,412 38,367 Less intangible assets (£m) (6,723) (6,655) Tangible equity (£m) 30,689 31,712 Ordinary shares in issue (millions) 11,272 12,129 TNAV per ordinary share (pence) 272p 261p Non-IFRS financial m easure s continued NatWest Group A nnual Repor t and Accou nts 2021 400 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 9. Net interest margin Bank net interest margin is defined as net interest income of the banking business of the Go-forward group less NatWest Markets (NWM) element and excluding liquid asset buffer, as a percentage of bank average interest-e arning assets. Bank average inte rest earning assets are the average interest earning assets of the banking business of the Go-for ward group less NWM element and excluding liquid asset buffer. The exclusion of the NWM element aims to eli minate the impact of distorting volatility in NWM. The exclusion of the Ulster Bank RoI from the aims to align the basis of calculation with prior periods. Liquid asset buffer consists of asse ts held by NatWest Group, such as cash and balances at central b anks and debt securities in issue, that can be used to ensure rep ayment of financial obligations as they fall due. The exclusion of liquid asset bu ffer has been introduced as a way to present net interest margin on a basis more comparable with UK peers and exclude the impact of regul atory driven factors. Refer to pages 83 and 88 to 91 for further de tails. Year ended 31 December 31 December 31 December 2021 2020 2019 £m £m £m Continuing operations NatWest Group net interest income (1) 7,614 7,476 7,799 Less NWM net interest income (9) 57 188 Less Ulster Bank RoI net interes t income (100) (122) (152) Bank net interest income 7,505 7,411 7,835 Average interest earning assets (IEA) 524,886 483,719 439,994 Less NWM average IEA (32,730) (37,929) (35,444) Less Ulster Bank RoI average I EA (15,854) (16,600) (16,538) Less liquid asset buffer average IEA (1) (162,195) (127,945) ( 106,925) Bank average IEA 314,107 301,245 281,087 Bank net interest margin 2.39% 2.46% 2.79% (1) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8 to the consolidated financial statements. Non-IFRS financial m easure s continued NatWest Group A nnual Repor t and Accou nts 2021 401 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 10. Net lending NatWest Group net lending is calculated as total loans to customers less loan impairment pro visions. Go-forward group net lending is calculated as net lo ans to customers less Uls ter Bank RoI net loans to customers. UK and RBSI retail and commercial businesse s net lending excluding UK Government sup port schemes comprises customer l oans in the Retail Banking, Commercial Banking, P rivate Banking and RBS International operating s egments, excluding UK Government support schemes. This is the basis of our lending target for our key retail and comme rcial businesses. Refer to pages 83 for further details. As at 31 December 31 December 2021 2020 £bn £bn Total loans to customers (amortise d cost) 362.8 366.5 Less loan impairment provisions (3.8) (6.0) Net loans to customers (amortis ed cost) 359.0 360.5 Less Ulster Bank RoI net loans to custome rs (amortised cost) (6.7) (18.0) Go - forward group net lending 352.3 342.5 Net loans to customers (amortis ed cost) Retail Banking 182.2 172.3 Private Banking 18.4 17.0 Commercial Banking 101.2 108.2 RBS International 15.5 13.3 UK and RBSI retail and commercial businesse s net loans to customers (a mortised cost) 317.3 310.8 Less UK Government support schemes (11.6) (12.9) Total UK and RBSI retail and co mmercial businessesnet lending excluding UK Go vernment support schemes 305.7 297.9 11. Customer deposits Go-forward group customer deposits is calculated as total customer deposits less Ulster Bank RoI customer deposits. UK and RBSI retail and commercial businesse s customer deposits comprises customer deposits in the Retail Banking, Comme rcial Banking, Private Banking and RBS International ope rating segments. This metric is used to show unde rlying deposit movements across our key ret ail and commercial businesses. Refer to pages 83 for further details. As at 31 December 31 December 2021 2020 £bn £bn Total customer deposi ts 479.8 431.7 Less Ulster Bank R oI customer de posits (18.4) (19.6) Go-forward group customer deposits 461.4 412.1 Retail Banking 188.9 171.8 Private Banking 39.3 32.4 Commercial Banking 177.7 167.7 RBS International 37.5 31.3 Total UK and RBSI retail and co mmercial businesses customer deposits 443.4 403.2 12. Total operating profit before tax including discontinued operations Given the current progress of the phased with drawal from the Republic of Ireland, Ulster Ban k RoI results are currently prese nted in both continuing and disconti nued operations. Including operating profit befo re tax from discontinued operations provides a complete view of the NatWest Group operating profit in 2 021. Refer to page 82 for further details. 2021 2020 2019 Operating profit/(loss) before tax 4,032 (481) 3,983 Operating profit before tax from discon tinued operations 279 130 249 Total operating profit including discontinued operations 4,311 (351) 4,232 Non-IFRS financial m easure s continued NatWest Group A nnual Repor t and Accou nts 2021 402 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Performance metrics not defined under IFRS Metrics based on GAAP measu res, included as not defined under IFRS and reported for compliance with ESMA adjusted performance measure rules. 1. Loan:deposit ratio Loan:deposit ratio is calculated as net custo mer loans held at amortised cost divide d by total customer deposits. This is a common metric used among peers to assess liquidity. Refer to page 89 to 90 for further details. As at 31 December 31 December 31 December 2021 2020 2019 £m £m £m Loans to customers - amortised cost 358,990 360,544 326,947 Customer deposits 479,810 431,739 369,247 Loan:deposit ratio (%) 75% 84% 89% 2. Loan impairment rate Loan impairment rate is the annualised loan impai rment charge divided by gross customer loans. Refer to pages 83 and 88 to 91 for further de tails. 3. Funded assets Funded assets is calculated as t otal assets less derivative assets. This measure allows review of balance shee t trends exclusive of the volatility associated with derivative fair values. Refer to pages 92 and 93 for further details. 4. AUMAs AUMA comprises both assets under management (AUMs) and assets under ad ministration (AUAs) serviced through the Priv ate Banking franchise. AUMs comprise assets where the investment management is unde rtaken by Private Banking on behalf of Private Banking, Retail Banking and RBSI custo mers. AUAs comprise third party assets held o n an execution-only basis in custody by Private Banking, Retail Banking and RBSI for their custo mers accordingly, for which the exe cution services are supported by Private Banking. Private Bankin g receives a fee for providing investment managemen t and execution services to Retail Ban king and RBSI franchises. Private Banking is the Centre of Expertise for ass et management across NatWest Group, servi cing all client segments across Retail, Premier and Private Banking. Refer to page 89 for further details. 5. Depositary assets Assets held by RBSI as an independent trustee and in a depositary service capacity. Depositary assets are a closely monitored KP I for the RBS International business and its inclusi on in commentary highlights the services that RBS International provides . Refer to page 91 for further details. 6. Wholesale funding Wholesale funding comprises deposits by banks, deb t securities in issue and subordinated li abilities. This is a closely monitored metric used ac ross the banking industry to ensure capital requi rements are being met. Refer to page 83 for further details. The Capital Req uirement s (Country-b y-Country Reporting) R egulations (Audited) NatWest Group A nnual Repor t and Accou nts 2021 403 Financial statements Strategic report Governance Risk and capital management Additional information Financial review This report has been prepared f or NatWest Group to comply with the Capital Require ments (Country-by-Country Reporting) Regulations 2013 which impleme nt Article 89 of the Capital Requirements Directive IV. This report shows the income, profit/(loss ) before tax, tax paid/(received), average and spo t employee numbers on a full-time equivalent basis for the entities located in the countries in which we operate. Country Each subsidiary or branch is all ocated to the country in which it is resident for tax purposes. The data is consolidated for all the subsidiaries and branches allocated to each count ry. Income and profit/(loss) before tax Income and profit/(loss) totals are reported in Note 4 wi thin the Geographical segments table. Tax paid/(received) Tax paid/(received) disclosed under CR D IV relates to corporation tax. Corporation tax paid represents net cash taxes p aid to/(received) from the tax authorities in e ach jurisdiction. Corporation tax paid is reported on a cash basis as op posed to an accounting basis and there fore does not necessarily have a direct correlation to the reporte d profits or losses arising in the year. For example, in certain j urisdictions taxable profits may be reduced as a result of the offset of tax losses br ought forward from prior years; or tax pay ments may be calculated with reference to prior year profits. Full time equivalent employees (FTEs) FTEs are allocated to the country in which they a re primarily based for the performance of th eir employment duties. The figures disclosed represent the average number of FTEs, inclu ding temporary staff, in each country durin g the period. The FTEs, including temporary staff, at 31 Decembe r 2021, have been added for completeness. Public subsidies received No public subsidies were receiv ed during the period . The Capital Re quirements ( Country-by-Co untry Report ing) Regulations ( Audited) continu ed NatWest Group A nnual Repor t and Accou nts 2021 404 Financial statements Strategic report Governance Risk and capital management Additional information Financial review NatWest Group Country-by-Country tax breakdown 2021 Headcount Income (1,7) Profit/(loss) bef ore tax (1,7) Tax paid/ (received) Average FTE including temporary staff FTE including tempora ry staff as at the year end 31 December 2021 Country £m £m £m UK 9,600 3 ,948 787 40,426 39,692 Guernsey 99 83 8 85 83 Isle of Man 55 22 — 348 337 Jersey 166 90 1 702 676 UK region 9,920 4 ,143 796 41,561 40,788 Finland — — 2 3 3 France 23 (9) 1 40 49 Germany 14 (2) 2 61 70 Gibraltar 29 17 1 58 55 Greece — (1) — 1 1 Republic of Ireland 453 (1) 2 2,000 1,935 Italy 7 (2) 1 14 12 Luxembourg 28 14 2 59 59 Netherlands 86 30 — 106 112 Norway — — 1 — — Poland (2) 5 2 — 1,280 1,369 Spain 6 (2) 1 13 5 Sweden 37 28 9 35 34 Switzerland (2) 1 5 6 273 274 Turkey 2 1 1 2 2 Europe region 691 80 28 3,945 3,980 USA 100 48 2 291 270 US region 100 48 2 291 270 Hong Kong 9 (2) — 14 9 India (2) 13 37 12 13,164 13,541 Japan 18 2 — 37 37 Singapore 31 3 — 110 110 Asia Pacific region 71 40 12 13,325 13,697 Saudia Arabia (3) — — 18 — — Middle East region — — 18 — — UK region 9,920 4 ,143 796 41,561 40,788 US region 100 48 2 291 270 Europe region 691 80 28 3,945 3,980 Rest of World region 71 40 30 13,325 13,697 Global total 10,782 4,311 856 59,122 58,735 For the notes to this table refer to the following pa ge. The Capital Re quirements ( Country-by-Co untry Report ing) Regulations ( Audited) continu ed NatWest Group A nnual Repor t and Accou nts 2021 405 Financial statements Strategic report Governance Risk and capital management Additional information Financial review NatWest Group Country-by-Country tax breakdown 2020 Headcount (Loss)/profit Tax paid/ Average FTE FTE including temporary Income (1,4) before tax (1,4) (received) (4) including staff as at t he year end £m £m £m temporary staff 31 December 2020 Country UK 9,431 (223) 113 42,748 41,185 Guernsey 92 42 12 100 92 Isle of Man 59 4 3 405 382 Jersey 165 (16) 15 624 616 UK region 9,747 (193) 143 43,877 42,275 Finland 6 6 2 3 2 France 20 2 — 31 32 Germany 13 1 (1) 39 43 Gibraltar 28 9 4 67 60 Greece — — 1 1 1 Republic of Ireland 512 (235) 1 2,223 2,153 Italy 9 2 1 16 16 Luxembourg 16 1 1 57 62 Netherlands 77 7 — 99 96 Norway 3 2 2 — — Poland (2) 1 5 — 1,216 1,184 Spain 9 — 1 18 18 Sweden 36 21 (2) 36 36 Switzerland (2) 3 18 11 273 270 Turkey 2 — 3 2 2 Europe region 735 (161) 24 4,081 3,975 USA 181 (85) (1) 378 326 US region 181 (85) (1) 378 326 Hong Kong 13 — — 27 24 India (2) 28 52 24 13,321 13,164 Japan 23 5 1 41 39 Singapore 68 30 — 135 112 Taiwan 1 2 (1) — — Asia Pacific region 133 89 24 13,524 13,339 Saudi Arabia (3) — — 24 — — United Arab Emirates — ( 1) — — — Middle East region — ( 1) 24 — — UK region 9,747 (193) 143 43,877 42,275 Europe region 735 (161) 24 4,081 3,975 US region 181 (85) (1) 378 326 Rest of World region 133 88 48 13,524 13,339 Global total 10,796 (351) 214 61,860 59,915 (1) A full list of NatWest Group subsidiaries' names, nat ure of activities and geographical locations is available at Note 12 of the parent company accounts. (2) Income excludes internal serv ice fee income which has been calculated on a cost plus mark-up basis. (3) Tax paid of £18 million in Saudi Arab ia is due to capital gains tax arising on the merger of Alawwal bank with SABB during 2019. (4) Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8 to the consolidated financial statements. (5) A list of the principal subsidiaries in each jurisdiction and the nature of th eir activities is available at Note 9 of the parent company accounts. (6) The amounts shown above are presented to the nea rest million and as a result any amounts less than £0.5 million have been rounded to zero. (7) The information above is presented on a gross reporting basis and includes results from discontinued operations. The results from discontinued operations are included in the Ireland totals, contributing to Income: £269 million; Profit bef ore tax: £279 million; Tax p aid: nil; Subsidies received: nil; Headcount: 715. Risk factors NatWest Group A nnual Repor t and Accou nts 2021 406 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Principal Risks and Uncertainties Set out below are certain risk factors that could adversely affect NatWest Group’s future results, its financial condition and prospects and caus e them to be materially different from what is forecast or expected, and direc tly or indirectly impact the value of it s securities in issue. These risk factors are broadly categorised and should be read in conjunction with other sectio ns 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 NatWest Group. The COVID-19 pandemic may exacerbate any of the risks described below. Economic and political risk The impact of the COVID-19 pa ndemic and related uncertainties continue to affect the UK, global economies and financial markets and NatWest Group’s customers, as well as its competitive environment, which may continue to have an adverse effect on NatWes t Group. In many countries, including the U K (NatWest Group’s most signific ant market), the COVID-19 pandemic has, at times, resulted in the imposition of strict social distancing measures, res trictions on non-essential activities and travel quarantines, in an attempt to slow the spread and reduce the impact of the COVID-19 pandemic. The COVID-19 pandemic has also, at times, cause d significant reductions in levels of consumer and commercial activity, reductions in consumer spending, increased levels of corporate d ebt and, for some customers, personal debt, increased unemployment and significan t market volatility in asset prices, interest rates and foreign exchange rates . It has also, at times, caused physical disruption to global supply chains and working practices, all of which have affe cted NatWest Group’s customers. NatWest Group has significant exposure s to many of the commercial sectors economically impacted by the COVID-19 pandemic, including property, retail, leisure and travel. Despite widespread COVID-19 vaccination within the geographical regions in which NatWest Group operates, the proliferation of CO VID-19 variants continues to affect the UK an d global economies. Further waves of infection or the spread of new s trains may result in renewed restrictions in affected countries and regions. As a result, significant uncertainties remain as to how long the impact of the COVID-19 pandemic will last, and how it will continue to affect the global economy. In response to the COVID-19 pandemic, central banks, governments, regulators and legislatures in the UK and e lsewhere have offered unprecedented levels of support and various schemes to assist impacted businesses and individuals. This has included forms of financial assistance and legal and regulatory initiatives. Many of these support schemes have now been curtailed. However, uncertainty remains as to the impact of the ending or tapering of these schemes and the repayment of the loa ns involved on customers, the economic environment and NatWest Group. Moreover, it is unclear as to how any further measures, such as risin g interest rates and inflation, may affect NatWest Group’s business and performance. The COVID-19 pandemic has prompted many changes that may prove to be permanent shifts in customer be haviour and economic activity, such as changes in spending patterns and significantly more people working from home. The se changes may have long lasting impacts on asset prices, the economic environment and its customers financial needs. Uncertainties relating to the COVID-19 pandemic has made reliance o n analytical models and planning and forecasting for NatWest Group more complex, and may result in uncertainty impacting the risk profile of NatWest Group and/or that of the wider banking industry. The medium and long-term implications of the COVID-19 pandemic for NatWest Group customers, the UK housing market, and the UK and global economies and financial markets remain uncertain. Any of the above may have a negative impact on NatWest Group. NatWest Group faces continued economic and political risks an d uncertainty in the UK and global markets. The outlook for the global economy over the medium-term remains uncertain due to a number of factors including: the COVID-19 pandemic, societal inequalities and changes, trade barriers and the increased possibility of and/or continuation of trade wars, widespread political instability (including as a result of populism and nationalism, which may lead to protectionist policies, state and privately sponsored cyber and terroris t acts or threats, efforts to destabilis e regimes or armed conflict), changes in inflation and interest rates (including negative interest rates), supply chain disruption, climate, environmental, social and other sustainability-related risks and global regional variations in the impact and responses to these factors. These conditions could be worsened by a number of factors including macro- economic deterioration, increased instability in the global financial sy stem and concerns relating to further financial shocks or contagion (for example, due to economic concerns in emerging markets), market volatility or fluctuations in the value of the pound sterling, new o r extended economic sanctions, volatility in commodity prices or concerns regarding sovereign debt. This may be compounded by the changing demographics of the populations in the markets that NatWest Group serves, increasing social and other inequalities, or rapid change to the economic environment due to the adoption of technology and artificial intellige nce. Any of the above developments could adversely impact NatWest Group directly (for example, as a result of credit losses) or indirectly (for example, by impacting global economic growth and financial markets and NatWest Group’s cus tomers and their banking ne eds). In addition, NatWest Group is exposed t o risks arising out of geopolitical events or political developments, such as exchange controls and other measures take n by sovereign governments that may hinder economic or financial activity levels. Furthermore, unfavourable political, military or diplomatic events, inclu ding secession movements or the exit of othe r member states from the EU, armed conflict, pandemics and widespread public health crises (including the c urrent COVID-19 pandemic and any future epidemics or pandemics), state and privately sponsored cyber and terroris t acts or threats, and the responses to them by governments and markets, could negatively affect the busi ness and performance of NatWest Group, including as a result of the indirect eff ect on regional or global trade and/or NatWest Group’s customers. NatWest Group faces political uncertainty in Scotland, as a res ult of a possible second Scottish independence referendum. Independence may adversely impact NatWest Group since NatWest Group plc and other NatWest Group entities (including NWM Plc) are incorporated in Scotland. Any changes to Scotland’s relationship with t he UK or the EU would impact the enviro nment in which NatWest Group and its subsidiaries operate, and may require further changes to NatWest Group’s structure, independently or in conjunction with other mandatory or strategic structural and organisational changes which, any of which could adversely impact NatWest Group. Risk factors c ontinued NatWest Group A nnual Repor t and Accou nts 2021 407 Financial statements Strategic report Governance Risk and capital management Additional information Financial review The value of NatWest Group’s financial instruments may be materially affected by market risk, including as a res ult of market fluctuations. Market volatility, illiquid market conditions and di sruptions in the credit markets may mak e it extremely difficult to value certain of NatWest Group’s financial instruments, particularly during periods of market displacement. This could cause a decline in the value of NatWest Group’ s financial instruments, which may have an adverse effect on NatWest Group’s results of operations in future periods, or inaccurate carrying values for ce rtain financial instruments. In addition, financial markets are susceptible to severe events evi denced by rapid depreciation in asset values, which may be accompanied by a reduction in asset liquidity. Unde r these conditions, hedging and other risk management strategies may not be as effective at mitigating trading losse s 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 partic ipants simultaneously and on a large scale, increasing NatWest Group’s cou nterparty risk. NatWest Group’s risk management and monitoring processes see k to quantify and mitigate NatWest Group’s exposure to more extreme mark et moves. However, severe marke t events have historically been difficult to predict and NatWest Group could reali se significant losses if extreme market events were to occur. Any of the above may have a negative effect on NatWest Group. Continuing uncertainty regarding the effects and extent of the UK’s post Brexit divergence from EU laws and regulation, and NatWest Group’s post Brexit EU operating model may continue to adversely affect NatWest Group and its operating environment. The UK ceased to be a member of the EU and the European Economic Area (‘EEA’) on 31 January 2020 (‘B rexit’) and the 2020 EU-UK Trade and Cooperation Agreement (‘TCA’) ended the transition period on 31 December 2020. T he TCA provides for free trade between the UK and EU with zero tariffs and quotas on all goods that comply with the appropriate rules of origin, with minimal coverage. However, for financial services, UK-incorporated financi al services providers no longer have EU passporting rights and there is no mutual recognition regime. Financial se rvices may largely be subject to individual equivalence decisions by relevant regulators. A number of temporary equivalence decisions have been made that cover certain services offered by NatWest Group. The EU’s equivalence regime does not cover most lending and deposit taking, and determinations in respect of third countries have not, to date, covered the provision of most investment services. In addition, equivalence determinations do not guarantee permanent access rights and can be withdrawn with short notice. T he TCA is accompanied by a Joint Declaration on financial services which sets out an intention for the EU and UK to cooperate on matters of financial regulation and to agree a Memorandum of Understanding, which has yet to be signed. In late 2021 the European Commission proposed legislation that would require non-EU firms to es tablish a branch or subsidiary in the EU bef ore providing “banking services” in the EU. If these proposals become law all “ banking services” will be licensable acti vities in each EU member state and member states will not be permitted to o ffer bilateral permissions to financial institutions outside the EU allowing them to provide “banking services” i n the EU. Uncertainty remains as to whet her “banking services” will also include investment products. NatWest Group continues to ev aluate its post Brexit EU operating model, making adaptations as necessary. NatWest Group also continues to assess where NatWest Group companies can obtain bilateral regulatory permissions to facilitate intragroup transactions and/or to permit business to continue from its UK entities, transferring what cannot be continued to be rendered from the UK to an EEA subsidiary or branch where permitted. Where these regulatory permissions are temporary or are withdrawn, a different approach may need to be taken or may result in a change in operating model or some business being ceased. Not all NatWest Group entities have applied for bilateral regulatory permissions and instead intend to move EEA business to an EEA licensed subsidiary or branch. T here is a risk that these EEA licenses may not be granted, or may be withdrawn, and where these permissions are not obtained, further changes to NatWest Group’s operating model may be required or some business may need to be ceased. In addition, failure to obtain required regulatory permissions or licences in one part of NatWest Group may impact other parts of NatWes t Group adversely. Certain permissions are required in order to maintain the ability to clear euro payments. O ther permissions, including the ability to have two intermediate EU parent undertakings, would allow NatWest Group to continue to serve EEA customers from both the ring-fenced and non-ring-fenced banking entitie s. Furthermore, transferring busine ss to an EEA based subsidiary is a complex exercise and involves legal, regulatory and execution risks, and could result in a loss of business and/or custome rs or greater than expected costs. The changes to NatWest Group’s operating model have been costly and fur ther changes to its business operations, product offering and customer engagement could result in further costs. The long-term effects of Brexit and the uncertainty regarding NatWest Group’s EU operating model may have a negative impact on NatWest Group’s business. These may be exacerbated by wider global macro-economic trends and events, particularly COVID-19 pandemic related uncertainties, which may significantly impact NatWest Gr oup and its customers and counterpartie s who are themselves dependent on trading with the EU or personnel from the EU. They may exacerbate the economic impacts of the COVID-19 pandemic on the UK, the Republic of Ireland (‘ROI’) and the rest of the EU/EEA. Significant uncertainties remain as to the extent to which EU/EEA laws will diverge from UK law (including bank regulation), whether and what equivalence determinations will be made by the various regulators, whether the propose d EEA licensed subsidiary is granted a banking licence, whether banking services will be harmonised across the EEA and, therefore, what the respective legal and regulatory arrangements will be, under which NatWest Group and its subsidiaries will operate. This divergence could lead to further market fragmentation. These risks and uncertainties may require costly changes to NatWest Group’s EU operating model. The legal and political uncertainty, and any actions taken as a result of this uncertainty, as well as the approach taken by regulators and new or amended rules, could have a si gnificant adverse impact on NatWest Group’s businesses, non-UK operations and/or legal entity structure, including attendant operating, compliance and restructu ring costs, level of impairments, capital requirements, changes to intra group arrangements, increased compl exity, regulatory environment and tax implications and as a result may adversely impact NatWest Group’s profitability, competitive position, business model and product off ering. Changes in interest rates have significantly affected and will continue to affect NatWest Group’s business and results. Interest rate risk is significant for NatWest Group. Monetary policy has been accommodative in recent years including initiatives implemented by the Risk factors c ontinued NatWest Group A nnual Repor t and Accou nts 2021 408 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Bank of England and HM Treasury, suc h as the Term Funding Scheme with additional incentives for SMEs (‘TFSME’), which have helped to support demand at a time of pronounced fiscal tightening and balance sheet repair. However, market expectations are curre ntly that benchmark interest rates such as UK base rate, could begin to rise furthe r and faster than had been anticipated previously and that this could be accompanied by other measures to reverse accommodative policy, such as quantitative tightening. While increases in interest rates may support NatWest Group’s interes t income, sharp rises could have macroeconomic effects that lead to adverse outcomes for the busin ess. For example, they could lead to ge nerally weaker than expected growth, or even contracting GDP, reduced busi ness confidence, higher default rates on customer loans, higher levels of unemployment or underemployment, and falling property prices in the markets in which NatWest Group operates, all of which could adversely affect the business and performance of NatWest Group. Conversely, decreases in interest rates and/or continued sustained low or negative interest rates would be expected to continue to put further pressure on NatWest Group’s interest income and profitability. Unexpected moves in interest rates will also affect valuations of assets and liabilities that are recognised at fair value on the balance sheet. Changes in these valuations may be adverse. Unexpected movements in spreads between ke y benchmark rates could have adverse impacts and also adversely affect NatWest Group’s financial position. Changes in foreign currency exchange rates may affect NatWest Group’s results and financial position. Decisions of major central banks (including the Bank of England, the European Central Bank and the US Federal Reserve) and political o r market events, which are outside NatWes t Group’s control, may lead to sh arp and sudden variations in foreign ex change rates. Although NatWest Group is principally a UK focused banking group, it is su bject to foreign exchange risk from capital deployed in NatWest Group’s foreign subsidiaries, branches and joint arrangements and customer transactions denominated in a currency other than the functional currency of NatWes t Group. NatWest Group also reli es on issuing securities in foreign currencies that assist in meeting NatWest Group’s minimum requirements for own funds and eligible liabilities (‘MREL’) and NWM Plc deals foreign exchange inst ruments. NatWest Group maintains policies and procedures designed to manage the impact of exposures to fluctuations in currency rates. Nevertheless, changes in currency rates, particularly in t he sterling-US dollar and euro-sterling rates, can adversely affect the value of assets, liabilities (including the total amount MREL-eligible instruments), foreign exchange dealing activi ty, income and expenses, RWAs and hence the reported earnings and financial condition of NatWest Group. HM Treasury (or UKGI on its behalf) could exercise a significant degree of influence over NatWest Group and further offers or sales of NatWest Group’s shares held by HM Tre asury may affect the price of NatWest Group securities. In its March 2021 Budget, the UK Government announced its intention to continue the process of privatisation of NatWest Group plc and to carry out a programme of sales of NatWest Group plc ordinary shares with the obj ective of selling all of its remaining shares in NatWest Group plc by 2025-2026. A s a result of a directed buyback of NatWest Group plc shares by NatWest Group plc from UK Government Investments Limited (‘UKGI’) in March 2021, sales of NatWest Group plc shares by UKGI by accelerated bookbuild in May 2021 and purchases made under NatWest Group plc’s on-market buyback program me announced in July 2021, as at 11 February 2022, the UK Government held 50.94% of the issued share capital with voting rights of NatWest Group plc. In addition to the £750 million on-market buyback announced on 18 February 2022, NatWest Group may participate in further directed or on-market buybacks in the future. The timing, extent and continuation of UKGI’s sell-dow ns is uncertain, which could result in a prolonged period of increased price volatility on NatWest Group plc’ s ordinary shares. Any offers or sales of a substantial number of ordinary shares by UKGI, market expectations about these sales and any associated directed, o n or off market buyback activity by NatWest Group, could affect the prevailing market price for the outstanding ordinary shares of NatWest Group plc. HM Treasury has indicated that it intends to respect the commercial decisions of NatWest Group and that NatWest Group will continue to have its own independent board of directors and management team determining its own strategy. However, for as long as HM Treasury remains the NatWest Group plc’s largest single shareholder, HM Treasury and UKGI (as manager of HM Treasury’s shareholding) could e xercise a significant degree of influence over the election of directors and appointment of senior management, NatWest Group’s capital strategy, dividend policy, remuneration policy or the conduct of NatWest Group’s operations, amongst others. HM Treasury or UKGI’s app roach 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 could give rise to conflicts between the interests of HM Treasury and the interests of other shareholders, including as a result of a chang e in government policy. Strategic risk NatWest Group continues to implement its purpose-led strategy, which carries significant execution and operational risks and may not achieve its stated aims and targeted outcomes. In February 2020, NatWest Gro up announced a new strategy, focuse d on becoming a purpose-led busine ss, designed to champion potential and to help individuals, families and busi nesses to thrive. This strategy is intende d to reflect the rapidly shifting environment and backdrop of unprecedente d disruption in society driven by technology and changing customer expectations, as accelerated by the COVID-19 pandemic. The purpose-led strategy has required an internal cultural shift across NatWest Group as to how performance is perceived and how NatWest Group conducts its bus iness. These changes are substantial and will take many years to fully embed. Thes e changes may not result in the expected outcome within the timeline and in the manner currently contemplated. As part of its purpose-led strategy, NatWest Group has set a numb er of financial, capital and operational targets and expectations, both for the s hort term and throughout the implementation period. Meeting these targets and expectations requires further significant reductions to NatWest Group’s cost base. Realising these cost reductions may result in material strategic costs , which may be more than currently expected. The continued focus on meeting cost reduction targets may also mean limited investment in other areas, which could affect NatWest Group’s long-te rm prospects, product offering or competitive position, its ability to meet its other targets and commitments (including those related to customer satisfaction) and its capacity to respond to climate-related risks. Risk factors c ontinued NatWest Group A nnual Repor t and Accou nts 2021 409 Financial statements Strategic report Governance Risk and capital management Additional information Financial review NatWest Group’s ability to meet its planned reductions in its annual underlying costs may vary considerably from year to year. Any of the factors above could jeopardise NatWest Group’s ability to achieve its associated financial targets and generate sustainable returns. The financial services industry is currently experiencing a trend towards consolidation and technological advancement and disruption. In pursuing its purpose-led strategy, NatWe st Group may decide to undertake divestments, restructurings or reorganisations of certain of its customer segments. Conversely, it may decide to grow its business through acquisitions, j oint ventures, investments and/or strategic partnerships as well as other transactions and initiatives, in certain customer segments and including to: (i) enhance capabilities that may lead to better productivity or cost efficiencies ; (ii) acquire talent; (iii) pursue new products or expand existing products; or (iv) enter new markets or enhance its pres ence in existing markets. There are risks that NatWest Group may not fully realise the expected benefits and value from these transactions and initiatives. In particula r, NatWest Group may: (i) fail to realise the business rationale for the transaction or initiative, or assumptions underlying the business plans supporting the valuation of a target business may prove inaccurate, for example, synergies and expected commercial demand; (ii) fail to successfully integrate any acquired businesses (including in respect of technologies, existing strategies, products and human capital); (iii) fail to retain key employees, customers and suppliers of any acquired busines s; (iv) be required or wish to terminate pre- existing contractual relationships, which could prove costly and/or be execu ted at unfavourable terms and conditions; (v) fail to discover certain contingent o r undisclosed liabilities in business es that it acquires, or its due diligence to discover any such liabilities may be inad equate; and (vi) not obtain necessary re gulatory and other approvals or onerous conditions may be attached to such approvals. Accordingly, NatWest Group may not be successful in growi ng its business through these types of transactions and initiatives and any particular transaction may not s ucceed, may be limited in scope or scale (including due to NatWest Group’s current ownership structure) and may not conclude on the terms conte mplated, or at all. Any of the above may materially and adversely affect NatWest Group’s results of operations, financial condition or prospects. NatWest Group’s phased withdrawal from ROI continues to present significant commercial, operational, legal and execution risks. In particular, th e phased withdrawal from ROI involves transfers of business, assets and liabilities to third parties, and entails many risks, the most significant of which include: (i) anticipated reductions in net income, total lending and RWAs; (ii) pote ntial trapped or stranded capital; (iii) the diversion of management resources and attention away from day-to-day management; (iv) the recognition of disposal losses as part of the orderly run- down of certain loan portfolios which may be higher than anticipated; (v) execution risks arising from the significant uncertainties of a phased withdrawal, including the additional IT and operational expense and re source required to mitigate manual and limite d customer switching and handling processes of Ulster Bank Ireland DAC, potential counterparties and ot her banks; (vi) customer action or inaction, or the inability to obtain necessary approvals and/or support from governmental authorities, regulators, trade unions and/or other stakeholders resulting in additional cost, resource and delays; (vii) potential loss of customers, resulting in retail and commercial deposit ou tflows (or a failure to attract deposit inflows) and reduced revenues and liqui dity; (viii) increased people risk through the potential loss of key colleagues and institutional knowledge and increased challenges of attracting and retaining colleagues; (ix) regulatory risk, including in relation to prudential, conduct and other regulatory requirements; (x) no or limited access to Euro system funding arrangements; and (xi) brand and reputational risks due to press speculation and stakeholder scrutiny about the phased withdrawal from ROI. Any of these risks and uncertainties may cost more, be more complex or harder to mitigate than currently estimated and may adversely affect NatWest Group’s ability to execute a phased withdrawal from ROI, or may affect the financial performance of NatWest Group. On 27 January 2022, NatWest Group announced that, in order to further support its customers’ growth ambitions and deliver on the next phase of its strategy, it is evolving its Commercial, NatWest Markets and RBS Inter national businesses to form a single franchise to best support its customers across the full non-personal customer lifecycle. T he transition is expected to begin over the coming months and be effe ctive from July 2022. In pursuing its strategy, NatWest Group may not be able to successfully: (i) implement all aspects of its strategy; (ii) reach any or all of the related targets or expectations of its strategy; or (iii) realise the intended strategic objectives of any other future strategic or growth initi ative. The scale and scope of its strategy and the intended changes continue to present material business, operational (including compliance with the UK ring- fencing regime), legal, execution, IT system, internal culture, conduct and people risks to NatWest Group. Implementing many changes and strategic actions concurrently, including in respect of any growth initiatives, will require application of robust go vernance and controls frameworks and r obust IT systems; there is a risk that Nat West Group may not be successfu l in these respects. The implementation of the purpose-led strategy and any other strategic initiatives 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, or at all, or could be phased or could progres s in a manner other than currently expected. This could lead to additional management actions by NatWest Group. Changes in the economic, politic al and regulatory environment in whic h NatWest Group operates, or regulatory uncertainty and changes, stron g market competition and industry disruption o r economic volatility may require NatWest Group to adjust aspects of its strategy or the timeframe for its implementation including in relation to its financial, capital and operational targets and expectations. As certain initiatives depend on achieving growth in new ventures and opportunities for NatWest Group, its strategy is vulnerable to an economic downturn. NatWest Group’s strategy also requires ongoing confidence from customers and the wider market, without which c ustomer activity and related income leve ls may fall or NatWest Group’s reputation may be adversely affected. Each of these risks, and others identified in these Risk Factors, individually or collectively could jeopardise the implementation and delivery of the purpose-led strategy and other strategic initiatives, result in higher than expected costs, impact NatWest Group’s products and services offering, its reputation with customers or business model and adversely impact NatWest Group’s ability to deliver its strategy and meet its targets and guidance, each of which could have a negative impact on NatWest Group. Additional information Risk factors c ontinued NatWest Group A nnual Repor t and Accou nts 2021 410 Financial statements Strategic report Governance Risk and capital management Additional information Financial review NatWest Group continues to refocu s its NWM franchise, which entails material execution, commercial and operational risks and the intended benefits for NatWest Group may not be realis ed within the timeline and in the manner currently contemplated. Over the past few years, as part of i ts purpose-led strategy, NatWest Group has sought to implement a more strategically congruent and economically sustainable model for its NWM franchise. As part of this, NatWest Group has been refocusing the NWM franchise to principally serve NatWest Group’s corporate and institutional customer base. This requires NWM Group to simplify its operating model and technology platform, as well as reduce its cost base and capital requirements. NWM Group has also directed resources to emphasising and growing pr oduct capability in the areas of impor tance to NatWest Group’s corporate and institutional customers, includin g the Fixed Income and Capital Markets businesses, and has refocused i ts Rates business to best serve its core customers. In addition, to improve efficie ncies and best serve customers following B rexit, NatWest Group expects that certain assets, liabilities, transactions and activities of its Western European corporate portfolio (principally including term funding and revolving credit facilities), will be transferred from the ring-fenced subgroup of NatWest Group to NWM Group on a rolling basis, su bject to certain regulatory and customer requirements. The timing and quantum of these transfers remain uncertain as is the impact of these transaction s on its go-forward results of operations. A s a result, NatWest Group’s business , results of operations, financial position and prospects could be adversely affe cted. NatWest Group’s ability to serve its customers may be diminished by the changed business strategy, as a result of the NWM Refocusing. In addition, customer reactions to the changed nature of NWM Group’s business model may be more adverse than expected and previously anticipated revenue and profitability levels may not be a chieved in the timescale envisaged or at all. A n adverse macroeconomic environment (including due to the COVID-19 pandemic, heightened inflation and rising interest rates), continued political and regulatory uncertainty, market volatility and/or strong market competition may also pose significant challenges to the achievement of the anticipated ta rgets and goals of the NWM Refocusing. The implementation of the NWM Refocusing has been a complex process and although substantial progress has been made, the risk remains that this strategy may not result in the contemplated business outcome and there continue to be material execu tion, commercial and operational risks in connection with the NWM Refocusing. There may continue to be material execution, commercial and operational risks for NWM Group and NWM Group may continue to be subject to s ignificant structural and other change. The re can be no certainty that the NWM Refocus ing will be successful or that NWM Group will be a viable, competitive or profitable business. The intended benefits for NatWest Group may not be realis ed within the timeline and in the manner currently contemplated. Trends relating to the COVID-1 9 pandemic may adversely affect NatWest Group’s strategy and impair its ability to meet its targets and strategic objectives. The trajectory of the COVID-19 pandemic’s impact on the UK a nd global economy and NatWest Group r emains uncertain. If trends relating to t he COVID-19 pandemic negatively impact the UK and global economy, NatWest Group’s may be unable to meet i ts financial, capital and operational targets and expectations. In addition, t he COVID-19 pandemic has, at times, caused significant market volatility, which could cause RWA inflation for NatWest Group. This could impair NatWest Group’s ability to timel y deliver on certain aspects of its purpose-led strategy, which may have an adverse effect on NatWest Group’s business , results of operations and outlook. Se e also, ‘ NatWest Group continues to implement its purpose-led strategy, which carries significant execution and operational risks and may not achieve it s stated aims and targeted outcomes ’. It is uncertain as to how the broader macroeconomic business envir onment and societal norms may be impacted by the COVID-19 pandemic, causing significant wider societal changes. For example, one of the most notable e ffects of the COVID-19 pandemic has been its disproportionate impact on the most vulnerable groups of society an d concerns about systemic racial biases and social inequalities. In addition, the COVID-19 pand emic has accelerated existing economic trends that may radically change the way businesses are run and people live their lives. These trends include digitalisation, decarbonisation, automation, e- commerce and agile working, e ach of which has resulted in significant market volatility in asset prices. There is also increased investor, regulatory and customer scrutiny regarding how businesses address these changes and related climate, environmental, s ocial, governance and other sustainability issues, including tackling inequality, working conditions, workplace health, safety and wellbeing, diversity and inclusion, data protection and management, workforce management, human rights and supply chain management. Any failure or delay by NatWest Group to successfully adapt its business strategy and to establish and maintain effective governance, procedures, systems and controls in response to these changes, and to manage emerging climate, environmental, social, governa nce and other sustainability-related risks and opportunities, may have a material adverse impact on NatWest Group’s reputation, business, results of operations, outlook and the value of NatWest Group’s securities. See also, ‘ Any failure by NatWest Group to implement effective and compliant climate change resilient systems, controls and procedures could adversely affect NatWest Group’s ability to mana ge climate-related risks ’ and ‘ A failure to adapt NatWest Group’s business strategy, governance, procedur es, systems and controls to manage emerging sustainability-related risks and opportunities may have a material adverse effect on NatWest Group, its reputation, business, results of operations and outlook ’. The COVID-19 pandemic may also result in unexpected developments or c hanges in financial markets, the fiscal, tax and regulatory frameworks and cons umer customer and corporate client be haviour, which could intensify competition in the financial services industry. This could negatively impact NatWest Group if it is not able to adapt or compete eff ectively. Financial resilience risk NatWest Group may not meet the targets it communicates or be in a position to continue to make discretionary c apital distributions (including dividends to shareholders). As part of NatWest Group’s strategy, NatWest Group has set a numb er of financial, capital and operational targets for NatWest Group including in respect of: CET1 ratio targets, MREL targets, return on tangible equity (‘ROTE’), funding plans and requirements, employee engagement, diversit y and inclusion as well as ESG (includ ing climate and sustainable funding and financing targets) and custome r satisfaction targets and discretiona ry capital distributions (including dividends to shareholders). See also, ‘ NatWest Group continues to implement its purpose-led strategy, which carries significant execution and Risk factors c ontinued NatWest Group A nnual Repor t and Accou nts 2021 411 Financial statements Strategic report Governance Risk and capital management Additional information Financial review operational risks and may not achieve it s stated aims and targeted outcomes ’. NatWest Group’s ability to meet its targets and to successfully mee t its strategy is subject to various internal and external factors and risks. These i nclude but are not limited to: the impa ct of the COVID-19 pandemic, market, regulatory, macroeconomic and political uncertainties, operational risks and risks relating to NatWest Group’s busine ss model and strategy (including ris ks associated with climate, environmental, social, governance and other sustainability-related issues) and litigation, governmental actions , investigations and regulatory matters. A number of factors, including the economic and other effects of the COVID-19 pandemic, may impact NatWest Group’s ability to maintain its CET1 ratio target and make discretionary capital distributions. See also, ‘ NatWest Group may not meet the prudential regulatory requirements for capital and MREL, or manage it s capital effectively, which could trigger the execution of certain management actions or recovery options ’. There is a risk that NatWest Group may not meet its targets and expectations or be in a position to continue to distribute capital, or that NatWest Group will be a viable, competitive or profitable banking business. NatWest Group operates in markets that are highly competitive, with increasing competitive pressures and technology disruption. The markets within which NatWe st Group operates are highly competitive. NatWest Group expects such competition to continue and intensify in response to various changes. These include: e volving customer behaviour, technological changes (including digital currencie s, stablecoins and the growth of digital banking, such as from fintech e ntrants), competitor behaviour, new entrants to the market (including non-traditional financial services providers such as large retail or technology conglomerates, who may have competitive advantages in scale, technology and customer engagement), competitive forei gn- 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 banking, lending and payment solutions offered by rapidly evolving incumbents, challengers and new entrants, notably with respect to payment service s and products, and the introduction of disruptive technology may impe de NatWest Group’s ability to grow or ret ain its share and impact its revenues and profitability, particularly in its ke y UK retail and commercial banking segments. Moreover, innovations such as biometrics, artificial intelligence, the cloud, blockchain, cryptocurren cies and quantum computing may rapidly facilitate industry transformatio n. These trends have accelerated during the COVID-19 pandemic and may be catalysed by various regulatory and competition policy interventions, including the UK initiative on Open Banking (PSD2), Open Finance and other remedies imposed by the Competition and Markets Authority (CMA) which are designed to further promote competition within retail banking. The competition enhancing measures under NatWest Group’s independently administe red Alternative Remedies Package (‘ARP’) benefits grant recipients and eligible competitors. The ARP may be more costly than anticipated and ma y adversely impact customer service for NatWest Group’s own customers, its competitive position and reputation. Failure to comply with the terms of the scheme could result in the imposition of additional measures or limitations on NatWest Group’s operations, additional supervision by NatWest Group’s regulators, and loss of investor confidence. Increasingly many of the products and services offered by NatWest Group a re, and will become, more technology intensive. For example, NatWest Group recently invested in a number of fintech ventures, including Mettle, Free Agent, Tyl, Rapid Cash and Rooster Money. Se e also, ‘ NatWest Group continues to implement its purpose-led strategy, which carries significant execution and operational risks and may not achieve it s stated aims and targeted outcomes ’. NatWest Group’s ability to develop such digital solutions (which also need to comply with applicable and evolving regulations) has become increasingly important to retaining and growing NatWest Group’s customer busi ness in the UK. There can be no certainty that NatWest Group’s innovation strategy (which includes investment in its IT capability intended to address the material increase in customer us e of online and mobile technology for banking as well as selective acquisitions, which carry associated risks) will be s uccessful or that it will allow NatWest Group to continue to grow such services in the future. Certain of NatWest Group’s current or future competitors may be more successful in implementing innovative technologies for delivering products or services to their customers. NatWest Group may also fail to identify future opportunities or derive bene fits from disruptive technologies in the context of rapid technological innovation, changing customer behaviour and growing regulatory demands, r esulting in increased competition from traditional banking businesses as well as new providers of financial services, including technology companies with strong b rand recognition, that may be able to develop financial services at a lower cost base. NatWest Group’s competitors may also be better able to attract and retain customers and key employees, may have better IT systems, and may have access to lower cost funding and/or be able to attract deposits on more favourable terms than NatWest Group. Although NatWest Group invests in new technologies and participates in industry and research led initiatives aimed at developing new technologies, su ch investments may be insufficient or ineffective, especially given NatWest Group’s focus on its cost savin gs targets. This may limit additional investment in areas such as financial innovation and could therefore affect NatWest Group’s offering of innovative products or technologies fo r delivering products or services to customers and its competitive position. Furthermore, the development of innovative products depends on NatWest Group’s ability to produce underlying high-quality data, fa iling which its ability to offer innovative products may be compromised. If NatWest Group is unable to off er competitive, attractive and innovative products that are also profitable and timely, it will lose share, incur losse s on some or all of its activities and l ose opportunities for growth. In this context, NatWest Group is investing in the automation of certain solutions and interactions within its customer-facing businesses, including through artificial intelligence. Such initiatives may result in operational, reputational and conduct risks if the technology used is de fective, inadequate or is not fully integr ated into NatWest Group’s current solutions. There can be no certainty that such initiatives will deliver the expected cost savings and investment in automated processes will likely also result in increased short- term costs for NatWest Group. In addition, the implementation of its purpose-led strategy (including in relation to acquisitions, reorganisations and/or partnerships), delivery on its climate ambition, cost-reduction measures, as well as employee remuneration constraints, may also have an impact on its ability to compete effectively and intensified compe tition from incumbents, challengers and new entrants could affect NatWest Group’s Risk factors c ontinued NatWest Group A nnual Repor t and Accou nts 2021 412 Financial statements Strategic report Governance Risk and capital management Additional information Financial review ability to maintain satisfactory re turns. Moreover, activist investors have increasingly become engaged and interventionist in recent years, which may pose a threat to NatWest Group’s strategic initiatives. Furthermore, continued consolidation or technological or other developments in certain sectors of the financial services industry could result in NatWest Group’s remaining competitors gaining greater ca pital and other resources, including the ability to offer a broader range of products and services and geographic diversity, or the emergence of new competitors . The impact of the COVID-19 pa ndemic on the credit quality of NatWest Group’s counterparties may negatively impact NatWest Group. The effects of the COVID-19 pandemic have adversely affected the credit quality of some of NatWest Group’s borrowers and other counterparties, and government support schemes may delay the effects of defaults by such counterparties. As government support schemes reduce, defaults are expected to rise with more customers moving from IFRS 9 Stage 2 to Stage 3. As a result, NatWest Group continues to experience elevated exposure to credit risk and demands on its funding, and the long- term effects remain uncertain. If borrowers or other counterpartie s face increasing levels of debt and d efault or suffer deterioration in credit, this would increase impairment charges, write- downs, regulatory expected loss and impact credit reserves. See also, ‘ NatWest Group has significant exp osure to counterparty and borrower risk ’ an d ‘NatWest Group’s financial statements are sensitive to the underlying accounting policies, judgments, estimates and assumptions’. In line with certain mandated COVID-19 pandemic support schemes, NatWest Group has sought to assist affected customers with a number of initiatives including NatWest Group’s par ticipation in BBLS, CBILS and CLBILS pro ducts. NatWest Group has sought to manage the risks of fraud and money laundering against the need for the fast and eff icient release of funds to customers and businesses. NatWest Group may be exposed to fraud, conduct and litigation risks arising from inappropriate approval (or denial) of BBLS or CBILS or the enforcing or pursuing repayme nt of BBLS and CBILS (or a failure to e xercise forbearance), which may have an adverse effect on NatWest Group’s reputation and results of opera tions. The implementation of the initiatives and efforts mentioned above may re sult in litigation, regulatory and government actions and proceedings. These actions may result in judgments, settlements, penalties or fines. Any of the above may have a negative impact on NatWest Group. NatWest Group has significant exposure to counterparty and borrower risk . NatWest Group has exposure to many different industries, 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 NatWest Group’s busine sses. NatWest Group’s lending strategy and associated processes may fail to identify or anticipate weaknesses or risks in a particular sector, market or borrower, or fail to adequately value physica l or financial collateral. This may result in increased default rates or a higher loss given default for loans, which may, in turn, impact NatWest Group’s profitability. See also, ‘ Risk and capital management — Credit Risk ’. The credit quality of NatWest Group’s borrowers and other counterparties may be affected by a deterioration in prevailing economic and marke t conditions (including those cause d by the COVID-19 pandemic) and by the legal and regulatory landscape in the UK and countries where NatWest Grou p is exposed to credit risk and any deterioration in such conditions or changes to legal or regulatory landscapes (including the extent of the UK’s post-Brexit divergence from EU laws and regulation). These cou ld worsen borrower and counterparty credit quality or impact the enforcement of contractual rights over security, increasing credit risk. An increase in drawings upon committed credit facilities may also increase NatWest Group’s RWAs. In addition, the level of household indebtedness in the UK remains high. The ability of households to service their debts could be worsened by a period of high unemployment (including as a re sult of the COVID-19 pandemic), increasing interest rates and higher inflation, particularly if prolonged. NatWe st Group may be affected by volatility in property prices (including as a result of the general UK political or economic cl imate or the COVID-19 pandemic) give n that NatWest Group’s mortgage loan and wholesale property loan portfolios as at 31 December 2021, amounted to £ 226.5 billion, representing 61% of NatWest Group’s total customer loan exposure. If property prices were to weaken this could lead to higher impairmen t charges, particularly if default rates also increase. In addition, NatWest Group’s c redit risk may be exacerbated if the collateral that it holds cannot be realised as a result of market conditions or regulatory intervention or if it is liquidated at prices not sufficient to recover the net amou nt 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 could lead to significant liquidity problems and loss es or defaults by other financial institutions, since the commercial and financial soundness of many financial institutions is closely related and interdependent as a result of credit, trading, clearing and other relationships. Any perceived lack of creditworthiness of a counterparty may lead to market-wide liquidity problems and losses for NatWest Group. This systemic risk may also adve rsely affect financial intermediaries, suc h as clearing agencies, clearing hous es, banks, securities firms and exchanges with which NatWest Group inte racts on a daily basis. See also, ‘ NatWest Group may not be able to adequately access sources of liquidity and funding ’. As a result, adverse changes in borrower and counterparty credit risk may cause accelerated impairment charges under IFRS 9, increased repurchase demands, higher costs, additional write-downs and losses for NatWest Group and an inability to engage in routine funding transactions. NatWest Group has applied an internal analysis of multiple economic s cenarios (MES) together with the determi nation of specific overlay adjustments to inform its IFRS 9 ECL (Expected Credit L oss). The recognition and measurement of ECL is complex and involves the use of significant judgment and estimation. This includes the formulation and incorporation of multiple forward-looking economic scenarios into ECL to meet the measurement objective of IFRS 9. T he ECL provision is sensitive to the model inputs and economic assumptions underlying the estimate. Going forward, NatWest Group anticipates obs ervable credit deterioration of a proportion of assets resulting in a systematic uplift in defaults, which is mitigated by t hose economic assumption scenarios being reflected in the Stage 2 ECL across portfolios, along with a combination of post model overlays in both wholes ale and retail portfolios reflecting the uncertainty of credit outcomes. See also, ‘ Risk and capital management ’. A credit deterioration would also lead to RWA increases. Furthermore, the ass umptions and judgments used in the MES and ECL assessment at 31 December 2021 may not prove to be adequate resulting in incremental ECL provisions for NatWest Group. As government support s chemes Risk factors c ontinued NatWest Group A nnual Repor t and Accou nts 2021 413 Financial statements Strategic report Governance Risk and capital management Additional information Financial review reduce, defaults are expected to rise with more ECLs cases moving from Stage 2 to Stage 3. NatWest Group is exposed to the financial industry, including sovereign debt securities, banks, financial intermediation providers (including providing facilities to financial sponsors and funds, backed by assets or investor commitments) and securitised products (typically senior lending to special purpose vehicles backed by pools of financial assets). Due to NatWest Group’s exposure to the financial industry, it also has exposure to shadow banking enti ties (i.e., entities which carry out ba nking activities outside a regulated framework). NatWest Group is required to identify and monitor its expo sure to shadow banking entities, imple ment and maintain an internal framewor k for the identification, management, control and mitigation of the risks associate d with exposure to shadow banking e ntities, and ensure effective reporting and governance in respect of such exposure. If NatWest Group is unable to properly identify and monitor its shadow banking exposure, maintain an adequate framework, or ensure effec tive reporting and governance in respect of shadow banking exposure, this may adversely affect the business, results of operations and outlook of NatWest Group. If NatWest Group experiences loss es and a reduction in future profitabilit y, this is likely to affect the recoverable value of fixed assets, including goodwill and deferred taxes, which may lead to further write-downs. NatWest Group may not meet the prudential regulatory requirements for capital and MREL, or manage its capital effectively, which could trigger the execution of certain manageme nt actions or recovery options . NatWest Group is required by regulators in the UK, the EU and other juri sdictions in which it undertakes regulate d activities to maintain adequate financial resources. Adequate capital provides NatWest Group with financial flexibility in the face of turbulence and uncertainty in the global economy and specifically in its core UK operations. It also permits NatWest Group plc to make discretionary capital distributions (including dividends to shareholders). As at 31 December 2021, NatWest Group plc’s CET1 ratio was 18.2% and N atWest Group plc currently targets a CET1 ratio of 13-14% by the end of 2023. NatWest Group plc’s target capital ratio is based on a combination of its expecte d regulatory requirements and in ternal modelling, including stress scenarios and management’s and/or the Prude ntial Regulatory Authority’s (‘PRA’) vie ws on appropriate buffers above mini mum operating levels. NatWest Group plc’s current capital strategy is based on the expected accumulation of additional capital through the accrual of profits over time, planned capital actions (including issuances, redemptions, and discretionary capital distributions), RWA growth in the form of regulator y uplifts and lending growth and other capital management initiatives which focus on improving capital efficiency and e nsuring NatWest Group meets its mediu m to long term targets. A number of factors may impact NatWest Group plc’s ability to maintain its current CET1 ratio target an d achieve its capital strategy. These include, amongst other things:  a depletion of its capital resourc es through increased costs or liabilities or reduced profits;  an increase in the quantum of RWAs in excess of that expected, inclu ding due to regulatory changes, o r a failure in internal controls or procedures to accurately measure and report RWAs;  changes in prudential regulatory requirements including NatWest Group plc’s Total Capital Requirement set by the PRA, including Pillar 2 requirements and regulatory buffers as well as any applicable scalars;  reduced dividends from NatWest Group’s subsidiaries because of changes in their financial performance and/or the extent to which local capital requirements exceed NatWest Group plc’s target ratio; and limitations on the use of double leverage, i.e. NatWest Group plc’s use of debt to invest in the equity of its subsidiaries, as a resu lt of the Bank of England’s and/or NatWest Group’s evolving view s on distribution of capital within gr oups. A shortage of capital could in turn affect NatWest Group plc’s capital rati o, and/or its ability to make capital distributions. A minimum level of capital adequacy is required to be met by NatWest Group plc for it to be entitled to make certain discretionary payments, and institutions which fail to meet the combined buffe r requirement are subject to restricted discretionary payments. The res ulting restrictions are scaled according to the extent of the breach of the combined buffer requirement and calculated as a percentage of the profits of the institution since the last distribution of profits or discretionary payment which gives rise to a maximum distributable amount (MDA) (if any) that the financial institution can distribute through discretionary payments. Any bre ach of the combined buffer requireme nt, may necessitate for NatWest Group plc reducing or ceasing discretiona ry payments (including payments of dividends to shareholders) to th e extent of the breach. NatWest Group is required to maintain a set quantum of MREL set as the higher of its RWAs or leverage requirement. The Bank of England has identified single point-of-entry as the preferred resolution strategy for NatWest Group. As a result, NatWest Group plc is the only entity tha t can externally issue securities that count towards its MREL requirements, the proceeds of which can then be downstreamed to meet the internal MREL issuance requirements of its operating entities and intermediate holding c ompanies. If NatWest Group plc is unable to raise the requisite amount of regulatory capital or MREL, downstream the proceeds of MREL to subsidiarie s as required, or to otherwise meet its regulatory capital, MREL and leverage requirements, it may be exposed to increased regulatory supervision or sanctions, loss of investor confidence, constrained or more expensive funding and be unable to make dividen d payments on its ordinary share s or maintain discretionary payments on capital instruments. If, under a stress scenario, the le vel of capital or MREL falls outside of risk appetite, there are a range of rec overy management actions (focused on risk reduction and mitigation) that NatWest Group could take to manage its capital levels, but any such actions ma y not be sufficient to restore adequate capital levels. 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 NatWest Group’s app licable capital or leverage requirement s may trigger the application of NatW est Group’s recovery plan to remediate a deficient capital position. NatWe st Group’s regulator may request that NatWest Group carry out certain capital management actions or, if NatWest Group plc’s CET1 ratio falls below 7%, certain regulatory capital instru ments issued by NatWest Group will be written- down or converted into equity and there may be an issue of additional e quity by NatWest Group plc, which could result in the dilution of the holdings of N atWest Group plc’s existing shareholders. The success of such iss uances will also be dependent on favourable market conditions and NatWest Group may not be able to raise the amount of c apital required on acceptable terms or at all. Risk factors c ontinued NatWest Group A nnual Repor t and Accou nts 2021 414 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Separately, NatWest Group may address a shortage of capital by taking action to reduce leverage exposure and/or RWAs via asset or business disposals. T hese actions may, in turn, affect, among other things, NatWest Group’s product offering, credit ratings, ability t o operate its businesses, pursue its current strategies and pursue strategic opportunities, any of which may aff ect the underlying profitability of NatWest Group and future growth poten tial. See also, ‘ NatWest Group may become subject to the application of UK statutory stabilisation or resolution powers which may result in, among other actions, the cancellation, transfer or dilution of ordinary shares, or the write-down or conversion of certain other of NatWest Group’s securities ’. NatWest Group is subject to Bank of England and PRA oversight in r espect of resolution, and NatWest Group could be adversely affected should the Bank of England deem NatWest Group’s preparations to be inadequate. NatWest Group is subject to regulatory oversight by the Bank of Engla nd and the PRA, and is required (under the PRA rulebook) to carry out an asses sment of its preparations for resolution, s ubmit a report of the assessment to the PRA, and disclose a summary of this rep ort. The initial report was submitted to the PRA on 30 September 2021 and the B ank of England’s assessment of NatWest Group’s preparations is schedule d to be released on 10 June 2022 although the Bank of England may provide fe edback before then. NatWest Group has dedicated significan t resources towards the preparation of NatWest Group for a potential re solution scenario. However, if the Bank of England assessment identifies a significant gap in NatWest Grou p’s ability to achieve the resolvability outcomes, or reveals that NatWest Group is not adequately prepared to be resolved, or did not have adequate plans in place to meet resolvability requirements which came into effect on 1 January 20 22, 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 as, depending on the Bank of England’s assessment, potential action may include, but is not limited to, restrictions on NatWe st Group’s maximum individual and aggregate exposures, a requirement to dispose of specified assets, a requirement to change legal or operational structure, a requirement to cease carrying out certain activities and/or maintaining a specified amount of MREL, consequently impacting NatWest Group’s strategic plans and having an adverse effect on the financial position and/or reputation of NatWest Group or a loss of investor confidence. NatWest Group may not be able to adequately access sources of liquidity and funding. NatWest Group is required to a ccess sources of liquidity and funding through retail and wholesale deposits, as well as through the debt capital markets. As at 31 December 2021, NatWest Group plc held £506.1 billion in deposits. The le vel of deposits may fluctuate due to factors outside NatWest Group’s control, such as a loss of investor confidence (in cluding in individual NatWest Group entitie s), sustained low or negative intere st rates, government support, increasin g 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 depos its within a short period of time. An inability to grow or any material decrease in NatWest Group’s deposits could, particularly if accompanied by one of the other factors described above, materially affect NatWest Group’s ability to satisfy its liquidity or funding needs. In turn, this could require NatWest Group to adapt its funding plans. The effects of the COVID-19 pandemic, current economic uncertainties and any significant market volatility could affect NatWest Group’s ability to access sources of liquidity and funding, which may result in higher funding costs and failure to comply with regulator y capital, funding and leverage requireme nts. As a result, NatWest Group and its subsidiaries could be required to adapt their funding plans. This could exacerbate funding and liquidity risk, which could have a negative ef fect on NatWest Group. As at 31 December 2021, NatWest Group plc’s liquidity coverage ratio was 1 72%. If its liquidity position were to come under stress, and if NatWest Group plc we re unable to raise funds through deposits or in the debt capital markets on acceptable terms or at all, its li quidity position could be adversely affe cted 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 fin ancing facilities, to comply with regulatory funding requirements, to undertake certain capital and/or debt management activities, or to fund new loans, investments and businesses. NatWest Group may need to liquidate unencumbered assets to meet its liabilities, including disposals of assets not previously identified for disposal to reduce its funding commitment s or trigger the execution of certain management actions or recovery options. In a time of reduced liq uidity, NatWest Group may be unable to sell some of its assets, or may need to sell assets at depressed prices, which in either case could negatively aff ect NatWest Group’s results. Any reduction in the credit rating and/or outlooks assigned to NatWest Group plc, any of its subsidiaries or any of their respective debt securities could adversely affect the availability of funding for NatWest Group, reduce NatWest Group’s liquidity position and increase the cost of funding. Rating agencies regularly review NatWest Group plc and other NatWest Group entity credit ratings and outlooks, which could be negatively affected by a number of factors that can change over time, including: the credit rating agency’s assessment of NatWest Group’s strategy and management’s capability; its financial condition including in respect of profitability, asset quality, capital, funding and liquidity; the level of political support for the industries in which NatWest Group operates; the implementation of structural reform; the legal and regulatory frameworks applicable to NatWest Group’s legal structure; business activities and the rights of its creditors; changes i n rating methodologies; changes in the relative size of the loss-absorbing buffers protecting bondholders and deposito rs; the competitive environment, political and economic conditions in NatWes t Group’s key markets (including the impact of the COVID-19 pandemic and any further Scottish independence referendum); any reduction of the UK’s sovereign credit rating and ma rket uncertainty. In addition, credit ratings agencie s are increasingly taking into accoun t 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. Any reductions in the credit ratings of NatWest Group plc or of certain other NatWest Group entities, including, in particular, downgrades below investment grade, or a deterioration in the capital markets’ perception of NatWest Group’s financial resilience could significantly affect NatWest Group’s access to money markets, reduce the size of its deposit base and trigger additional collateral or other requirements in derivative s contracts and other secured funding arrangements or the need to amend such arrangements, which coul d adversely affect NatWest Group’s (and, in particular, NatWest Group plc ’s) cost Risk factors c ontinued NatWest Group A nnual Repor t and Accou nts 2021 415 Financial statements Strategic report Governance Risk and capital management Additional information Financial review of funding and its access to capital markets and could limit the range of counterparties willing to enter into transactions with NatWest Group (and, in particular, with NatWest Group plc). This could in turn adversely impact Nat West Group’s competitive position an d threaten its prospects in the short to medium-term. NatWest Group may be adversely affected if it fails to meet the requirements of regulatory stres s tests. NatWest Group is subject to annual stress tests by its regulator in t he UK and is also subject to stress tests by European regulators with respect to NWM N.V. and Ulster Bank Ireland DAC. Stress tests are designed to ass ess the resilience of banks 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 tes ts 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 bank will need to take action to strengthen its capital position. Failure by NatWest Group to me et the quantitative and qualitative requirements of the stress tests as set forth b y its UK regulator or those elsewhere may result in: NatW est 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. NatWest Group’s results could be adversely affected if an event trigge rs the recognition of a goodwill impairment. NatWest Group capitalises goodwill, which is calculated as the excess of the cost of an acquisition over the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Acquired goodwill is recognised at cost less any accumulated impairment losses. As required by IFRS, NatWest Group tests goodwill for impairment at least annually, or more frequently when events or circumstances indicate that it might be impaired. An impairment test compares the recoverable amount (the higher of the value in use and fair value less cost to sell) of an individual cash gener ating unit with its carrying value. At 31 De cember 2021, NatWest Group plc carried goodwill of £5.5 billion on its balance sheet. The value in use and fair value of NatWest Group’s cash-generating units are affected by market conditio ns, the economies in which NatWest Group operates and may also be affected by the COVID-19 pandemic. The goodwill held by NatWest Group plc relies on management’s assumptions on future profitability. Goodwill is particularly sensitive to changes in assumed future profitability. If actual performance were to fall below management’s forecasts, then there is a risk that an impairment of goodwill would become necessary. Where NatWest Group is required to recognise a goodwill impairment, it is recorded in NatWest Group’s income statement, but it has no effect on NatWest Group’s regulatory capital position. Changes in such assumptions may result in the ca rrying bala nce being impaired, which could have a negative impact on NatWest Group. NatWest 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 NatWest Group’s business, strategy and capital requirements, NatWest Group re lies 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 stre ss testing). In addition, NatWest 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 fraud risk management (collectively, ‘financial crime’)). NatWest Group’s mode ls, and the parameters and assumptions on which they are based, are periodically reviewed and updated to maximise their accuracy. As models analyse scenarios based on assumed inputs and a conceptual approach, model outputs theref ore remain uncertain. Failure of mo dels (including due to errors in model desi gn) or new data inputs (including non- representative data sets), for example, to accurately reflect changes in the micro and macroeconomic environme nt in which NatWest Group operates (for example to account for the impact of the COVID-19 pandemic), to capture risks and exposures at the subsidiary level and to update for changes to NatW est Group’s current business model or operations, or for findings of de ficiencies by NatWest Group’s regulators (including as part of NatWest Group’s mandated stress testing), may render some business lines uneconomic, result in increased capital requirements, may require management action or may subject NatWest Group to regulatory sanction. NatWest Group may also face adverse consequences as a result of actions based on models that a re poorly developed, implemented or used, models that are based on inaccurate or compromised data or as a result of the modelled outcome being misun derstood, or by such information being u sed for purposes for which it was not de signed. NatWest Group’s financial statements are sensitive to the underlying accounting policies, judgments, e stimates and assumptions. The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, income, expens es, exposures and RWAs. While esti mates, judgments and assumptions tak e into account historical experience and other factors, (including market pract ice 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, judgments and assumptions (particularly those involving the use of complex models). The accounting policies deemed critical to NatWest Group’s results and financial position, based upon materiality and significant judgments and estimates, which include loan impairment provisions, are set out in ‘Critical accounting policies and key sources of estimation uncertainty ’. New ac counting standards and interpretations that have been issued by the International Accounting Standards Board but which have not yet been adopted by NatWest Group are discussed in ‘ Future accounting developments ’. Changes in accounting standards may materially impact NatWest Group’s financial results. Changes in accounting standards or guidance by accounting bodies or in the timing of their implementation, whether immediate or foreseeable, could result in NatWest Group having to recognise additional liabilities on its balance sheet, or in further write-downs or impairments to its assets and could also signif icantly impact the financial results, condition and prospects of NatWest Group. The valuation of financial instruments, including derivatives, measured at fair value can be subjective, in particular where models are used which include unobservable inputs. Generally, to establish the fair value of these instruments, NatWest Group rel ies on quoted market prices or, where the market for a financial instrument is no t sufficiently credible, internal valuation Risk factors c ontinued NatWest Group A nnual Repor t and Accou nts 2021 416 Financial statements Strategic report Governance Risk and capital management Additional information Financial review models that utilise observable market data. In certain circumstances, the data for individual financial instruments or classes of financial instruments utilised by such valuation models may not be available or may become unavailable due to prevailing market conditions. In these circumstances, NatWest Group’s internal valuation models require NatWest Group to make assumptions, judgments and estimates to establish fai r value, which are complex and of ten relate to matters that are inher ently uncertain. The value or effectiveness of any c redit protection that NatWest Group has purchased depends on the value of the underlying assets and the financial condition of the insurers and counterparties. NatWest Group has some rema ining credit exposure arising from over-the- counter derivative contracts, mainly credit default swaps (CDSs), and othe r credit derivatives, each of which are carried at fair value. The fair value of these CDSs, as well as NatWest Group’s exposure to the risk of default by the underlying counterparties, dep ends on the valuation and the perceived credit risk of the instrument against which protection has been bought. Many market counterparties have be en adversely affected by their exposure to residential mortgage-linked an d corporate credit products, whether synthetic or otherwise, and thei r actual and perceived creditworthiness may deteriorate rapidly. If the financial condition of these counterparties or their actual or perceived creditworthines s deteriorates, NatWest Group may record further credit valuation adjustm ents on the credit protection bought from these counterparties under the CDSs. NatWest Group also recognises any fluctuations in the fair value of other credit de rivatives. Any such adjustments or fair value changes may have a negative i mpact on NatWest Group’s results. NatWest Group may become subject to the application of UK statutory stabilisation or resolution powers which may result in, among other actions, the cancellation, transfer or dilutio n of ordinary shares, or the write-down or conversion of certain other of NatWest Group’s securities. HM Treasury, the Bank of Engl and and the PRA and FCA (together, the ‘Authorities’) are granted subst antial powers to resolve and stabilise UK- incorporated financial institutions. Five stabilisation options exist: (i) transfer of all of the business of a relevant entity o r the shares of the relevant entit y to a private sector pur chaser; (ii) tr ansfer 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 tools ma y be applied to NatWest Group plc as the parent company or an affiliate 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 f ail). Moreover, there are modified insolvency and administration procedures for relevant entities, 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 a nd may promulgate provisions with retrospective applicability. Under the UK Banking Act, the Authorities are generally requir ed to have regard to specified objectives in exercising the powers provided for by the Banking Act. One of the obje ctives (which is required to be balance d as appropriate with the other spe cified objectives) refers to the protection and enhancement of the stability of the financial system of the UK. Mor eover, the ‘no creditor worse off’ safeguard contained in the Banking Act m ay not apply in relation to an applicati on of the separate write-down and conversion power relating to capital instruments under the Banking Act, in circumstances where a stabilisation power is n ot also used. Holders of debt instrume nts 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 of NatWest Group, which may depend on f actors outside of NatWest Group’s control. Moreover, the Banking Act provisions remain untested in practice. If NatWest Group is at or is approaching the point of non-viability such that regulatory intervention is require d, any exercise of the resolution regime powers by the Authorities may adversely aff ect holders of NatWest Group plc’s ordinary shares or other NatWest Group securities. This may result in va rious actions being undertaken in rel ation to NatWest Group and any securities of NatWest Group, including cancell ation, transfer, dilution, write-down or conversion (as applicable). There may also be a corresponding adverse e ffect on the market price of such securities. Climate and sustainability-relat ed risks NatWest Group and its custome rs face significant climate-related risks, including in transitioning to a net zero economy, which may adversely impact NatWest Group. Climate-related risks and uncertainties are continuing to receive increasing regulatory, judicial, political and societal scrutiny. Financial and non-financial risk s from climate change arise through p hysical and transition risks. Furthermor e, NatWest Group may also face a variety of climate-related legal risks, both physical and transition, from potential litigation and conduct liability. Se e also, ‘ NatWest Group may be subject to potential climate, environmental and other sustainability-related litigation, enforcement proceedings, invest igations and conduct risk’ . There are significant uncertaint ies as to the extent and timing of the manifestation of the physical risks of climate change, such as more se vere and frequent extreme weather events (flooding, subsidence, heat wave s and long-lasting wildfires), rising sea levels, biodiversity loss and resource scarcity. Damage to NatWest Group custome rs’ properties and operations could disrupt business, impair asset values and negatively impact the creditworthiness of customers leading to increased default rates, delinquencies, write-offs and impairment charges in NatWest Group’s portfolios. In addition, NatWest Group premises and operations, or thos e of its critical outsourced functions may experience damage or disruption leading to increased costs and negative ly affecting NatWest Group’s business continuity and reputation. In October 2021, the UK Government published its Net Zero Strategy which sets out how the UK will deliver on its commitment to reach net zero emissions by 2050. The timing, content a nd implementation of the specific policies and proposals remain uncertain. Widespread transition to a net zero economy across all sectors of the economy and markets in which N atWest Group operates will be require d to meet the goals of the 2015 Paris Agree ment, the UK’s Net Zero Strategy and the Glasgow Climate Pact of 2021. The impact of the extensive commercial, technological, policy and regulatory changes required to achieve transitio n remains uncertain, but it is expected to be significant and may be disruptive Risk factors c ontinued NatWest Group A nnual Repor t and Accou nts 2021 417 Financial statements Strategic report Governance Risk and capital management Additional information Financial review across the global economy and ma rkets, especially if these changes do not occur in an orderly or timely manner or are not effective in reducing emissions sufficiently. Some sectors such as property, energy (including oil and gas), mining, infrastructure, transport (including automotive and aviation) and agriculture are expected to be particularly impacted. The timing and pace of the transition to a net zero economy is also uncertain and may be near term, gradual and orderly or delayed, rapid and disorderly, or the combination of these. Climate-related risks may be drivers of several different risk categories simultaneously and may exacerbate existing risks, including credit risk, operational risk (business continuity), market risk (both traded and non- traded), liquidity and funding risk (f or example, net cash outflows or depletion of liquidity buffers). If NatWest Group fails to adapt its business and operating model in a timely manner to the climate-related ris ks and opportunities and changing regulatory and market expectations, or to appropriately identify, measure, manage and mitigate climate change related physical, transition and legal ris ks and opportunities that NatWest Group, its customers and value chain face, NatWest Group’s reputation, busines s, operations or value chain and resu lts of operations and outlook may be impacted adversely. NatWest Group’s purpose-led strategy includes climate change as one of its three areas of focus. This is likely to require material changes to the business and operating model of NatWe st Gro up which entails significant execution risk. In February 2020, NatWest Gro up announced its ambition to become a leading bank on climate in the UK, helping to address the climate challenge by setting itself the challenge to at least halve the climate impact of its f inancing activity by 2030 and intending to do what is necessary to achieve alignment with the 2015 Paris Agreement. In addition, in April 2021, NatWest Group by joining the Net Zero Banking Alliance 'Business Ambition to 1.5C', stated its ambition to reach net zero by 2050. Furthermore, a s part of its e fforts to support the transition to a net zero economy, NatWest Group has also announced its ambitions to phase out of 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; to plan to stop financing new customer relationships with corporate cus tomers who explore for, extract or produce coal or operate unabated coal powered plants; and that it would not provide services to existing customers who are increasing coal mining activity by exploring for new coal, developing new coal mines or increasing thermal coal production. To achieve its 2030 and 2050 a mbitions, NatWest Group has also announced other climate ambitions, targets and commitments, and going-forward it m ay also announce other climate ambitions, targets and commitments, including science-based targets to be validated by the Science Based Target Initia tive. Making the changes necessary to achieving these ambitions may materially affect NatWest Group’s business and operations and will require significant reductions to its financed emissions and to its exposure to customers that do no t align with a transition to a net zero economy or do not have a credible transition plan. Increases in lending and financing activities may wholly or partially offset some or all of these reductions, which may increase the extent of changes and reductio ns necessary. It is anticipated that achieving these reductions, together with the active management of climate-related risks and other regulatory, policy and market changes, are likely to nece ssitate material and accelerated changes to NatWest Group’s business, operating model and existing exposures (potentially on accelerated timescales and outside of risk appetite) which may have a material adverse effect on NatWest Group’s ability to achieve its financial targets and generate sustainable returns. NatWest Group’s ability to achieve theses ambitions, targets and commitments will depend to a large extent on many factors and uncertainties beyond NatWest Group’s control. Thes e include the macroeconomic en vironment, the extent and pace of climate c hange, including the timing and manifestation of physical and transition risks, th e effectiveness of actions of governments, legislators, regulators, businesse s, investors, customers and other stakeholders to adapt and/or mitigate the impact of climate-related risk s, changes in customer behaviour and demand, the challenges related with the implementation and integration of adoption policy tools, changes in the available technology for mitigation and adaptation, the availability of accurate, verifiable, reliable, consistent and comparable data. See also, ‘Na tWest Group continues to implement its purpose-led strategy, which ca rries significant execution and operational risks and may not achieve its stated aims and targeted outcomes ’ and ‘ The re are significant challenges in relation to climate-related data due to quality and other limitations, lack of standar disation, consistency and incompleteness which amongst other factors contribute to the significant uncertainties inheren t in accurately modelling the impact of climate-related risks ’. These internal and external factors and uncertainties will make it challenging for NatWest Group to meet its climate ambitions, targets and commitments and there is a significant risk that all or some of them will not be achieved. Any delay or failure in setting, making progress against or meeting NatWest Group’s climate-related ambitio ns, targets and commitments may have a material adverse impact on NatWes t Group, its reputation, business, resul ts of operations, outlook, market and competitive position and may increase the climate-related risks NatWes t Group faces. Any failure by NatWest Group to implement effective and compliant climate change resilient systems, controls and procedures could adversely affect NatWest Group’s ability to manage climate-related risks. The prudential regulation of climate- related risks is an important driver in how NatWest Group develops its risk appetite for financing activities or engaging with counterparties that do not align with a transition to a net zero economy or do not have a credible transition plan. Legislative and regulatory authorities are publishing expectations as to how banks should prudently manage and transparently disclose climate-related and environmental risks under prudential rules. In April 2019, the PRA published a supervisory statement (the ‘SS 3 /19’) with particular focus on the management of financial risks from climate change with respect to governance, risk management, scenario analysis and disclosures. Following the submission of initial plans by UK banks in October 2019, in July 2020 the PRA issued a ‘Dear CEO’ letter requiring firms to embed fully their approaches to managing climate-related financial risks by the end of 2021 . In response, on 8 October 2020, NatWest Group provided the PRA with an update to its original plan noting that the COVID-19 pandemic had disrupted some elements of NatWest Group’s origin al plan and, as a result, the updated plan would require additional operating cycles reaching into 2022 and beyond to prove embedding. Subsequently the PRA issue d its ‘Climate Change Adaptation Re port’ in October 2021 advising firms of the Risk factors c ontinued NatWest Group A nnual Repor t and Accou nts 2021 418 Financial statements Strategic report Governance Risk and capital management Additional information Financial review need to continue to refine and innov ate ways to further integrate the financial risks from climate change within risk management practices and it re stated that by the end of 2021, firms s hould be able to demonstrate that the expectations set out in SS3/19 have been implemented and embedded throughout the firms’ organisation as fully as possible. In January 2022, NatWes t Group provided the PRA with an update on how it has addressed the commitments made in its October 202 0 plan, noting the delivery of a 1st generation, largely qualitative in nature, approach to supervisory require ments. In June 2021, the Bank of Engla nd launched its 2021 Bie nnial Exploratory Scenario (‘CBES’) to stress test the resilience of the current business models of the largest banks, insurers and the financial system to the physical and transition risks from climate ch ange under three climate scenarios. NatWest Group delivered its CBES submiss ion to the PRA in October 2021. The Bank of England has since announced that the CBES is likely to include a second round over February and March 2022 , which is likely to be largely qualitative in nature. The Bank of England guidance for the CBES confirmed that it is exploratory in nature and not intended to be us ed to set capital requirements. In the aforementioned ‘Climate Change Adaptation Report 2021’, the Bank of England confirmed that over the coming year it will undertake further analysis to explore enhancements to the r egulatory capital frameworks as they relate to climate related financial risk. To suppo rt this work, the Bank of England will put out a ‘Call for Papers’ and host a Research Conference on the interaction between climate change and capital in Q4 2022. Informed by these ste ps and internal analysis, the Bank of England is expected to publish a follow-up repo rt on the use of capital including on the role of any future scenario exercises by the end of 2022. It is therefore likely that in the coming years financial institutions, including NatWest Group, may be required to hold additional capital to enhance their resilience against systemic and/or institution specific vulnerabilities to climate-related financial risks, which could, in turn, negatively impact NatWest Group. Any failure of NatWest Group to fully and timely embed climate-related risk s into its risk management practices and framework to appropriately identify, measure, manage and mitigate the various climate-related physical and transition risks and apply the appropriate product governance in line with applicable legal and regulatory requirements and expectations, may have a material and adverse impact on NatWest Group’s regulatory compliance, prudential capital requirements, liquidity position, reputation, business, re sults of operations and outlook. There are significant challenges in relation to climate-related data due to quality and other limitations, lack of standardisation, consistency and incompleteness which amongst other factors contribute to the significant uncertainties inherent in accur ately modelling the impact of climate-related risks. Meaningful reporting of climate-related risks and opportunities and their potential impacts and related metrics depend on access to accurate, reliable, consistent and comparable climate- related data from counterparti es or customers. These may not be ge nerally available or, if available, may n ot be accurate, verifiable, reliable, consistent, or comparable. Any failure of NatWest Group to incorporate climate-related factors into its counterparty and customer data sourcing and accompanying analytics, or to develop accurate, reliable, consistent and comparable counterparty and cu stomer data, may have a material adve rse impact on NatWest Group’s ability to prepare meaningful reporting of cli mate- related risks and opportunities, its regulatory compliance, reputation, business and its competitive pos ition. In the absence of other sources, reporting of financed emissions by financial institutions, including NatWest Group, is necessarily based therefore on aggregated information developed by third parties that may be prepared in an inconsistent way using different methodologies, interpretations, or assumptions. Accordingly, our climate- related disclosures use a great er number and level of assumptions and es timates than many of our financial disclosu res. These assumptions and estimate s are highly likely to change over time , and, when coupled with the longer ti me frames used in these climate 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 industry and other assumptions that may not be accurate for a given counterpa rty or customer. There may also be data gaps, particularly for private co mpanies, that are filled using proxy data, such as sectoral averages, again developed in different ways. As a result, our climate related disclosures may be ame nded, updated or restated in the future as the quality and completeness of our data and methodologies continue to imp rove. These data quality challenges, gaps and limitations could have a material impact on NatWest Group’s ability to make effective business decisions about climate risks and opportunities, including risk management decisions, comply wi th disclosure requirements and our ability to monitor and report our progress in meeting our ambitions, targets and commitments. Significant risks, uncertainties a nd variables are inherent in the asses sment, measurement and mitigation of climate- related risks. These include dat a quality gaps and limitations mentioned above, the pace at which climate science , greenhouse gas accounting standards and various emissions reduction solutions develop. In addition, there is a significant uncertainty about how climate c hange and the transition to a net zero economy will unfold over the coming decades an d affect how and when climate-re lated risks will manifest. These timeframes are considerably longer than NatW est Group’s historical strategic, financial, resilience and investment planning horizons. As a result, it is very difficult to predict and model the impact of climate -related risks into precise financial and e conomic outcomes and impacts. Climate-related risks present significant methodological challenges due to their forward-looking nature, the lack and/or quality of historical testing capabilities, lack of standardisation and incomplete ness of emissions and other climate and sub- sector related data and the immature nature of risk measurement and modelling methodologies. The evaluation of climate-related risk exposure and the development of associated potential risk mitigation techniques largely de pend 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 NatWest Group would like to happen, they rather explore the possibl e implications of different judgments and assumptions by considering a series of scenarios;  climate scenarios do not provid e a comprehensive description of all possible future outcomes;  it requires a special skill set that banks traditionally do not have and therefore NatWest Group needs to rely on third party advice, modelling, and data which is also subject to many limitations and uncertaintie s;  modelling approaches and data on climate-related risks on financial assets is immature in nature and it is expected that techniques and understanding will evolve rapidly in the coming years; Add it io nal i nf or mati on Risk factors c ontinued NatWest Group A nnual Repor t and Accou nts 2021 419 Financial statements Strategic report Governance Risk and capital management Additional information Financial review  it is challenging to benchmark or back test the climate scenarios given their forward-looking nature and the multiple possible outcomes;  there is a significant uncertainty as to how the climate will evolve ove r 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 be continually evolving with more data/inform ation which may affect the baselines f or 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 shee t with regard to emissions. Accordingly, these risks and uncertainties coupled with signific antly longer timeframes make the ou tputs of climate-related risk modelling, including emissions reductions targets an d pathways, inherently more unc ertain than outputs modelled for traditional financial planning cycles based on historical financial information. Capabilities within NatWest Group to appropriately assess, model and mana ge climate-related risks and the su itability of the assumptions required to model and manage climate-related risks appropriately are developing. Even when those capabilities are develope d, the high level of uncertainty regarding any assumptions modelled, the highly subjective nature of risk measurement and mitigation techniques, incorrect or inadequate assumptions and judgments and data quality gaps and limitations may lead to inadequate risk management information and frameworks, or ineffective business adaptation or mitigation strategies , which may have a material adv erse impact on NatWest Group’s regulatory compliance, reputation, business, results of operations and outlook. A failure to adapt NatWest Group’s business strategy, governance, procedures, systems and controls to manage emerging sustainability -related risks and opportunities may have a material adverse effect on NatWest Group, its reputation, business, resul ts of operations and outlook. Investors, customers, international organisations, regulators and other stakeholders are increasingly focusing on identification, measurement, management and mitigation of ‘sustainability-related’ risks and opportunities such as environme ntal (including biodiversity and loss of natural capital); social (including diversity and inclusion, the living wage, fair taxation and value chains); and governance (including board diversity, ethics, executive compensation and management structure) related risks and opportunities and on long term sustainable value creation. Financial institutions, including NatWest Group, are directly and indirectly exposed to multiple types of environmental and biodiversity-related risk through their activities, including risk of default by clients. Additionally, there is a growing need to move from safeguards and interventions th at focus on reducing negative impacts on environment and biodiversity towards those that focus on increasing positive impact on environment and bio diversity and nature-based solutions. In 202 1, NatWest Group accordingly classifi ed ‘Biodiversity and Nature Loss’ as an emerging risk for NatWest Group within its Risk Management Framework. This is an evolving and complex area which requires collaborative approaches with partners, stakeholders and peers to help measure and mitigate negative i mpacts of financing activities on the environment, biodiversity and n ature as well as supporting the growing sector of nature-based solutions, habitat restoration and biodiversity markets. NatWest Group is in the early stages of developing its approach and NatWest Group recognises the need for more progress. There is also increased investor, regulatory and customer scruti ny regarding how businesses addre ss social issues, including tackling inequality, working conditions, workplace health, safety and wellbeing, diversity and inclusion, data protection and management, workforce management, human rights and supply chain management which may impact NatWest Group’s employees, customers, and their business activities or the communities in which they operate. There is also growing attention on the need for a 'just transition' and “energy justice” – in recognition that the transition to a net zero economy should not disproportionally affect the most disadvantaged members of socie ty. The increased focus on these issues may create reputational and other risks for financial institutions, including NatWest Group. In addition to climate-related risks , sustainability-related risks (i) may also adversely affect economic activity, asset pricing and valuations of issuers ’ securities and, in turn, the wider financial system; (ii) may impact economic activities directly (for example through lower corporate profitability or the devaluation of assets) or indire ctly (for example through macro-financial changes); (iii) may also affect the viabili ty or resilience of business models over the medium to longer term, particu larly those business models most vul nerable to sustainability-related risks; (iv) can trigger further losses stemming directly or indirectly from legal claims (liability risks) and reputational damage as a result of the public, customers, counterparties and/or investors associating NatWest Group or its customers with adverse sustainability- related issues; and (v) intersect with and further complexity and challenge to achieving our purpose-led strategy including climate ambitions, targets and commitments. Together with climate-related ri sks, these risks may combine to generate even greater adverse effe cts on our business. Furthermore, sustainability-related risks may be drivers of several different risk categories simultaneously and may exacerbate the risks described he rein, including credit risk, operationa l risk (business continuity), market risk (both traded and non-traded), liquidit y and funding risk (for example, net cash outflows or depletion of liquidity buffers). Accordingly, any failure or delay by NatWest Group to successfully adapt its business strategy and to establish and maintain effective governance, procedures, systems and controls in response to these issues, and to manage these emerging sustainability-r elated risks and opportunities may have a material adverse impact NatWest Group’s reputation, liquidity pos ition, business, results of operations, outlook and the value of NatWest Group’s securities. Any reduction in the ESG ratin gs of NatWest Group could have a negative impact on NatWest Group’s reputation and on investors’ risk appetite and customers’ willingness to deal with NatWest Group. ESG ratings from agencies and data providers which rate how NatWest Group manages environmental, social and governance risks are increasingly influencing investment decisions or being used as a basis to label financial products and services as green or sustainable. ESG ratings are (i) unsolicited; (ii) subject to the asses sment and interpretation by the ESG rating agencies; (iii) provided without warranty; (iv) not a sponsorship, endorsement, or promotion of NatWest Group by the relevant rating agency; and (v) may depend on many factors some of which Risk factors c ontinued NatWest Group A nnual Repor t and Accou nts 2021 420 Financial statements Strategic report Governance Risk and capital management Additional information Financial review are beyond NatWest Group’s c ontrol (e.g. any change in rating meth odology). Any reduction in the ESG ratin gs of NatWest Group could have a negative impact on NatWest Group’s reputation and could influence investors’ risk appetite for NatWest Group’s and/or its subsidiaries’ securities, particularly ESG securities and could affect a cu stomer’s willingness to deal with NatWest Group. Increasing levels of climate, environmental and sustainability-related laws, regulation and oversight may adversely affect NatWest Group’s business and expose NatWest Group to increased costs of compliance, regulatory sanction and reputational damage. There are an increasing number of EU, UK and other regulatory and legislative initiatives to address issues around climate, environmental and sustainability risks and opportunities and to promote the transition to a net zero economy. As a result, an increasing number of laws, regulations, legislative actions are likely to affect the financial sector and the real economy, including proposals, guidance, policy and regulatory initiatives many of which have been introduced or amended recently and are subject to further changes. Many of these initiatives are focuse d on developing standardized definitions for green and sustainable criteria of assets and liabilities, integrating climat e change and sustainability into decision- making and customers access to green and sustainable financial products and services which may have a significant impact on the services provided by NatWest Group and its subsidiaries, especially mortgage lending, and its associated credit, market and financial risk profile. They could also impact NatWest Group’s recognition of its climate and sustainable funding and financing activity and may adversel y affect NatWest Group’s ability to achieve its climate strategy and climate and sustainable funding and financing ambitions. In addition, NatWest Group and its subsidiaries are and will be sub ject to increasing entity wide climate-re lated and other non-financial disclosure requirements pursuant to the recommendations of the Task Force on Climate-related Financial Disclosure (‘TCFD’) and under other regimes . From February 2022, NatWest Group will be required to provide enhanced cli mate- related disclosures consistent with the TCFD recommendations to comply wi th the FCA Policy Statement on the ne w Listing Rules (PS 20/17) that require commercial companies with a UK premium listing – such as NatWe st Group - to make climate related disclos ures, consistent with TCFD, on a ‘comply or explain’ basis. The FCA is proposing to expand this requirement to a wider scope of listed issuers which w ould include NatWest Group’ subsidiaries as i t moves towards mandatory TCFD reporting across the UK economy by 2025. See also, ‘ There are significant challenges in relation to climate-related data due to quality and other limitat ions, lack of standardisation, consistency and incompleteness which amongst other factors contribute to the signific ant uncertainties inherent in accurately modelling the impact of climate-related risks ’. In addition, NatWest Group’s E U subsidiaries and branches are and will continue to be subject to an increasing array of the EU/EEA climate and sustainability-related legal and regulatory requirements. These requirements may be used as the basis for UK laws and regulations (such as the UK Green Taxonomy) or regarded by investors and regulators as best practice standards whether or not they apply to UK businesses. Any divergence between UK, EU/EEA and US climate and sustainability-related legal and regulatory requirements may r esult in NatWest Group not meeting inve stors’ expectations, may increase the cost of doing business and may restrict access of NatWest Group’s UK business to the EU/EEA market. NatWest Group is also participating in various voluntary carbon reporting and other standard setting initiatives f or disclosing climate and sustaina bility- related information, many of which have differing objectives and methodologies and are at different stages of development in terms of how the y apply to financial institutions. Compliance with these developing and evolving climate and sustainability- related requirements is likely to require NatWest Group to implement significant changes to its business models, pro duct and other governance, internal controls over financial reporting, disclosure controls and procedures, modelling capability and risk management sys tems, which may increase the cost of doing business, entail additional chan ge risk and compliance costs. Failure to implement and comply with these legal and regulatory requirements or emerging best practice expec tations may have a material adverse effe ct on NatWest Group’s regulatory compliance and may result in regulatory sanction, reputational damage and investor disapproval each of which could have an adverse effect on NatWest Group’s business, results of operations and outlook. NatWest Group may be subject to potential climate, environmental 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 NatWest Group, may through their business activities face increasing litigati on, conduct, enforcement and contrac t liability risks related to climate c hange, environmental degradation and other social, governance and sustain ability- related issues. These risks may arise, for example, from claims pertaining to : (i) failures to meet obligations, targets or commitments relating to, or to disclose accurately, or provide updates on material clima te and/or sustainability related risk s, or otherwise provide appropriate disclosure to investors, customers, counterparties and other stakeholders; (ii) conduct, mis- selling and other customer prote ction type claims; (iii) marketing that portrays products, securities, activities o r policies as producing positive climate, environmental or sustainable outcomes to an extent that may not the case ; (iv) damages claims under various tort theories, including common law public nuisance claims, or negligent mismanagement of physical and/or transition risks; (v) alleged violations of officers’, directors’ and other fiduciaries’ fiduciary duties, for example by financing various carbon-intensive, environmentally harmful or otherwise highly exposed assets, companies, and industries; (vi) changes in unde rstanding of what constitutes positive climate, environmental or sustainable outcomes as a result of developing climate scie nce, leading to discrepancy between curren t product offerings and investor and/or market and/or broader stakeholder expectations; (vi) any weakness es or failures in specific systems or p rocesses associated particularly with climate, environmental or sustainability linke d products, including any failure in timely implementation, onboarding and/or updating of such systems or process es; or (vii) counterparties, collaborators and third parties in NatWest Group’s value chain action who act, or fail to act, or undertake due diligence, or apply appropriate risk management a nd product governance in a manner that impacts Natwest Group’s reputation or sustainability credentials. Furthermore, there is a risk that shareholders, campaign groups, Risk factors c ontinued NatWest Group A nnual Repor t and Accou nts 2021 421 Financial statements Strategic report Governance Risk and capital management Additional information Financial review customers and special interest groups could seek to take legal action against NatWest Group for financing or contributing to climate change and environmental degradation and for not supporting the principles of “jus t 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 priva te sectors). There is a risk that as climate scie nce develops and societal understanding of climate science increases and deepens, courts, regulators and enforcement authorities may apply the then current understandings of climate related matters retrospectively when asse ssing claims about historic conduct or dealings of financial institutions, including NatWest Group. These potential litigation, conduct, enforcement and contract liability risks may have a material adverse effe ct on NatWest Group’s ability to achieve its strategy, including its climate ambition, and they could have an adverse effect on NatWest Group’s reputation, business , financial results, position and prospects, results of operations and outlook. Operational and IT resilience r isk Operational risks (including reliance on third party suppliers and outsourcing of certain activities) are inherent in NatWest Group’s businesses. Operational risk is the risk of los s resulting from inadequate or failed internal processes, procedures, people or systems, or from external events, including legal risks. NatWest Group operates in a number of countries, offering a diverse range of products and services supported directly or indirectly by third party suppliers. As a resu lt, operational risks or losses can arise from a number of internal or external factors (including financial crime and fraud), for which there may now be a risk of greater scrutiny by third parties on NatWest Group’s compliance with financial crime requirements; see ‘ NatWest Group is exposed to the risks of various litigation matters, regul atory and governmental actions and investigat ions as well as remedial undertakings, including conduct-related reviews, anti- money laundering and redress projects, the outcomes of which are inherentl y difficult to predict, and which could have an adverse effect on NatWest Group ’). These risks are also present wh en NatWest Group relies on third-party suppliers or vendors to provide se rvices to it or its customers, as is incre asingly the case as NatWest Group outs ources certain activities, including with respect to the implementation of new technologies, innovation and responding to regulatory and market changes. Operational risks continue to b e heightened as a result of the implementation of NatWest Group’s purpose-led strategy, including NatWest Group’s phased withdrawal fro m ROI, NatWest Group’s current cost-reduction measures and conditions affecting the financial services industry generally (including the COVID-19 pandemic and other geo-political developments) as well as the legal and regulatory uncertainty resulting therefrom. It is unclea r as to how the future ways of working may evolve, including in respect of how working practices may develop , or how NatWest Group will evolve to be st serve its customers. Any of the above may place significant pressure on NatWest Group’s ability to maintain effective internal controls and governance frameworks. The effective management of operational risks is critical to meeting customer service expectations and retaining and attracting customer business. Although NatWest Group has implemented risk controls and mitigation actions, with resources and planning having been devoted to mitigate operational risk, suc h measures may not be effective in controlling each of the operational risks faced by NatWest Group. Ineffective management of such risks could adversely affect NatWest Group. NatWest Group is subject to increasingly sophisticated and frequent cyberattacks. NatWest Group experiences a constant threat from cyberattacks across the entire NatWest Group and against NatWest Group’s supply chain, reinforcing the importance of due diligence of and close working relationship with the third parties on which NatWest Group relies. NatWest 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, NatWest Group is required to continue to invest in additional capability de signed to defend against the emerging threats. In 2021, NatWest Group and its su pply chain were subjected to a small numbe r of Distributed Denial of Service (‘DDOS’) and ransomware attacks, which are a pervasive and significant threat to the global financial services industry. T he focus is to manage the impact of the attacks and sustain availability of services for NatWest Group’s c ustomers. NatWest Group continues to inves t significant resources in the development and evolution of cyber security controls that are designed to minimise t he potential effect of such attacks . Hostile attempts are made by third parties to gain access to, introduce malware (including ransomware) into and exploit vulnerabilities of, NatWest Group’s IT systems. NatWest Group has information and cyber security c ontrols in place to minimise the impact of any attack, which are subject to review on a continuing basis but given the nature of the threat, there can be no assurance that such measures will prevent all attacks in the future. See also, ‘ NatWest Group’s operations are highly dependent on its complex IT systems (inclu ding those that enable remote working) and any IT failure could adversely affect NatWest Group’ . Any failure in NatWest Group’s cybersecurity policies, procedures or controls, may result in significant financial losses, major business disruption, inability to deliver cus tomer services, or loss of data or other sensitive information (including as a result of an outage) and may cause associated reputational damage . Any of these factors could increase cos ts (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 NatWest Group’s ability to retain and att ract customers. Regulators in the UK, US, Europe and Asia continue to recognise cybersecurity as an important sys temic 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 notification of them, as appropr iate. Additionally, third parties may also fraudulently attempt to induce employees, customers, third-party providers or other users who have access to NatWest Group’s syst ems to disclose sensitive information in order to gain access to NatWest Group’s data or that of NatWest Group’s customers or employees. Cybersecurity and information security events can derive from groups or factors such as: internal or external threat actors, huma n error, fraud or malice on the part of NatWest Group’s employees or third par ties, including third party providers, or may result from accidental technological failure. NatWest Group expects greater regulatory engagement, supervision and enforcement to continue at a high level in relation to its overall resilienc e to withstand IT and related disruption, either through a cyberattack or some Additional information Risk factors c ontinued NatWest Group A nnual Repor t and Accou nts 2021 422 Financial statements Strategic report Governance Risk and capital management Additional information Financial review 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 could negatively impact NatWest Group. Due to NatWest Group’s reliance on technology and the increasing sophistication, frequency and impact of cyberattacks, such attacks may have a material adverse impact on NatWest Group. In accordance with the Data Protection Act 2018 and the European Uni on Withdrawal Act 2018, the Data Protection, Privacy and Electro nic Communications (Amendments Etc.) (EU Exit) Regulations 2019, as ame nded 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, NatWest Group is required to ensure it implements timely, appropriate and effective organisational and technological safeguards against unauthorised or unlawful access to the data of NatWest Group, its cust omers and its employees. In order to meet this requirement, NatWest Group re lies on the effectiveness of its internal policies , controls and procedures to protect the confidentiality, integrity and availability of information held on its IT sys tems, networks and devices as well as with third parties with whom NatWes t 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 d amage. NatWest Group operations and strategy are highly dependent on the accuracy and effective use of data. NatWest Group relies on the effective use of accurate data to support , monitor, evaluate, manage and enhance its operations and deliver its strategy. T he availability 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 be coming a critical strategic asset, which is subjec t to increased regulatory focus. Failu re to have 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 innovative products and services. This could also result in a failure to deliver NatWest Group’s strategy and could place NatWest Group at a competitive disadvantage by increasing its costs, inhibiting its efforts to reduce costs or its ability to improve its systems, controls and processe s, which could result in a failure to deliver NatWest Group’s strategy. These data limitations, or the unethical or inappropriate use of data, and/or non- compliance with customer data protection laws could give rise to conduct and litigation risks and may increase the risk of operational events, losses or other adverse consequence s due to inappropriate models, systems, processes, decisions or other actions. NatWest Group’s operations are highly dependent on its complex IT systems (including those that enable remote working) and any IT failure could adversely affect NatWest Group. NatWest Group’s operations are highly dependent on the ability to proces s a very large number of transactions efficiently and accurately while complying with applicable laws and regulations. The proper functioning of NatWest Group’s payment syst ems, financial crime, fraud systems and controls, risk management, credit analysis and reporting, accounting, customer service and other IT sys tems, as well as the communication n etworks between its branches and main data processing centres, is critical to NatWest Group’s operations. Individually or collectively, any critical system failure, material loss of service availability or material breach of data security could cause serious damage to NatWest Group’s ability to provide services to its customers, which could result in reputational damage, significant compensation costs or regulatory sanctions (including fines resulting from regulatory investigations) or a breach of applicable regulations and could affec t its regulatory approvals, competitive position, business and brands, which could undermine its ability to attract and retain customers. This risk is heightened as most of NatWest Group’s employees continue to work remotely, as it outsources certain functions and as it continues to innovate and offer new digital solutions to its customers as a result of the trend towards online and mobile banking. In 2021, NatWest Group continued to make considerable investments to further simplify, upgrade and imp rove its IT and technology capabilities (including migration of certain services to cloud platforms). NatWest Group also continues to develop and enhance digital services for its customers and see ks to improve its competitive position through enhancing controls and procedures and strengthening the resilience of se rvices including cyber security. Any failure of these investment and rationalisation initiatives to achieve the expected results, due to cost challenges or otherwise, could negatively affec t NatWest Group’s operations, its reputation and ability to retain or grow its customer business or adverse ly impact its competitive position, thereby negatively impacting NatWest Group. Remote working may adversely affect NatWest Group’s ability to maintain effective internal controls. From March 2020 to September 2021, many of NatWest Group’s employ ees worked exclusively on a remot e basis. Following the lifting of government restrictions, NatWest Group will implement a new hybrid working policy whereby many employees may work remotely the majority of the time in the ordinary course of their roles. Remote working arrangements for NatWest Group employees continues to place heavy reliance on the IT sy stems that enable remote working and increased exposure to fraud, conduct, operational and other risks and may place additional pressure on NatWest Group’s ability to maintain effective internal controls and governance frameworks. Remote 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 cause d to customers; and ensure no increased risk of financial crime. See also, ‘ A failure in NatWest Group’s risk management framework could adversely affect NatWest Group, including its abili ty to achieve its strategic objectives .’ Moreover, the IT systems that enable remote working interface with third- party systems, and NatWest Gr oup could experience service denials or di sruptions if such systems exceed capacity or if 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. See also, ‘ NatWest Group’s operations are highly dependent on its complex IT systems (including those that enable remote working) and any IT failure could adversely affect NatWest Group ’. Sustained periods of remote working may negatively affect workforce morale. Whilst NatWest Group has taken measures seeking to maintain t he health, wellbeing and safety of its employe es, these measures may be ineffective. Any Risk factors c ontinued NatWest Group A nnual Repor t and Accou nts 2021 423 Financial statements Strategic report Governance Risk and capital management Additional information Financial review of the above could impair NatWest Group’s ability to hire, retain and engage well-qualified employees, espec ially at a senior level, which in turn may adversely impact NatWest Group’s ability to serve its customers efficiently and impact productivity across NatWest Group. This could also adversely affect NatWest Group’s reputation and compet itive position and its ability to grow its business. NatWest Group relies on attracting, retaining and developing diverse se nior management and skilled personnel, and is required to maintain good employee relations. NatWest Group’s success depends on its ability to attract, retain through creating an inclusive environment, and de velop highly skilled and qualified diverse personnel, including senior management, directors and key employees especially for technology and data focused roles, in a highly competitive market and under internal cost reduction pressure s. NatWest Group’s ability to do this may be more difficult due to the cost reduction pressures, 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 in receipt of government support such as NatWest Group). This increases the cost of hiring, training and retaining diverse skilled personnel. In addition, certain economic, market and regulatory conditio ns and political developments may red uce the pool of diverse candidates for ke y management and non-executive roles, including non-executive directors with the right skills, knowledge and experience, or increase the number of departures of existing employe es. Moreover, a failure to foster a diverse and inclusive workforce may have an adverse impact on NatWest Group’s employee engagement and the formulation and execution of its s trategy, and could also have a negative e ffect on its reputation with customers, investors and regulators. The inability to compensate employe es competitively and/or any reduc tion of compensation, as a result of negative economic developments or otherwise, could have an adverse effe ct on NatWest Group’s ability to hire, retain and engage well qualified employees, es pecially at a senior level, which may have a negative impact on the financial position and prospects of NatWest Group. Many of NatWest Group’s employee s 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 NatWest Group in maintaining good employee relations. Any failure to do so could impact NatWest Group’s ability to operate its business effectively. A failure in NatWest Group’s risk management framework could adversely affect NatWest Group, including its ability to achieve its strategic objectiv es. Risk management is an integral part of all of NatWest Group’s activities and includes the definition and monitoring of NatWest Group’s risk appetite and reporting on NatWest Group’s ris k exposure and the potential impact thereof on NatWest Group’s financial condition. Financial risk management is highly dependent on the use and effectiveness of internal stress te sts and models. In addition, financial crime risk management is dependent on the use and effectiveness of financial crime assessment, systems and contr ols. Weak or ineffective financial crime proce sses and controls may risk NatWest Group inadvertently facilitating financial crime which may result in regulatory investigation, sanction, litigation and reputational damage. Financial crime continues to evolve, whether through fraud, scams, cyber-attacks or other criminal activity. NatWest 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. Ineffective risk management may arise from a wide variety of factors, including lack of transparency or incomplete risk reporting, unidentified conflicts or misaligned incentives, lack of accountability control and governance, incomplete risk monitoring and management or insufficient cha llenges or assurance processes. Failure to manage risks effectively could adversely impact NatWest Group’s reputation or its relationship with its regulators, customers, shareholders or other stakeholders. NatWest 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 NatWest Group’s regulatory obligations, customers’ needs or do not refle ct NatWest Group’s customer-foc used 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, th e possibility of mis-selling of financial products and mishandling of customer complaints. Some of these risks have materialised in the past and ineffe ctive management and oversight of conduct risks may lead to further remediation and regulatory intervention or enforcement. NatWest Group’s businesses ar e also exposed to risks from employee misconduct including non-compliance with policies and regulations, ne gligence or fraud (including financial crimes and fraud), any of which could resul t in regulatory fines or sanctions and se rious reputational or financial harm t o NatWest Group. These risks may be exacerbated as most of NatWest Group’s employees continue to work remotely, which places additional pressure on NatWest Group’s ability to maintain effective internal controls and governance frameworks. NatWest Group has been seeking to embed a strong risk culture across the organisation and has implemented policies and allocated new resou rces across all levels of the organisation to manage and mitigate conduct risk and expects to continue to invest in its risk management framework. However, such efforts may not insulate NatWest Group from future instances of misconduct and no assurance can be given that NatWest Group’s strategy and control fr amework will be effective. Any failure in NatWest Group’s risk management framework could negatively affect NatWest Group and its financial condition through reputational and financial harm and may result in the inability to achieve its strategic objectives for its customers, employees and wider stakeholders. NatWest Group’s operations are subje ct to inherent reputational risk. Reputational risk relates to stakeholder and public perceptions of NatW est Group arising from an actual or perceived failure to meet stakeholder expec tations, including with respect to NatWes t Group’s purpose-led strategy and related targets, due to any events, behaviour, action or inaction by NatWest Group, its employees or those with whom NatWest Group is associated. See also ‘ NatWest Group’s businesses are subject to substantial regulation and oversig ht, which are constantly evolving and may adversely affect NatWest Group ’. This includes brand damage, which may be detrimental to NatWest Group’s business, Risk factors c ontinued NatWest Group A nnual Repor t and Accou nts 2021 424 Financial statements Strategic report Governance Risk and capital management Additional information Financial review including its ability to build or s ustain business relationships with customers, and may cause low employee morale, regulatory censure or reduced acces s to, or an increase in the cost of, funding. Reputational risk may arise whenever there is a material lapse in standards of integrity, compliance, customer or operating efficiency and may adversely affect NatWest Group’s ability to attract and retain customers. In partic ular, NatWest Group’s ability to attract and retain customers (particularly, corporate and retail depositors) may be adversely affected by, amongst others: negative public opinion resulting from the actual or perceived manner in which NatWest Group conducts or modifies its business activities and operations, media coverage (whether accurate or otherwise), employee misconduct, NatWest Group’s financial performance, IT systems failures or cyberattack s, 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 f actors. Modern technologies, in particul ar online social networks and other broadcast tools that facilitate communication with large audiences in short timeframes and with minimal costs, may also significan tly increase and accelerate the impact of damaging information and allegations. Although NatWest Group has implemented a Reputational Risk Policy to improve the identification, assess ment and management of customers, transactions, products and issu es, which represent a reputational risk, N atWest Group cannot be certain that it will be successful in avoiding damage to its business from reputational risk. Legal, regulatory and conduct risk NatWest Group’s businesses ar e subject to substantial regulation and ove rsight, which are constantly evolving and may adversely affect NatWest Group. NatWest Group is subject to exte nsive laws, regulations, corporate governance practice and disclosure requirements, administrative actions and policies in each jurisdiction in which it operates. Many of these have been introduced or amended recently and are subject to further material changes, which may increase compliance and conduct risks, particularly if EU/EEA and UK laws diverge as a result of Brexit. N atWest Group expects government an d regulatory intervention in the financial services industry to remain high for the foreseeable future. In recent years, regulators and governments have focused on reforming the prudential regulation of the financial services industry and the mann er in which the business of financial services is conducted. Amongst others, me asures have included: enhanced capital, liquidity and funding requirements, implementation of the UK ring-fencing regime, implementation and strengthening of the recovery a nd resolution framework applicable to financial institutions in the UK, the EU and the US, financial industry reforms (including in respect of MiFID II), corporate governance require ments, restrictions on the compensation of senior management and other employees, enhanced data prot ection and IT resilience requirements, financial market infrastructure reforms (including enhanced data protection and IT resilience requirements, enhance d regulations in respect of the provision of ‘investment services and activitie s’), and increased regulatory focus in certain areas, including conduct, consumer protection, competition, disputes regimes, payment systems, financial crime and fraud laws and regulations. Other areas in which, and examples of where, governmental policies, r egulatory and accounting changes, and increased public and regulatory scrutiny could have an adverse impact (some of which could be material) on NatWest Group include, but are not limited to, t he following:  general changes in governmen t, central bank, regulatory or competition policy, or changes in regulatory regimes that may influence investor decisions in the jurisdictions in which NatWest Group operates;  rules relating to foreign ownership, expropriation, nationalisation and confiscation of assets;  increased scrutiny from the CMA , FCA and Payment Systems Regulator (‘PSR’) for the protection and resilience of, and competition and innovation in, UK payment syste ms and retail banking developments relating to the UK initiative on O pen Banking, Open Finance and the European directive on payment services;  the ongoing compliance by NatWes t Group with CMA’s Retail Banking Market Order 2017 (the ‘Order’ ) as well as the ongoing consultation by the UK Government to introduce penalties for breaches of the Order (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 Maste rcard card schemes;  new or increased regulations re lating to customer data protection as well as IT controls and resilience, including the UK Data Protection Framework and the impact of the Court of Justice of the EU (CJEU) decision (known as Schrems II), in which the CJEU ruled that the Privacy Shield (an EU/US data transfer mechanism) is now invalid, leading to more onerous due diligence requirements for the Group prior to sending personal data of its EU customers and employees t o non- EEA countries, including the UK and the US;  the introduction of, and change s to, taxes, levies or fees applicable to NatWest Group’s operations, such as the imposition of a financial transaction tax, introduction of global minimum tax rules, 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 t ax;  increased regulatory focus on customer protection (such as the FCA’s consumer duty consultation paper (CP21/13)) in retail or other financial markets;  the potential introduction by the Bank of England of a Central Bank Digital Currency which could re sult in deposit outflows, higher funding costs, and/or other implications f or UK banks including NatWest Group; and  regulatory enforcement in the form of PRA imposed financial penal ties for failings in banks’ regulatory reporting governance and cont rols, and regulatory scrutiny following the 2019 PRA “Dear CEO letter” letter regarding PRA’s ongoing focus on: the integrity of regulatory reporting, which the PRA considers has equal standing with financial reportin g; the PRA’s thematic reviews of the governance, controls and proce sses for preparing regulatory returns of selected UK banks, including N atWest Group; the publication of the PRA’s common findings from those revie ws in September 2021; and NatWe st Group’s programme of improvements to meet PRA expectations. These and other recent regulatory changes, proposed or future developments and heightened leve ls 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 Risk factors c ontinued NatWest Group A nnual Repor t and Accou nts 2021 425 Financial statements Strategic report Governance Risk and capital management Additional information Financial review landscape, changes in other regulatory requirements and increased op erating costs, and have impacted, and will continue to impact, competitive position, product offerings and business models. Future competition investigations, ma rket reviews, or the regulation of me rgers may lead to the imposition of financial penalties or market remedies that may adversely impact NatWest Group’s competitive or financial position. Any of these developments (including any failure to comply with new rules and regulations) could also have a significant impact on NatWest Group’s authorisations and licences, the products and services that NatWest Grou p may offer, its reputation and the val ue of its assets, NatWest Group’s operations or legal entity structure, and the manner in which NatWest Group conducts its business. Material consequences c ould arise should NatWest Group be found to be non-compliant with these regulatory requirements. Regulatory developmen ts may also result in an increased number of regulatory investigations and proceedings and have increased the risks relating to NatWest Group’s ability to comply with the applicable body of rules and regulations in the manner and within the time frames 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 NatWest Group to comply with s uch laws, rules and regulations, may adversely affect NatWest 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 aff ect NatWest Group’s ability to engage in effective business, risk and capital management planning. NatWest Group is exposed to the risks of various litigation matters, regulatory an d governmental actions and inves tigations as well as remedial undertakings, including conduct-related reviews, anti- money laundering and redress projects, the outcomes of which are inhe rently difficult to predict, and which c ould have an adverse effect on NatWest Group. NatWest Group’s operations are diverse and complex and it operates in le gal and regulatory environments that expose it to potentially significant legal proce edings, and civil and criminal regulatory and governmental actions. NatWest Group has resolved a number of legal and regulatory actions over the pas t several years but continues to be, and may in the future be, involved in such actions in the US, the UK, Europe and oth er jurisdictions. NatWest Group is currently, has recently been and 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, relating to, among othe r matters, 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 compliance issues. Legal and regulatory actions are subject to many uncertainties, and their outcom es, including the timing, amount of fines, damages or settlements or the form of any settlements, which may be ma terial and in excess of any related provisions, are often difficult to predict, particularly in the early stages of a case or investigation. NatWest Group’s expectation for resolution may change and substantial additional provisions and costs may be recognised in respect of any matter. The resolution of significant investigations include: (a) NWM Plc’s December 2021 spoofing-relate d guilty plea in the United States, which involves a three-year period of probation, an independent corporate monitor, and commitments to compliance programme reviews and improvements and reporting obligations, as well as approximately US$35 million in fines and restitution, and (b) National Westminster B ank Plc’s October 2021 guilty plea for bre aches of the UK Money Laundering Regulations 2007, which resulted in a fine o f approximately £265 million. For additional information relating to these and other legal and regulatory proceedings and matters to which NatWest Group is currently expose d, see ‘ Litigation and regulatory matters ’ at Note 27 to the consolidated ac counts. The recent guilty pleas, other r ecently resolved matters or adverse outcomes or resolution of current or future legal or regulatory actions could increase the risk of greater regulatory and third party scrutiny and could have material collateral consequences for NatWest Group’s business and result in restrictions or limitations on NatWest Group’s operations. These may include the effective or actual disqualification from carrying on certain regulated activities and conseq uences resulting from the need to reapply f or various important licences or obtain waivers to conduct certain existing activities of NatWest Group, particularly but not solely in the US, which may take a significant period of time and the results of which are uncertain. Disqualification from carrying on any activities, whether automatically as a result of the resolution of a particular matter or as a result of the fail ure to obtain such licences or waivers could adversely impact NatWest Group’s business, in particular in the US. This in turn and/or any fines, settlement payments or penalties could ad versely impact NatWest Group’s reporte d financial results and condition, c apital position or reputation. Failure to comply with undertakings made by NatWest Group to its regulators, or the conditions of probation resulting from the spoofing-related guilty plea, may result in additional me asures or penalties being taken against NatWest Group. In addition, any failure to administer conduct redress process es adequately, or to handle individual complaints fairly or appropriately, could result in further claims as well as the imposition of additional measure s or limitations on NatWest Group’s operations, additional supervision by NatWest Group’s regulators, and loss of investor confidence. NatWest Group may not effectively manage the transition of LIBOR and other IBOR rates to alternative risk-free rates. UK and international regulators are driving the transition from the us e of interbank offer rates (‘IBORs’), including LIBOR, to alternative rates, pri marily risk free rates (‘RFRs’). As of 31 December 2021, LIBOR, as currently determined, has ceased for all tenors of GBP, JPY, CHF, EUR, and for the 1 week and 2 month tenors for USD. The remaining USD LIBOR tenors, as currently determined, are due to cease after 30 June 2023. The FCA has use d its powers under the UK Benchmarks Reg ulation (‘UK BMR’) to require, for a limited period of time after 31 Decembe r 2021, the ongoing publication of the 1 , 3, and 6 month GBP and JPY LIBOR tenors using a changed methodology (i.e., ‘Art23A LIBOR’ on a synthetic basis). The UK has passed the Critical Benchmarks (References and Administrators ’ Liability) Act 2021 (‘Critical Benchmarks Act’) which establishes a framework that allows the ongoing use of Art23A LIBO R under certain circumstances w here contracts have pro-actively transitioned onto alternative rates. However, the FCA Risk factors c ontinued NatWest Group A nnual Repor t and Accou nts 2021 426 Financial statements Strategic report Governance Risk and capital management Additional information Financial review has been clear that the solutions provided under UK BMR and the Critical Benchmarks Act are not permanent and cannot be guaranteed after the e nd of 2022 (and for JPY the FCA has confirmed that Art23A LIBOR will no longer be available after the end of 2022). This framework and its lack of permanence may expose NatWest Group, its customers and the financial services industry more widely to various risks, including: (i) the FCA further restricting use of Art23A LIBOR resulting in proactive transition of contracts; and (ii) mis-matches between positions in cleared derivatives and the exposures they are hedging where those e xposures are permitted to make use of Art23A LIBOR, as the FCA has chosen not to permit the use of Art23A LIBOR for cleared derivatives. Although the f ormal cessation date for the remaining USD LIBOR tenors (as currently determined) is not until the end of June 2023, US and UK regulators have been clear that this is only to support the rundown of back book USD LIBOR exposures, and that no new contracts should reference these USD LIBOR tenors after 31 December 2021, other than in a very limited range of circumstances. Natwest Group will continue to have ongoing expos ure to the remaining USD LIBOR tenors until they cease at the end of June 20 23. Natwest Group had significant exposures to IBORs and has actively sought to transition away from these during 202 1 in accordance with regulatory expectations and milestones. Transition measures have included the pro-active development of new products on using alternative rates, primarily but not exclusively RFRs rather than LIBOR, pro- actively restructuring existing L IBOR exposures so that they cease to reference LIBOR and instead ref erence alternative rates, and embedding language into contracts that allows for the automatic conversion to alternative rates when LIBOR ceases to be available. The main Central Counterparty Clearing houses (CCPs) conducted mass conversion exercises in December 2021 covering GBP, JPY, CHF and EUR LIBO R cleared derivatives to fully trans ition all outstanding LIBOR exposure to the relevant RFR. Natwest Group entities, along with many of their major counterparties, have already a dhered to the ISDA IBOR fall-backs supplement and protocol which establishes a cle ar, industry accepted, contractual process to manage the transition from IBORs to RFRs for non-cleared derivative products. These transition efforts have involved extensive engagement with cus tomers, industry working groups and regulators to seek to deliver transition in a transparent and economically appropriate manner. Any economic impacts will be dependent on, amongst other things, the establishment of deep and liquid RFR markets, the establishment of clear and consistent market conventions for all replacement products, as well as counterparties’ willingness to accept, and transition to, these conventions. Furthermore, ce rtain IBOR obligations may not be able to be pro-actively changed which co uld, depending on any over-arching legislative transition frameworks , potentially result in fundamentally different economic outcomes than originally intended. The uncert ainties around the manner of transition to R FRs, and the ongoing broader acceptance and use of RFRs across the market, expose NatWest Group, its clie nts and the financial services industry more widely to risks. Examples of these risks may include (i) legal (including litigation) risks relating to documentation for new and the majority of existing transactions (including, bu t not limited to, changes, lack of changes, unclear contractual provisions, and disputes in respect of these); (ii) financial risks from any changes in valuation of financial instruments linked to impacted IBORs that may impact NatWest Group’s performance, including its cost of funds, and its risk management related financial models; (iii) pricing, inte rest rate or settlement risks such as changes to benchmark rates that could impact pricing, interest rate or settleme nt mechanisms in or on certain instruments; (iv) operational risks due to the requirement to adapt IT systems, trade reporting infrastructure and operational processes, as well as ensuring compliance with restrictions on new USD LIBOR usage after December 2 021; (v) conduct and litigation risks arising fro m communication regarding the p otential impact on customers, and engage ment with customers during and afte r the transition period, or non-acceptance by customers of replacement rate s; and (vi) different legislative provisions in different jurisdictions, for example, unlike certain US states and the EU, the UK has not provided a clear and robust safe harbour to protect against litigation and poten tial liability arising out of the switch to ‘synthetic LIBOR’. Notwithstanding all efforts to date, un til the transition away from LIBOR onto alternative rates has been fully completed and there is greater experience of how RFRs are adopted across different products and c ustomer groups, it remains difficult to de termine to what extent the changes will affect NatWest Group, or the costs of implementing any relevant remedial action. Uncertainty as to the nature and extent of such potential changes, the take up of alternative reference rates, or other reforms may adversely af fect financial instruments originally referencing LIBOR as the benchmark. The implementation of any alternative RFRs may be impossible or impracticable under the existing terms of cert ain financial instruments and could have an adverse effect on the value of, return on, and trading market for, certain f inancial instruments and on NatWest Group’s profitability. Changes in tax legislation or failure to generate future taxable profits may impact the recoverability of certain deferred tax assets recognised by NatWest Group. In accordance with the accounting policies set out in ‘Critical accounting policies and key sources of estimat ion uncertainty ’, NatWest 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 def erred 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 change s 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 £899 million as at 31 December 2021. Changes to the treatment of certain deferred tax assets may impact NatWest Group’s capital position. In addition, NatWest 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 diff er materially from the amounts pr ovided depending on the ultimate resol ution of such matters. Material con tracts NatWest Group A nnual Repor t and Accou nts 2021 427 Financial statements Strategic report Governance Risk and capital management Additional information Financial review The company and its subsidiaries are party to various contracts in the ordinary course of business. Material contracts include the following: B Share Acquisition and Contingent Capital Agreement On 26 November 2009, the company and HM Treasury entered into the Acquisition and Contingent Ca pital Agreement pursuant to which HM Treasury subscribed for the init ial B shares and the Dividend Acces s Share (the Acquisitions) and agreed the terms of HM Treasury's contingent subscription (the Contingent Subscription) for an additional £8 billion in aggregate in the form of further B shares (the Contingent B shares), to be issued on the same terms as the initial B shares. The Acquisitions were subject to the satisfaction of various conditions, including the company having obtained the approval of its shareholders in relation to the Acquisitions. On 16 December 2013, the company announced that, having received approval from the PRA, it had terminated the £8 billion Contingent Subscription. The company was able to cance l the Contingent Subscription as a re sult of the actions announced in the sec ond half of 2013 to further strengthen its capital position. On 9 October 2015, the company announced that on 8 October 2015 , it had received a valid conversion notice from HM Treasury in respect of all outstanding B shares held by HM Treasury. The new ordinary shares issued on conversion of the B shares were admitted to the official list of the UK Listing Authority (UKLA), an d to trading on the London Stock Exchange plc, on 14 October 2015. Following such conversion, HM Treasury no lo nger holds any B shares. The company gave certain representations and warranties to HM Treasury on the date of the Acquisition and Contingent Capital Agreement, on the date the circular was posted to shareholders, on the first date on which all of the conditions precedent were satisfied, or waived, and on the date of the Acquisitions. The company also agreed to a number of undertakings. The company agreed to reimbu rse HM Treasury for its expenses incurred in connection with the Acquisitions. For as long as it is a substantial shareholder of the company (within the meaning of the UKLA’s Listing Rules), HM Treasury has undertaken not to vote on related party transaction resolutions at general meetings and to direct that i ts affiliates do not so vote. Directed Buyback Contract On 7 February 2019, the comp any and HM Treasury entered into the Directed Buyback Contract to help facilitate the return of the company to full private ownership through the use of any exces s capital to buy back the company ’s ordinary shares held by HM Treasury. Under the terms of the Directe d Buyback Contract, the company may agree with HM Treasury to make off-market purchases from time to time of its ordinary shares held by HM Treasury, including by way of one or more standalone purchases, through a non- discretionary, broker-managed directed trading programme, or in conju nction with any offer or sale by HM Tre asury by way of an institutional placing. Neither the company nor HM Treasury would be under an obligation to agree to make such off-market purchases and would only do so subject to regulatory approval at the time. The aggregate number of ordinary shares which the company may purchase from HM Treasury under the Directed Buyback Contract will not exceed 4.99%. of the company’s iss ued share capital and the aggregate consideration to be paid will not exceed 4.99%. of the company’s market capitalisation. The price to be p aid for each ordinary share will be the ma rket price at the time of purchase or, if the directed buyback is in conjunction with an institutional placing, the placing price. Framework and State Aid Deed As a result of the State Aid granted to the company, it was required to work with HM Treasury to submit a State Aid restructuring plan to the Europe an Commission (EC), which was the n approved by the EC under the State Aid rules on 14 December 2009. T he company agreed a series of me asures which supplemented the measures in the company’s strategic plan. The company entered into a St ate Aid Commitment Deed with HM Treasury at the time of the initial EC decision and, following the EC’s approval of amendments to the restructuring plan in April 2014, the company entered into a revised State Aid Commitment Deed with HM Treasury. In September 20 17, the revised State Aid Commitment Deed was amended by a Deed of Variation (as so amended, the “Revised State Ai d Commitment Deed”) following the EC’s approval of an alternative remedies package (the “Alternative Remedies Package”) to replace the comp any’s final outstanding commitment under its State Aid obligations (to divest the busine ss previously known as Williams & Glyn). On 25 April 2018, the Revised State Aid Commitment Deed was replaced by the Framework and State Aid Deed between the company, HM Treasury and an independent body established to facilitate and oversee the delive ry of the Alternative Remedies Package (the “Independent Body”). Under th e Framework and State Aid Deed, the company agrees to do all acts and things necessary to ensure that HM Treasury is able to comply with its obligatio ns under any EC decision approving State A id to the company, including under the Alternative Remedies Package. Pursuant to the Framework and State Aid Deed, the company has committed: (i) £425 million into a fund for eligible bodies in the UK banking and financial technology sectors to develop and improve their capability to compete with the company in the provision of bankin g services to small and medium-sized enterprises (“SMEs”) and devel op and improve the financial products and services available to SMEs (the “Capability and Innovation Fund”); and (ii) £275 million to eligible bodies to help them incentivise SME banking customers within the division of the company previously known as Williams & Glyn to switch their business current accounts and loans to the eligible bodies (the “Incentivised Switching Scheme” ). The company has also agreed to set aside up to a further £75 million in funding to cover certain costs customers may incu r as a result of switching under t he Incentivised Switching Scheme. In addition, under the terms of the Alternative Remedies Package, s hould the uptake within the Incentivise d Switching Scheme not be sufficie nt, the company may be required to make a further contribution, capped at £50 million. The Independent Body will distribute funds from the Capability and Innovation Fund and implement the Incentivised Switching Scheme. Under the Framework and State Aid Deed, the company also agreed to indemnify the Independent Body and HM Treasury, up to an amount of £320 million collectively to cover liabi lities that may be incurred in implementi ng the Alternative Remedies Package. The provisions of the indemnity to the Independent Body are set out in the Framework and State Aid Deed and the provisions of the indemnity to HM Treasury are set out in a separate agreement between the company and HM Treasury, described under “ Deed of Indemnity ” below. Material contract s continue d NatWest Group A nnual Repor t and Accou nts 2021 428 Financial statements Strategic report Governance Risk and capital management Additional information Financial review The Framework and State Aid Dee d also provides that if the EC adopts a decision that the UK Government must rec over any State Aid (a "Repayment De cision") and the recovery order of the Repayment Decision has not bee n annulled or suspended by the General Court or the European Court of Jus tice, then the company must repay HM Treasury any aid ordered to be recovered under the Repayme nt Decision. Deed of Indemnity In the context of the Framework and State Aid Deed, the company entered into a Deed of Indemnity with HM Treasury on 25 April 2018, purs uant to which the company agreed to indemnify HM Treasury to cover liabilities that may be incurred in implementing the Alternative Remedies Package, as described under “Framework and State Aid Deed” above . Trust Deed In the context of the Framework and State Aid Deed, the company entered into a Trust Deed with the Independent Body on 25 April 2018, to set up a trust to administer the funds commit ted by the company under the Framework and State Aid Deed for the Alternative Remedies Package. State Aid Costs Reimbursement Deed Under the 2009 State Aid Costs Reimbursement Deed, the company has agreed to reimburse HM Treasury for fees, costs and expenses associated with the State Aid and State Aid approval. HMT and UKFI Relationship Deed On 7 November 2014, in order to comply with an amendment to the UK Listing Rules, the company entered into a Relationship Deed with HM Treasury and UK Financial Investments Limited in relation to the company’s obligations under the UK Listing Rules to pu t in place an agreement with any controlling shareholder (as defined for these purposes in the Listing Rules). T he Relationship Deed covers the three independence provisions mandated by the Listing Rules: (i) that contracts between the company and HM Treasury (or any of its subsidiaries) will be arm's length and normal commercial arrangements, (ii) that neither HM Treasury nor any of its associate s will take any action that would have the effect of preventing the company from complying with its obligations under the Listing Rules; and (iii) neither HM Treasury nor any of its associate s will propose or procure the propos al of a shareholder resolution which is intended or appears to be intended to circumvent the proper application of the Listing Rules. Memorandum of Understanding Relating to The Royal Bank of Scotland Group Pension Fund On 16 April 2018 the company entered into a Memorandum of Understanding (the ”MoU”) with the trustee of T he Royal Bank of Scotland Group Pensi on Fund (the ”Group Fund”), which aimed to facilitate both the necessary changes to the Main Section of the Group Fund to align the employing entity structure with the requirements of the UK ring-f encing legislation and acceleration of the settlement framework for the 3 1 December 2017 triennial valuation of the Main Section of the Group Fund (b rought forward from 31 December 2018 ). In addition, the MoU also provided clarity on the additional related funding contributions required to be made by the company to the Main Section of the Group Fund as follows: (i) a pre-tax payment of £2 billion that was made in the second half of 2018 and (ii) from 1 January 2020, further pre-tax contributions of up to £1.5 billio n in aggregate linked to the making of future distributions to RBS shareholders including ordinary and special dividends and/or share buy backs (subject to an annual cap on contributions of £50 0 million before tax). On 28 September 2018, the implementation of the MoU was documented through a Framework Agreement entered into between the company and the trustee of the Group Fund . NatWest Group A nnual Repor t and Accou nts 2021 429 Additional information 429 Additional information 430 Financial calendar 430 Shareholder enquiries 431 Analysis of ordinary shareholders 431 Important addresses 432 Principal offices 433 Forward-looking statements 434 Presentation of information Shareholder information NatWest Group A nnual Repor t and Accou nts 2021 430 Financial statements Strategic report Governance Risk and capital management Additional information Financ ial review Financial calendar Dividends Payment dates Cumulative preference shares 31 May and 30 December 2022 Non-cumulative preference shares 31 March, 30 June, 30 September and 30 December 2022 Ordinary shares (2021 final) 4 May 2022 Ex - dividend date Cumulative preference shares 5 May and 1 December 2022 Ordinary shares (2021 final) 17 March 2022 Record date Cumulative preference shares 6 May and 2 December 2022 Ordinary shares (2021 final) 18 March 2022 Annual General Meeting 28 April 2022 Interim results 29 July 2022 Shareholder enquiries You can check your shareholdings in the company by visiting the Shareholder Hub section of our website at natwestgroup.com and clicking the ‘Access y our shareholding online’ tab. You will need the shareholder reference number printed on your share certificate or dividend confi rmation statement to access this information. You c an also view any outstanding payments, update bank account and address details and download various forms. NatWest Group is committed to reducing its im pact on the environment. You can choose to receive your shareholder communications electronically via the ‘Sign u p for e-comms’ tab and you will receive an email notificatio n when documents become available to view on our website. You can also check your share holding by contacting our Registrar: Braille and audio Strategic report with addition al information Shareholders requiring a Braille or audio ve rsion of the Strategic report with additional information should contact the Registrar on +44 (0)370 70 2 0135. ShareGift The company is aware that shareholde rs who hold a small number of shares may be retaining the se shares because dealing costs make it uneconomical to dispose of them. ShareGift is a free charity share donation ser vice operated by The Orr Mackintosh Foundation (regis tered charity 1052686 ) to enable shareholders to donate s hares to charity. If you are a UK taxpayer, donating your shares in this way will not give rise to either a gain or a loss f or UK capital gains tax purposes. You may be able to claim UK inco me tax relief on gifted shares and can do so in various ways. Furthe r information can be obtained from HM Revenue & Customs. Should you wish to donate your shares to ch arity please contact ShareGift for further information: Share and bond scams Scammers will request money upfron t, as a bond or other form of security, but victims are ofte n left out of pocket, sometimes losing their savings or even their family home. Even seasoned investors have been caught out by scams. Clone firms A ‘clone firm’ uses the name, firm registration numbe r (FRN) and address of a firm or individual who is FCA authorised. The scammer may claim that the genuine firm's cont act details on the FCA Register (Register) are out of date and t hen use their own details, or copy the website of an autho rised firm, making subtle changes such as the phone numbe r. They may claim to be an overseas firm, which won’t always h ave full contact and website details listed on the Register. Share and bond scams are ofte n run from ‘boiler rooms’ where fraudsters cold-call investors, offe ring them worthless, overpriced or even non-existent shares or bonds. They use increasingly sophisticated tactic s to approach investors, offering to buy or sell shares, often pressuring inves tors to make a quick decision or miss out on the deal. Co ntact can also be in the form of email, post or word of mou th. Scams are sometimes advertised in newspapers, magazines or online as genuine investment opportunities and may offer free gifts or discounts on dealing charges. ShareGift, The Orr Mackintosh Foundation, 4th Floor Rear, 67/68 Jermyn Street, London SW1Y 6NY, Telephone: +44 (0)20 7930 3737, Website: shar egift.org Computershare Investor Servic es PLC The Pavilions Bridgwater Road Bristol BS99 6ZZ Telephone: +44 (0)370 702 0135 Fax: +44 (0)370 703 600 9 Website: www-uk.computershare.com/investor/cont actus Shareholder inf ormation contin ued NatWest Group A nnual Repor t and Accou nts 2021 431 Financial statements Strategic report Governance Risk and capital management Additional information Financial review How to protect yourself Always be wary if you’re contacted out of the blue, p ressured to invest quickly, or promised r eturns that sound too good to be true. FCA authorised firms are unlike ly to contact you unexpectedly with an offer to buy or sell shares or bonds. It is strongly advised that you se ek independent professional advice before making any inves tment. Report a scam If you suspect that you have been approached by fr audsters, or have any concerns about a potential scam, report this to the FCA by contacting their Consumer Helpline on 080 0 111 6768 or by using their reporting form which can be found on their website. If you have already invested in a scam, fraudsters are likely to target you again or sell your details to othe r criminals. The follow-up scam may be completely separate, or may be related to the previous scam in the for m of an offer to get your money back or buy back the investment on payment of a fee . Analysis of ordinary shareholders At 31 December 202 1 Shareholdings Number % of shares - millions Individuals 172,365 96,720,657 0.84 Banks and nominee companies 3,749 5,347,209,748 46.63 Investment trusts 40 335,083 — Insurance companies 3 487,631 — Other companies 433 26,797,269 0.24 Pension trusts 20 33,956 — Other corporate bodies 68 5,996,398,291 52.29 176,678 11,467,982,635 100.00 Range of shareholdings: 1 - 1,000 152,553 36,685,708 0.32 1,001 - 10,000 22,253 51,255,478 0.45 10,001 - 100,000 993 30,052,411 0.26 100,001 - 1,000,000 520 185,638,204 1.62 1,000,001 - 10,000 ,000 272 923,070,585 8.05 10,000,001 and over 87 10,241,280,249 89.30 176,678 11,467,982,635 100.00 Important addresses Shareholder enquiries Registrar Computershare Investor Servic es PLC The Pavilions Bridgwater Road Bristol BS99 6ZZ Telephone: +44 (0)370 702 0135 Facsimile: +44 (0)370 703 6 009 Website: www-uk.computershare.com/investor/cont actus ADR Depositary Bank BNY Mellon Shareowner Services PO Box 505000 Louisville, KY 40233 -5000 Direct Mailing for overnight packages: BNY Mellon Shareowner Services 462 South 4th Street Suite 1600 Louisville KY 40202 Corporate, Governance NatWest Group plc PO Box 1000, Gogarburn Edinburgh, EH12 1HQ Telephone: 0131 5 56 8555 Investor Relations 250 Bishopsgate, London EC2M 4AA, England Registered office 36 St Andrew Square Edinburgh, EH2 2YB Telephone: 0131 5 56 8555 Registered in Scotland No. SC4 5551 Website natwestgroup.com Telephone: +44 (0)131 556 8555 Email: investor.relations@ natwest.com Telephone: 1-888-26 9-2377 (US callers – toll free) Telephone: +1 201 6 80 6825 (International) Email: shrrelations@ cpushareownerservices.co m Website: mybnymdr.com Ask for their (FRN) and contact details and then contact them using the telephone number on the Register . Never use a link in an email or website from the firm offering you an investment. Please do not give any personal details to any c aller unless you are certain that they are genuine . Check the Register to ensure the firm contacting you is authorised and also c heck the FCA’s Warning List of firms to avoid at fc a.org.uk/scamsmart. Find out more at fca.org.uk/consumers Shareholder inf ormation contin ued NatWest Group A nnual Repor t and Accou nts 2021 432 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Principal offices NatWest Group plc PO Box 1000, Gogarburn Edinburgh, EH12 1HQ NatWest Markets Plc 250 Bishopsgate, London EC2M 4AA, England The Royal Bank of Scotland plc PO Box 1000, Gogarburn Edinburgh, EH12 1HQ 250 Bishopsgate, London EC2M 4AA, England National Westminster Bank Plc 250 Bishopsgate, London EC2M 4AA, England Ulster Bank Limited 11-16 Donegall Square East, Be lfast, Co Antrim, BT1 5UB, Northern Ireland Ulster Bank Ireland DAC Ulster Bank Head Office, Block B , Central Park, Leopardstown, Dublin 18, D18 N153 NatWest Markets Group Holdings Corp. 251, Little Falls Drive, Wilmington Delaware, 19808 Coutts & Company 440 Strand, London WC2R 0QS, England The Royal Bank of Scotland International Limited Royal Bank House, 71 Bath Stree t St Helier, JE4 8PJ Presentatio n of informati on NatWest Group A nnual Repor t and Accou nts 2021 433 Financial statements Strategic report Governance Risk and capital management Additional information Financial review In the Annual Report and Accounts, unless specified otherwise, ‘parent company’ refers to NatWest Grou p plc, and ‘NatWest Group’, ‘Group’ or ‘we’ refers t o NatWest Group plc and its subsidiaries. T he term ‘NWH Group’ refers to NatWest Holdings Limited (‘NWH’) and its subsidiary and associated undertakin gs. The term ‘NWM Group’ refers to NatWes t Markets Plc (‘NWM Plc’) and its subsidiary and associated undertakings. The te rm ‘NWM N.V.’ refers to NatWest Markets N.V. The term ‘NWMSI’ refers to NatWest Markets Securities, Inc. The term ‘RBS plc’ refe rs to The Royal Bank of Scotland plc. The ter m ‘NWB Plc’ refers to National Westminster Bank Plc. The term ‘UBIDAC’ refers to Ulster Bank Ireland DAC. The term ‘RBSI Limited’ refe rs to The Royal Bank of Scotland International Limited. ‘Go-fo rward group’ excludes Ulster Bank RoI and discontinued operations. NatWest Group publishes its financial s tatements in pounds sterling (‘£’ or ‘sterlin g’). The abbreviations ‘£m’ and ‘£bn’ rep resent millions and thousands of millions of pounds sterling (‘GBP’ ), respectively, and references to ‘p ence’ represent pence where amounts are denominated in pounds sterli ng. Reference to ‘dollars’ or ‘$’ are to United States of America (‘US’) dollars. The abbreviations ‘$m’ and ‘$bn’ re present millions and thousands of millions of doll ars, respectively. The abbreviation ‘€’ represents the ‘euro’, and the abbreviations ‘€m’ and ‘€bn’ represent millions and thousands of millions of euros, respectively. Forward loo king statem ents NatWest Group A nnual Repor t and Accou nts 2021 434 Financial statements Strategic report Governance Risk and capital management Additional information Financial review Cautionary statement regarding forward-looking statements Certain sections in this document contain ‘forward-lo oking statements’ as that term is defined i n the United Sta tes Private Securities Litigation Reform Act of 1995, such as st atements that in clude the words ‘expect’ , ‘estimate’, ‘proje ct’, ‘anticipate’, ‘commit’, ‘believe ’, ‘should’, ‘intend’, ‘ will’, ‘plan’, ‘could ’, ‘probability’, ‘risk’, ‘Value- at-Ri sk (VaR)’, ‘target’, ‘goal’ , ‘objective’, ‘may’, ‘e ndeavour’, ‘outlook ’, ‘optimistic’, ‘prosp ects’ and similar expressi ons or variations on these expres sions. In particular, this document includ es forward-looki ng targets and guid ance relating to financial perf ormance mea sures, such as inco me growth, operat ing expense, cost reducti o ns, RoTE, RO E, discretionary capital distribution t argets, impairment loss rates, bala nce sheet reduction, incl uding the reducti on of RWAs, CET1 rati o ( and key drivers of the CET1 ratio includ ing timing, impact and de tails), Pillar 2 and other regulatory buff er requirements and MREL and n on- financial performa nce measures, s uch as climate and ESG- related performa nce ambitions, targets and metrics, i ncluding in relatio n to initiatives to transiti on to a net zero econ omy, Climate and Susta inable Funding a nd Financing (CSFF ) and financed emissi ons. In addition, this document includes forward-looking s tatements relati ng, but not limited to: the COVID-19 pandemic and its imp act on NatWe st Group; planned cost reductio ns, disposal losses and strategic costs; imp lementatio n of NatWest Group’s pu rpose-led stra tegy and other stra tegic priorities (including in relation to: its phased withdra wal from ROI, the NW M Refocusing a nd investment program mes relating t o digital transformation of it s operations a nd services and inorga nic opportunities ); the timing a nd outcome of litig ation and governme nt and regulatory investig ations; direct a nd on-market buy- backs; funding plans and c redit risk profile; managing its cap ital position; liquidity ratio; portfolios; net interest margin an d drivers related the reto; lending and income gr owth, product share and growt h in target segments; impairments and write- downs, including wit h respect to go odwill; restructuring and remediation cos ts and charges; NatWes t Group’s exposure to politica l risk, economic as sumptions and risk, climat e, enviro nmental and sustainab ility risk, operatio nal risk, conduct risk, financial crime ris k, cyber, data and IT risk and credit rati ng risk and to vari ous types of market risk, including i nterest rate risk, forei gn exchange rate risk a nd commodi ty and equity price risk; customer experie n ce, including o ur Net Promotor Score (NPS); employee engagement and g ender balance in leadership posit ions. Limitations inherent to forward-looking statements These statements are based on c urrent plans, expecta tions, estimates , targets and projectio ns, and are subject to s ignificant inhere nt risks, uncertainties and other factors, b oth external and relat ing to NatW est Group’s strateg y or operations , which may result in NatWe st Group being unable to ac hieve the current pla ns, expectations, est imates, targets , projections and other anticipated outcome s expressed or implied by such f orward-looking s tatements. In addit ion, certain of these disc losures are depende nt on choices relyi ng on key model characteristics and ass umptions a nd are subject to various limi tations, includi ng assumptions and estimat es made by management. By their nature, certain of these disclosures are o nly estimates and, as a result, act ual future results, gai ns or losses could differ materiall y from those that have been estimated. Accordingly , undue reliance should not be placed on these statem ents. The forwa rd-looking statements contained in this do cument speak only as of the date we make them and we e xpressly disclaim a ny obligation or u ndertaking to upd ate or revise any forward-lo oking stateme nts contained herein, whether to reflect any change in o ur expectat ions with regard theret o, any change in events, conditions or ci rcumstances on whic h any such sta tement is based, or other wise, except to the extent legally requi red. Important factors that could affect the actual outcome of the forward-looking statements We caution you t hat a large numbe r of important factors c ould adversely affect our results or o ur ability to imple ment our strategy , cause us to fail to meet ou r targets, pre dictions, expectations a nd other a nticipated outcomes or affect the accuracy of forward-loo king statements des cribed in this docum ent. These factors i nclude, but are not limited to, those set fo rth in the risk factors a nd the other uncertainties des cribed in NatWes t Group plc’s Annual Rep ort on Form 20-F a nd its other filings with the US Securities a n d Exchang e Commission. The pri ncipal risks a nd uncertainties that c ould adverse ly NatWest Group’s future results, its financial condition and pr ospects and cause them to b e materially d ifferent from what is fo recast or expected, i nclude, but are not limited to: economic a nd political ris k (including in respect of: the impa ct of the COVID-19 pa ndemic on NatW est Group and its custom ers; political and ec onomic risks and uncertainty in the UK and global markets; uncertainty regarding the effects of Brexit; cha nges in interest rates and foreign curre ncy exchange rates; a nd HM Treasury ’s ownership of NatWe st Group plc); strate gic risk (including i n respect of the imp lementation of Na tWest Group’s purpose-led Strategy; refocusing of its NWM franc hise; and the effect of the COVID-19 p andem ic on NatWest Group’s stra tegic objectives and targets ); financial res ilience risk (including i n respect of: NatWes t Group’s abili ty to meet target s and to make discretio nary capital dis tributions; the competit ive environment; imp act of the COV ID-19 pandemic on the c redit quality of NatWes t Group’s counterparties; co unterparty and borrower risk; prudentia l regulatory requi rements for capi tal and MREL; the ad equacy of NatWes t Group’s resolutio n plans; liquidity and funding risks; cha nges in the credit ratings; the require ments of regulatory st ress tests; good will impairment; model ris k; sensitivit y to accounting policies, judgments , assumptions and estimate s; changes in app licable accounti ng standards; the value or effectivene ss of credit protectio n; and the appl ication of UK statutory stabi lisation or resolutio n powers); climate and sustainabilit y risk (including i n respect of: risks rel ating to clima te change and the tra nsitioning to a net zero economy; t he implementation of Na tWest Group ’s climate change strat egy and climat e change resilient syste ms, controls a nd procedures; climate -related data and model risk; the failure to ada pt to emerging climat e, environmental a nd sustainability ris ks and opportunities ; changes in ESG ratings; increasing levels of climate , environmental and sustai nability relat ed regulation and oversig h t; and climat e, environmental a nd sustainabilit y-related litigation, en forcement proceedings and investig ations); operational and IT resilience risk (i ncluding in respect of: operational risks (i ncluding reliance o n third party supplie rs); cyberattacks ; the accuracy and effect ive use of data ; complex IT syste ms (including those t hat enable remote working); attracting, reta ining and developi ng senior manag ement and skilled p ersonnel; NatWe st Group’s risk manag ement framework; a n d reputational ris k); and le gal, regulatory and co nduct risk (including i n respect of: the impa ct of substantial reg ulation and oversig ht; compliance with reg ulatory requirem ents; the outcome of legal, regulatory and g overnmental act ions and investigat ions; the transition of LIBOR other IBOR rates to alternative risk- free rates; and c hanges in tax legis lation or failure to generate future taxabl e profits). Caution about climate and sustaina ble funding and financing (CSFF) information. Climate and ESG disclosu res in t his report use a greater number and level of judgments, ass umptions and estima tes, including with respect to the classifica tion of climate and sustainable funding a nd financing activities, t h an our reporting of historical fina ncial information. These judgments, assump tions and estimates are highly likely to cha nge over time, a nd, when couple d with the longer time frames used i n these disclosures, make a ny assessmen t of materiality inhe rently uncertain. In ad dition, our climate risk a nalysis and net zero strategy rema in under developme nt, and the data underlying our analys is and strategy rema in subject to evoluti on over time. As a res ult, we expect t hat certain climate and ES G disclosure s made in this report a re likely to be ame nded, updated, recalcul ated or restated in the future. T his forward-looking sta tement shoul d be read together wit h the ‘Climate -related and other forward-l ooking statements and metrics’ of the NatWest Group 2021 C limate-rela ted Disclosures Report. The information, stat ements and opi nions contained in this d ocument do n ot constitute a public offer under any ap plicable legi slation or an offer to sell or a s olicitation of an offer t o buy any securitie s or financial instrume n ts or any advice or recommendat ion with respect t o such securities or other fi nancial instruments. NatWest Group plc 36 St Andrew Square Edinburgh, EH2 2YB www.natwestgroup.com NatWest Group plc 2021 Annual Report and Accounts Designed and produced by Black Sun Plc. This Report is printed on Edixion Offset which has been independently certified according to the rules of the Forest Stewardship Council® (FSC®). Printed in the UK by Pureprint, a CarbonNeutral® company. Both manufacturing paper mill and the printer are registered to the Environmental Management System ISO 14001:2004 and are Forest Stewardship Council® (FSC) chain-of-custody certified.

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