DBRS Morningstar Confirms NatWest Group’s LT Issuer Rating at BBB, Trend Revised to Positive

DBRS Ratings Limited (DBRS Morningstar) confirmed the long-term ratings of NatWest Group plc (NatWest or the Group) and its related entities. NatWest’s Long-Term Issuer Rating was confirmed at BBB, and NatWest Markets Plc’s Long-Term Issuer Rating was confirmed at BBB (high). The trend on these ratings has been revised to Positive from Stable.

NatWest’s Intrinsic Assessment (IA), which reflects the Group’s combined credit strength, has been maintained at BBB (high). The Group’s Support Assessment remains SA3 and its Long-Term Issuer Rating is positioned one notch below the IA, in line with DBRS Morningstar’s approach to rating bank holding companies. Please see a full list of the rating actions at the end of this press release.

KEY RATING CONSIDERATIONS
The change in the trend to Positive from Stable takes into account NatWest’s performance through the challenging operating and economic environment driven by the COVID-19 pandemic. Underlying earnings, albeit still moderate, have remained resilient and the impact on asset quality has been limited. Although DBRS Morningstar expects asset quality indicators to weaken from the current low levels when the COVID-19 support measures end, we note that the high level of provisions taken by the Bank in 2020 should allow it more flexibility than some other international peers. The Positive trend also reflects the strong capital position of the Group, which has further improved, partly driven by a reduction in risk-weighted assets (RWAs), and the cancellation of the 2019 dividend.

The ratings continue to incorporate the Group’s strong and well-entrenched retail and commercial banking franchise in the UK, the continued de-risking of its corporate and institutional division, the solid funding and liquidity profile, and the robust capital position, which provides the Group with sizeable cushions to absorb potential shocks. They also reflect the Bank’s challenges in establishing a strong earning profile, and also that the full impact of the UK’s withdrawal from the European Union is not yet clear.

RATING DRIVERS
The ratings would be upgraded if the Group demonstrates improved profitability and limited asset quality deterioration over coming quarters as the COVID-19 support measures are withdrawn. The trend would revert to Stable if NatWest’s credit profile proves to be less resilient than anticipated, as a result of the operating environment driven by the COVID-19 pandemic.

A sustained deterioration in the Group’s capacity to generate earnings or a severe deterioration in asset quality would lead to a rating downgrade.

RATING RATIONALE
NatWest is one of the largest UK banking groups with a strong retail and commercial banking franchise with total assets of about GBP 770 billion at end-Q1 2021. In Q1 2021, the Group announced a phased withdrawal from the Republic of Ireland, where Ulster Bank Ireland is currently the third largest bank in the country. NatWest expects the process will be capital accretive.

DBRS Morningstar views NatWest’s underlying earnings generation as resilient. In 2020, the impact of COVID-19 led to a significant increase in loan loss provisions (partly model-driven under IFRS 9) with loan loss provisions totalling GBP 3.2 billion (vs GBP 0.7 billion in 2019). This led to the Group reporting a net loss of GBP 434 million. However, in Q1 2021 the Group reported a reversal in provisions (GBP 0.1 billion) helping the Group to report a net profit of GBP 713 million, which represented a return on tangible equity of 7.9%. The low rate environment has led to lower revenues, but we anticipate volume and net fee and commission income to pick up as the restrictions end, whilst the Group’s ongoing cost discipline will be key in supporting improving returns. The Group’s full year 2020 impairment loss rate was 88 basis points of gross customer loans and NatWest expects that its the full year 2021 loss rate will be at or below the through the cycle guidance of 30-40 basis points.

NatWest’s asset quality has remained robust since the COVID-19 pandemic began. Although DBRS Morningstar expects Stage 3 loans will increase when support measures are removed, these are currently at low levels. The Group's share of Stage 3 exposures reduced to 1.6% at end-Q1 2021 from 1.7% at end-2020 (1.9% at end-2019; 2.6% at end-2018). However, Stage 2 loans accounted for a significant 18.3% of the Group's loan portfolio at end-Q1 2021, down from 21.2% at end-2020 and well above the 8.3% level at end-2019. But DBRS Morningstar understands this reflects very conservative model assumptions.

NatWest benefits from a very solid funding and liquidity position. There has been a notable increase in customer deposits in 2020, reflective of the Group’s strong UK franchise. Customer deposits increased by GBP 62.5 billion in 2020 to GBP 431.7 billion, up 16.9% Year-on-Year, accounting for 85% of the Group's funding sources and supporting the Group’s loan to deposit ratio of 84%. At end-2020, the Group had a substantial liquidity buffer of GBP 262 billion compared to short-term obligations of around GBP 25 billion, with the Liquidity Coverage Ratio (LCR) at 159% at end-2020 and the Net Stable Funding Ratio (NFSR) at 151%.

The Group’s capital cushions provide ample room to absorb potential shocks and this is a key consideration for the positive trend. The Group's CET1 ratio was a robust 18.2% at end-Q1 2021 (vs. 18.5% at end-2020, and up from 16.2% at end-2019), reflecting a reduction in risk-weighted assets (RWAs), the cancellation of the 2019 dividend, a software amortization benefit and the adoption of IFRS 9 transitional arrangements on expected credit losses, which outweighed the attributable loss for 2020 and the foreseeable dividends for 2020. We generally expect some reduction in capital ratios, particularly when regulatory requirements change, and this is in part reflected in the Group’s targets which include a CET1 ratio of 13-14% by 2023 and a dividend payout ratio of 40%. We note, however, that the Q1 2021 CET1 ratio implies a sizeable capital cushion of 420-520 bps above 13-14% internal targets and represented about GBP 7.0-8.6 billion based on RWAs at end-Q1 2021.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

The Grid Summary Grades for The NatWest Group plc are as follows: Franchise: Strong; Earnings Power: Moderate, Risk Profile: Good, Funding/Liquidity: Strong; Capitalisation: Strong/Good

DBRS Morningstar notes that this Press Release was amended on June 4, 2021 to incorporate the link to the principal methodology.

DBRS Morningstar notes that this Press Release was amended on August 5, 2021 to correct the solicitation status as “Unsolicited Participating Without Access".

Notes:
All figures are in GBP unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (8 June 2020) https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883

The sources of information used for this rating include Company Documents, NatWest Annual Report 2020, NatWest Q1 2021 and 2020 Pillar III report, Q1 2021 Investor Presentation, FY20 Investor Presentation, 2020 Climate Related Disclosure Report, Q1 2021 and FY20 Financial Statements, Central Bank of England, and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/379341

This rating is endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Vitaline Yeterian, Senior Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Global Financial Institutions Group
Initial Rating Date: 27 October 2004
Last Rating Date: 2 June 2020

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