DBRS Morningstar Confirms NatWest Group plc’s LT ratings at BBB (high), 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 (high), and NatWest Markets Plc’s Long-Term Issuer Rating was confirmed at A (low). The trend on the Long-Term ratings has been revised to Positive from Stable.

NatWest’s Intrinsic Assessment (IA), which reflects the Group’s combined credit strength, was also confirmed at A (low). 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 the Group’s solid franchise in the UK, helped by moving past its legacy issues, improved Group financial metrics in recent years including better profitability, and solid asset quality. Despite a deteriorating macroeconomic environment, DBRS Morningstar considers the initial impact of higher interest rates to be revenue positive. Higher provisions and higher operating costs could materialise at a later stage, however, the deterioration would have to be significant to affect DBRS Morningstar’s overall credit assessment of NatWest’s Long-Term ratings.

The ratings continue to incorporate the Group’s position as one of the largest UK banking groups with a strong retail and commercial banking franchise and a leading position in the domestic market, the solid funding and liquidity profile, and the robust capital position, which provides the Group with sizeable cushions to absorb potential shocks.

The IA of A (low) for NatWest Group plc remains positioned below the three-notch Intrinsic Assessment Range (IAR) generated by the Methodology. Despite the progress made by the Group, given the lengthy restructuring that the Group has been through, we continue to monitor whether NatWest can maintain a positive earnings track record through an economic downturn.

RATING DRIVERS
An upgrade of the Long-Term ratings of the Group would occur from maintaining satisfactory profitability through a more adverse economic environment, while keeping a conservative risk profile and solid capitalisation levels.

The trend would return to Stable trend if a more adverse economic environment significantly reverses the progress NatWest has made in recent years. The Long-Term ratings would be downgraded in case of a severe decline in the Group’s profitability and asset quality, combined with much lower capital cushions.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Very Strong/Strong
NatWest is a leading UK bank with total assets of about GBP 806.5 billion at end-H1 2022. NatWest has a significant market presence in the UK, serving around 19 million customers through a variety of digital and physical channels with a retail mortgage market share of 11.5% at end-2021. The Group has aimed at becoming a simpler and leaner bank, focusing mainly on retail and commercial banking as well as a digital transformation across its divisions. The Group is in the process of a phased withdrawal from the Republic of Ireland over a multi-year process. At end-2021, NatWest had entered binding agreements with both Allied Irish Banks and Permanent tsb for the transfer of Ulster Bank’s performing assets, with most of the transfers expected to be completed during 2022 and 2023. The downsizing of NatWest Capital Markets is largely complete. Meanwhile, DBRS Morningstar considers the Group’s legacy issues are now behind it.

Earnings Combined Building Block (BB) Assessment: Good/Moderate
NatWest reported a net attributable profit after tax to ordinary shareholders of GBP 1,891 million in H1 2022, up 2.7% from GBP 1,842 million year over year (YoY). The first half of 2022 was marked by higher net interest income, up 16.1% YoY, mainly driven by rising interest rates, while the Group’s return on tangible equity (ROTE) was 13.1% in H1 2022 (up from 9.4% in 2021) as reported by NatWest. Against a backdrop of rising interest rates, the Group expects to achieve a solid ROTE between 14%-16% for the full year 2022 while also guiding for a cost of risk of 10 bps. DBRS Morningstar notes the highly uncertain environment and the threat of a recession in the UK in 2023, however, unemployment levels would remain low under DBRS Morningstar’s base case scenario, mitigating some of the impact on the Group.

Risk Combined Building Block (BB) Assessment: Good
In an operating environment that remains highly challenging, there has been no visible deterioration in asset quality. At end-H1 2022, the Group's share of Stage 3 exposures (assets, which have defaulted or are otherwise considered to be credit impaired) was 1.4%, unchanged from end-2021 and below pre-pandemic levels. NatWest's gross loan portfolio is weighted towards the UK, which accounted for approximately 92% of the book at end-H1 2022. Personal lending, predominantly mortgages, represented 56% of the book, while wholesale lending represented the remaining 44% in DBRS Morningstar estimates. The Group’s exposure to SMEs could experience additional pressure given high and rising inflation, as well as rapidly increasing interest rates after a prolonged period of low interest rates, however, the deterioration would start from low levels.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong
DBRS Morningstar considers NatWest to have a solid funding and liquidity profile. Customer deposits have continued to grow steadily during 2021 and in H1 2022 to GBP 492 billion, resulting in a loan-to-deposit ratio of 74% at end-H1 2022, which is just below 75% at end-2021 and lower than 84% at end-2020. Customer deposits accounted for 86% of the Group’s funding sources. Total wholesale funding was GBP 76 billion at end-H1 2022, with ca. 32% of it being short-term according to DBRS Morningstar estimates. The Liquidity Coverage Ratio (LCR) was a strong 159% and the Net Stable Funding Ratio (NSFR) was 153% at end-H1 2022.

Capitalisation Combined Building Block (BB) Assessment: Strong/Good
NatWest capitalisation levels are solid, although they have come down closer to the Group’s CET1 ratio target of 13-14%. At end-H1 2022, the Group’s CET1 ratio was 14.3%, and with an MDA trigger of 8.7% the Group has currently a comfortable cushion above minimum requirements of 560 bps. We note the countercyclical buffer will increase to 1% effective December 2022, and a further increase to 2% is planned for Q3 2023. Nevertheless, given recurring earnings, we still consider the Group’s target capital position to provide a solid cushion to absorb potential shocks.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/403044

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

The sub-factor Corporate Governance within the Governance ESG factor has been a point of concern as a result of a numerous legacy issues encountered post financial crisis. However, we now expect legacy issues to be behind the Group and we no longer consider the subfactor ‘corporate governance’ to be relevant to the rating of the Group. The Group is currently 48% state-owned, although the UK government intends to sell off the remainder of its stake by 2024.

The G factor has changed from the prior credit rating disclosure.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in GBP unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (23 June 2022) - https://www.dbrsmorningstar.com/research/398692/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 (17 May 2022) https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

The sources of information used for this rating include Morningstar Inc. and Company Documents, NatWest Group plc 2021 Annual Report, NatWest Group plc Pillar 3 Report 2021, NatWest Fixed Income Presentations FY2021 and H1 2022, NatWest Results Announcement FY21 and H1 2022, NatWest Financial Supplement FY21 and H1 2022, NatWest 2021 Climate Related Disclosure Report, NatWest 2021 ESG Supplement. 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://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/403045

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 FIG
Initial Rating Date: 27/10/2004
Last Rating Date: 27/09/2021

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