DBRS Morningstar Upgrades NatWest Group’s LT Issuer Rating to BBB (high), Revises Trend to Stable

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

NatWest’s Intrinsic Assessment (IA), which reflects the Group’s combined credit strength, has been revised to 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 upgrade of the ratings reflects the progress NatWest has made over past years in rationalising its operations, maintaining a strong balance sheet and minimising the impact of legacy issues on the Group. NatWest Group has built a strong franchise thanks to its simplification strategy and reduced risk appetite, which has led to improved profitability levels, whilst building large cushions of capital, now well above minimum requirements and comparing favourably with peers. Since the onset of the COVID-19 pandemic, the Group has taken a conservative approach to managing asset quality and has continued to improve its already robust capital levels and also reinforced its strong funding and liquidity profile. As a result, the Intrinsic Assessment (IA) has been revised positively to A (low) from BBB (high).

The Bank’s IA of A (low) is positioned below its three-notch Intrinsic Assessment Range (IAR) generated by the Methodology. Despite the progress made by the Group, it is yet to establish a stable track record in profitability, and this lack of track record is incorporated into the final rating assigned to the Group.

RATING DRIVERS
If NatWest were to demonstrate further progress in profitability metrics whilst maintaining its current risk profile, the Long-Term ratings would be upgraded.

The Long-Term ratings would be downgraded if NatWest’s profitability and asset quality metrics experienced a severe deterioration, with much lower capital levels.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Strong
NatWest is one of the UK’s large banking groups with total assets of about GBP 776 billion at end-H1 2021. NatWest has a significant presence in the UK including a 10.9% mortgage market share at end-H1 2021 and banking 1 in 4 UK businesses in the UK. The Group has made significant, multi-year investments in systems and controls, whilst selling non-core businesses, and the completion of the restructuring included the rebranding in July 2020 of “RBS Group” as “the NatWest Group”. In addition, as part of its simplification strategy, the Group announced this year a phased withdrawal from the Republic of Ireland, where Ulster Bank Ireland is currently the third largest bank in the country. We consider the majority of legacy issues experienced in the last decade are behind the Group which is a key consideration to the upgrade of the ratings. We also note that the Group’s “Purpose-led strategy” has a focus on shaping the Group’s activities over the long-term.

Earnings Combined Building Block (BB) Assessment: Moderate
The Group’s net attributable profit after tax to ordinary shareholders increased to GBP 1.8 billion in H1 2021, up from a loss of GBP 0.7 billion in H1 2020 following the reporting of a very high level of provisions in H1 2020 at the onset of the pandemic. We consider the high level of provisions to be reflective of NatWest’s conservative approach to managing asset quality. The improvement in H1 2021 mainly reflects an improved economic outlook which led to impairment releases, with GDP growth now forecast at 7% in 2021 in the UK. As a result, the Group’s return on tangible equity (ROTE) increased to 11.7% in H1 2021 compared to -4.4% in H1 2020. NatWest operates in a resilient market which is large, diverse and wealthy, and we expect this to be supportive of recurrent earnings considering the Group’s lower risk appetite as well as lower operating costs. In addition, in DBRS Morningstar’s view, the high level of provisions taken by the Group should allow it more flexibility than some other international peers when asset quality indicators likely weaken from the current low levels as COVID-19 support measures end.

Risk Combined Building Block (BB) Assessment: Good
The operating environment remains challenging, and we note the UK’s furlough scheme will end at end-September 2021. However, NatWest’s asset quality has remained robust since the COVID-19 pandemic began. Stage 3 exposures were 1.5% of total gross loans at end-H1 2021 down from 1.7% at end-2020, which compares well with large domestic European banks. In addition, outstanding COVID-19 payment holidays were down to GBP 1.4 billion at end-H1 2021, equivalent to approximately 1% of the total loan book. We also note the Group saw an increased migration of assets to Stage 1 from Stage 2 thanks to the improved macroeconomic outlook. Stage 2 exposures consequently decreased to 14% of total gross loans at end-H1 2021 from 21% of total gross loans at end-2020.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong
NatWest benefits from a robust funding and liquidity position. NatWest's loan-to-deposit ratio decreased to 78% at end-H1 2021 compared to 84% at end-2020, due to continued solid growth in retail and commercial deposits which increased by 8.2% compared to end-2020. The Group's average LCR ratio was 164% at end H1 2021, in line with end-2020.

Capitalisation Combined Building Block (BB) Assessment: Strong/Good
DBRS Morningstar considers NatWest has a strong balance-sheet as the result of ongoing efforts to de-risk, and simplify the business. NatWest’s CET1 ratio was a solid 18.2% at end-June 2021; this includes a planned share buy-back and dividend payment. The current capital position provides the Group with sizeable cushions to absorb potential shocks. We also note NatWest expects that the withdrawal from Ireland will be capital accretive. Separately, NatWest targets a CET1 ratio between 13-14% by 2023, and this would still provide the Group with about EUR 6.8-8.5 billion capital cushion above minimum regulatory requirements based on risk-weighted assets at end-H1 2021.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/384934

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.

Notes:
All figures are in GBP unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (19 July 2021) https://www.dbrsmorningstar.com/research/381742/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 2020 Presentation, NatWest Interim Report H1 2021, NatWest H1 2021 Pillar 3 Report, NatWest H1 2021 Presentation 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/384935

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: 28 May 2021

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