Morningstar DBRS Upgrades NatWest Group Plc to "A"; Trend Revised to Stable

DBRS Ratings Limited (Morningstar DBRS) upgraded the Long-Term credit ratings of NatWest Group plc (NatWest or the Group) and its related entities. NatWest's Long-Term Issuer Rating was upgraded to "A" from A (low), and NatWest Markets Plc's Long-Term Issuer Rating was upgraded to A (high) from "A". The trends on the Long-Term ratings were changed to Stable from Positive.

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

KEY CREDIT RATING CONSIDERATIONS
The upgrade of NatWest's Long-Term credit ratings reflects the continued improvement in the Group's profitability, its low risk profile, sustained strong capitalisation levels, and ample liquidity. The upgrade also reflects its strong asset quality relative to UK peers which is also reflected in its low loan loss provisions. Morningstar DBRS views this reflects the Group's now simpler business model and conservative risk management approach, which is the result of a long restructuring instituted in the aftermath of the global financial crisis. In addition, the UK economy is performing better than initially expected, with improving consumer and business confidence, which has been reflected in generally good consumer activity and business growth at NatWest.

The Stable trend reflects Morningstar DBRS' view that NatWest will continue to leverage on its well-established and diversified franchise to maintain strong profitability, robust asset quality and a solid funding position.

CREDIT RATING DRIVERS
An upgrade to the credit ratings would require that the Group successfully maintains strong earnings generation and capitalisation, while retaining a similar risk profile over the long term.

Conversely, the credit ratings would be downgraded if there is a sustained decline in the Group's profitability levels, combined with a deterioration in its risk profile and capital cushions.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Strong
NatWest is a leading UK bank with total assets of GBP 690.3 billion at end-H1 2024. NatWest has a significant market presence in the UK, serving approximately 19 million customers with a retail mortgage market share of 12.7% at end-2023. The Group has become a simpler, leaner, more digitalised bank, focusing mainly on retail and commercial banking in the UK. The Group is in its final phase of withdrawing from the Republic of Ireland. NatWest has also announced the acquisition of Metro Bank plc (GBP 2.5 billion mortgage book) and Sainsbury's Bank (GBP 2.5 billion book comprising unsecured personal loans and credit cards, and GBP 2.6 billion customer deposits), which further reinforces NatWest's franchise. Both transactions are subject to regulatory approvals and are expected to be completed in H2 2024 and H1 2025 respectively.

Earnings Combined Building Block (BB) Assessment: Good
The Group reported significantly higher profits in 2023, as the higher interest rate environment aided growth in net interest income whilst there was a slow repricing on the liability side. Net profit attributable to shareholders was GBP 4.4 billion in 2023, up 31.6% YOY from GBP 3.3 billion in 2022, representing a return on tangible equity (ROTE) of 17.8% in 2023. Profits remained strong in H1 2024, although lower than in 2023, due to margin compression on mortgages as well as the changes in deposit balance mix with a shift to higher interest-bearing balances. NatWest reported a net profit attributable to shareholders of GBP 2.1 billion in H1 2024, representing a ROTE of 16.4% compared with a 2026 target ROTE of above 13.0%. NatWest's total income was down 7.7% YOY to GBP 7.1 billion in H1 2024 in part driven by lending margin pressure. Competition in the UK mortgage market is challenging; however, growth in mortgages picked up in Q2 2024, surging 20% QOQ compared with Q1 2024, while costs of deposits stabilised.

The Group reported GBP 48 million in loan loss provisions in H1 2024, down significantly from GBP 578 million in 2023 and from GBP 337 million in 2022, reflecting a better than initially anticipated UK macroeconomic environment. NatWest's cost of risk was just 3 basis points (bps) in H1 2024, down sharply from 12 bps in H1 2023 and 15 bps in 2023, and also below 9 bps in 2022. NatWest is guiding for a cost of risk below 15 bps in 2024 (down from its prior guidance of 20 bps in 2024).

Risk Combined Building Block (BB) Assessment: Strong
Morningstar DBRS considers NatWest Group's risk profile to be solid, thanks to significant improvement in recent years, partly because of active de-risking of its balance sheet and the disposal of legacy loans in the Republic of Ireland. Deterioration in asset quality has been minimal. The Group's share of Stage 3 loans was 1.5% at end-H1 2024, broadly in line with end-H1 2023,and end-2022 , and still below 1.7% at end-2020 and 1.9% at end-2019. The share of Stage 2 loans, which are loans for which credit risk has increased significantly since initial recognition and which are seen as early indicators of deteriorating asset quality, further reduced to 9.6% at end-H1 2024, from 11.3% at end-H1 2023 and 12.4% at end-2022.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong
Morningstar DBRS considers NatWest to have a very solid funding profile, underpinned by a sound domestic retail deposit base, which represents the primary funding source for the Group, and a well-diversified funding mix. Customer deposits excluding repos increased to GBP 426.1 billion at end-H1 2024 (up GBP 2.9 billion, or up 0.7% YOY from GBP 423.2 billion at end-H1 2023). The Group's loan-to-deposit (LTD) ratio remained unchanged YOY at 83% at end-H1 2024. Total wholesale funding, including deposits from banks stood at circa GBP 83 billion at end-H1 2024, of which GBP 27 billion was short-term. The Group has ample liquidity, with a substantial liquidity buffer of GBP 227 billion at end-H1 2024 (unchanged from end-H1 2023) representing about 33% of total assets at end-H1 2024; 71% of these funds were primarily held in highly liquid assets, mainly cash and balances at central banks. The Liquidity Coverage Ratio was a strong 151% and the Net Stable Funding Ratio was 139% at end-H1 2024.

Capitalisation Combined Building Block (BB) Assessment: Strong/Good
Morningstar DBRS considers NatWest's capitalisation levels as solid, supported by sound and recurrent internal capital generation. The Group's CET1 ratio was 13.6% at end-H1 2024, slightly up from 13.5% at end-H1 2023 as a result of higher net profit and a decrease in risk-weighted assets, albeit offset by distributions to shareholders. The minimum capital requirement, i.e., MDA trigger for NatWest increased to 10.5% at end-H1 2024 from 9.6% at end-H1 2023 as the UK countercyclical buffer increased to 2% from 1% effective July 2023, representing an ample cushion of 310 bps at end-H1 2024. Morningstar DBRS expects NatWest to maintain a CET1 ratio of 13-14% going forward, in line with the company's targets. The Group's minimum requirement for own funds and eligible liabilities (MREL) was 31.7% at end-H1 2024 (minimum of 30.5%), and the Group reported a UK leverage ratio of 5.2% at end-H1 2024, well above the minimum requirement of 3.85%. Lastly, the UK government is no longer a majority shareholder of the Group with its current shareholding being approximately 17.97%.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/439710.
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ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental, Social and Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024), https://dbrs.morningstar.com/research/437781/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-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 (04 June 2024) https://dbrs.morningstar.com/research/433881/global-methodology-for-rating-banks-and-banking-organisations. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings https://dbrs.morningstar.com/research/437781/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The sources of information used for this credit rating include Morningstar, Inc. and Company Documents, NatWest Group plc Annual Report and Accounts 2023, NatWest Group plc Interim Results 2024, NatWest Group FY 2023 & Q2 2024 Fixed Income Investors Presentation and NatWest Group plc FY 2023 & H1 2024 Pillar 3 Report. Morningstar DBRS considers the information available to it for the purposes of providing this credit 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

Morningstar DBRS does not audit the information it receives in connection with the credit 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. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/439709.

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

Lead Analyst: Vitaline Yeterian, Senior Vice President - European Financial Institution Ratings
Rating Committee Chair: William Schwartz, Senior Vice President - Global Fundamental Ratings, Credit Practices
Initial Rating Date: October 27, 2004
Last Rating Date: September 22, 2023

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