Update: National Westminster Plc

Primary Credit Analyst: Richard Barnes, + 44 20 7176 7227; [email protected]

Secondary Contact: John Wright, London (44) 20-7176-0520; [email protected]

Table Of Contents

Credit Highlights

Outlook

Related Criteria

Related Research

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 25, 2021 1 Update: National Plc

Credit Highlights

Global Scale Ratings Issuer Credit Rating A/Negative/A-1 Resolution Counterparty Rating A+/--/A-1

Key strengths Key risks Core subsidiary of ultimate parent NatWest Group plc. Adverse impact on asset quality and earnings from the COVID-19 pandemic. Solid market position across U.K. retail, commercial, and private Margin pressure from prolonged low interest rates. banking. Supportive capital, funding, and liquidity profiles. Geographic concentration in the U.K.

S&P Global Ratings assesses National Westminster Bank (NWB) as a core subsidiary of ultimate parent NatWest Group plc (NWG). NWB has an integral role in the parent's strategy, material share of the group's capital base and financial performance, and strong link to the group's brand and reputation. We align our long-term issuer credit rating on NWB with the 'a' group credit profile, which includes a two-notch uplift for additional loss-absorbing capacity (ALAC), and we do not assess NWB's stand-alone credit profile.

NWB is the group's largest subsidiary. It is the main entity in the ring-fenced bank subgroup and represents close to one-half of NWG's regulatory risk-weighted assets. It is active in retail and commercial banking across , , and Northern , and is one of the traditional "big four" players alongside Bank UK PLC, HSBC UK Bank plc, and plc. Its main subsidiary is U.K. private bank & Company and it absorbed former subsidiary Ltd. in May 2021.

Whereas NWG reported a loss for 2020, NWB remained profitable. NWB reported a £602 million pretax profit for 2020, down 55% from the previous year due to a sharp increase in IFRS 9 impairment losses triggered by the pandemic. These charges were much lower in the second half of the year than the first half, and we project they will decline further in 2021 if the U.K. economy recovers as expected. NWB's common equity Tier 1 ratio was a healthy 18.5% on March 31, 2021, providing comfortable headroom over minimum regulatory requirements. We expect the ratio will fall in the next two years, consistent with NWG's plan to reduce its surplus regulatory capital.

NWB has a pivotal role in the parent's strategy. NWG's focus is supporting customers, improving cost efficiency, and reallocating capital toward U.K. retail and commercial banking. NWB's reported 69% cost-to-income ratio in 2020 lagged those of more efficient peers, partly due to ongoing restructuring charges.

NWB has a diversified loan portfolio. Mortgages represented 56% of NWB's £279 billion gross loans at year-end 2020, unsecured consumer credit 4%, and the remainder corporate and commercial lending across a range of sectors. The portfolio increased by 17% in 2020 due to strong demand for mortgages and COVID-19 government-guaranteed lending schemes. The 58% average indexed loan-to-value ratio of the mortgage book at year-end 2020 indicated reasonable collateral cover.

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 25, 2021 2 Update: National Westminster Bank Plc

Like its U.K. peers, NWB reports large stage 2 loan balances. Stage 2 and stage 3 loans represented 20.8% and 1.2%, respectively, of the portfolio at year-end 2020. NWB applies a relatively low threshold to migrate loans to stage 2 from stage 1, and the stage 2 proportion declined in the second half of 2020 as the economic outlook brightened. NWB's coverage of stage 2 and stage 3 loan balances by associated provisions appears appropriately prudent, and should enable releases in 2021 if the U.K. economy recovers robustly from the pandemic.

We view NWB's funding and liquidity profiles as solid. Customer deposits increased by 21% in 2020 as households and corporates reduced spending and prioritized liquidity in response to the pandemic. The net stable funding ratio and liquidity coverage ratio were healthy at 144% and 152%, respectively, at year-end 2020.

NWG has downstreamed material loss-absorbing debt to NWB. We think this buffer benefits NWB's senior creditors and therefore include ALAC uplift in the ratings.

Outlook

The negative outlook on NWB mirrors that on NWG and reflects residual risks to asset quality and earnings from the economic impact of the COVID-19 pandemic. We view as positive NWG's robust balance-sheet profile and the unprecedented fiscal and monetary response, and we expect its impairment charges will decline significantly in 2021. However, there remains uncertainty over the shape of the economic recovery and the implications for asset quality over our two-year outlook horizon as the U.K. government tapers fiscal support measures.

Our ratings on NWB will move in tandem with those on NWG as long as we continue to view NWB as a core subsidiary of the group.

Downside scenario

We could lower the ratings on NWG and NWB if we think the operating environment could remain challenging for an extended period, with material adverse consequences for NWG's asset quality and profitability. The likely trigger for us to consider a downgrade is a downward revision of our Banking Industry Country Risk Assessment (BICRA) for the U.K., NWG's home market. In that scenario, we would consider the extent to which NWG's balance-sheet strengths may mitigate economic conditions.

We could lower the ratings on NWB independently of a rating action on NWG if we saw NWB becoming less integral to the parent's strategy, which is not a likely scenario given its position at the heart of the retail and commercial banking franchise.

Upside scenario

We could revise our outlooks on NWG and NWB to stable if NWG's earnings and balance-sheet metrics remain resilient, and it is on track to achieve a stable, profitable business model.

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 25, 2021 3 Update: National Westminster Bank Plc

Related Criteria

• Group Rating Methodology, July 1, 2019

• Hybrid Capital: Methodology And Assumptions, July 1, 2019

• Methodology For Assigning Financial Institution Resolution Counterparty Ratings, April 19, 2018

• Risk-Adjusted Capital Framework Methodology, July 20, 2017

• Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017

• Guarantee Criteria, Oct. 21, 2016

• Bank Rating Methodology And Assumptions: Additional Loss-Absorbing Capacity, April 27, 2015

• Quantitative Metrics For Rating Globally: Methodology And Assumptions, July 17, 2013

• Banks: Rating Methodology And Assumptions, Nov. 9, 2011

• Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011

• Principles Of Credit Ratings, Feb. 16, 2011

• Commercial Paper I: Banks, March 23, 2004

Related Research

• NatWest Group plc, May 25, 2021

• NatWest Markets Plc, May 25, 2021

• Ulster Bank Ltd. 'A/A-1' Ratings Withdrawn Following Merger Into Parent NatWest Bank, May 4, 2021

• United Kingdom 'AA/A-1+' Ratings Affirmed; Outlook Stable, April 23, 2021

• U.K. Bank Credit Losses Could Fall 40% In 2021, March 29, 2021

• U.K. Banks' Poor 2020 Earnings Mask A Hint Of Optimism For Future Creditworthiness, March 9, 2021

• Bulletin: NatWest's 2020 Loss And Robust Capital Ratios Reflect Pandemic-Related Stress And Continued Restructuring, Feb. 19, 2021

• Banking Industry Country Risk Assessment: United Kingdom, Nov. 17, 2020

• Royal Outlook Revised To Negative On Economic Impact Of COVID-19; Ratings Affirmed, April 23, 2020

Ratings Detail (As Of May 25, 2021)* National Westminster Bank Plc Issuer Credit Rating A/Negative/A-1 Resolution Counterparty Rating A+/--/A-1 Commercial Paper Local Currency A-1

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Ratings Detail (As Of May 25, 2021)*(cont.) Junior Subordinated BB Junior Subordinated BB+ Preference Stock BB Senior Unsecured A Short-Term Debt A-1 Subordinated BBB- Issuer Credit Ratings History 23-Apr-2020 A/Negative/A-1 16-May-2019 A/Stable/A-1 31-May-2018 A-/Positive/A-2 15-Nov-2017 BBB+/Positive/A-2 07-Jul-2016 BBB+/Stable/A-2 Sovereign Rating United Kingdom AA/Stable/A-1+ Related Entities NatWest Group plc Issuer Credit Rating BBB/Negative/A-2 Commercial Paper Foreign Currency A-2 Junior Subordinated + Junior Subordinated BB Junior Subordinated BB- Preference Stock BB- Senior Unsecured A- Senior Unsecured BBB Short-Term Debt A-2 Subordinated BB+ NatWest Markets N.V. Issuer Credit Rating A-/Negative/A-2 Resolution Counterparty Rating A/--/A-1 Commercial Paper Local Currency A-2 Senior Unsecured A- Short-Term Debt A-2 Subordinated BB+ NatWest Markets Plc Issuer Credit Rating A-/Negative/A-2 Resolution Counterparty Rating A/--/A-1 Commercial Paper Foreign Currency A-2 Junior Subordinated BB Resolution Counterparty Liability A Senior Unsecured A-

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Ratings Detail (As Of May 25, 2021)*(cont.) Short-Term Debt A-2 Subordinated BB+ NatWest Markets Securities Inc. Issuer Credit Rating A-/Negative/A-2 Resolution Counterparty Rating A-/--/A-2 Senior Unsecured A- International Ltd. Issuer Credit Rating A-/Negative/A-2 Commercial Paper Foreign Currency A-2 Royal Bank of Scotland plc (The) Issuer Credit Rating A/Negative/A-1 Resolution Counterparty Rating A+/--/A-1 Ulster Bank Ireland DAC Issuer Credit Rating A-/Negative/A-2 Resolution Counterparty Rating A/--/A-1 *Unless otherwise noted, all ratings in this report are global scale ratings. S&P Global Ratings’ credit ratings on the global scale are comparable across countries. S&P Global Ratings’ credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees.

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