Natwest Markets Plc

NatWest Markets Plc

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

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

Table Of Contents

Major Rating Factors

Outlook

Rationale

Related Criteria

Related Research

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 23, 2020 1 NatWest Markets Plc

Major Rating Factors

Global Scale Ratings Issuer Credit Rating A-/Negative/A-2 Resolution Counterparty Rating A/--/A-1

Strengths: Weaknesses

• Highly strategic subsidiary of NatWest Group plc. • Concentration in capital markets activities, which involve inherent cyclicality and complexity. • Updated strategy should, if executed well, deliver a more focused and profitable business model. • Poor profitability and cost efficiency record relative to peers. • Solid capital and liquidity positions. • Subject of prolonged restructuring processes and strategic reviews.

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 23, 2020 2 NatWest Markets Plc

Outlook

S&P Global Ratings' negative outlook on NatWest Markets Plc (NWM) mirrors that on parent NatWest Group plc (NWG; previously named The Royal Bank of Scotland Group plc). It reflects downside risks to the group's asset quality and earnings from the economic and market impact of the COVID-19 pandemic. Although we view positively NWG's robust balance sheet profile and the unprecedented fiscal and monetary response, an extended economic downturn could further increase impairment losses and weaken revenues over our two-year outlook horizon.

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

Downside scenario

We could lower the ratings on NWG and NWM if we think the deteriorating operating environment could materially weaken NatWest's asset quality and profitability. The likely trigger for us to consider a downgrade is a lowering of our Banking Industry Country Risk Assessment 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 the adverse economic conditions.

We could lower the ratings on NWM independently of a rating action on NWG if we saw NWM becoming less integral to the parent's strategy, which we do not expect.

Upside scenario

We could revise the outlook on NWG and NWM to stable if NWG's earnings and balance sheet metrics remain resilient, or if governments and central banks are successful in averting a deep and long-lasting recession.

Rationale

Our ratings on U.K.-incorporated NWM reflect our view that it is a highly strategic subsidiary of NWG. This classification takes into account NWM's materiality, important role in the parent's strategy, and close link to the group's brand and reputation. We see NWM as highly strategic rather than core (which is a stronger assessment) because we consider it has a higher risk profile and weaker earnings than NWG's ring-fenced activities. As a result of NWM's highly strategic status, we position the long-term issuer credit rating one notch below the 'a' group credit profile, which includes a two-notch uplift for additional loss-absorbing capacity (ALAC). We do not maintain a stand-alone credit profile on NWM.

NWM is NWG's primary non-ring-fenced bank. It houses the majority of the group's capital markets activities, which focus on rates, credit, currencies, and financing. NWG has significantly reduced the scale and scope of its capital markets business over the past 10 years but it remains a sizable player in the U.K. NWM's Dutch subsidiary NatWest Markets N.V. (A-/Negative/A-2) provides continuity to EU clients beyond Brexit, and it also has broker-dealer

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 23, 2020 3 NatWest Markets Plc subsidiaries in Hong Kong and the U.S. NWM's peers include the non-ring-fenced bank subsidiaries of other U.K. groups, particularly Barclays Bank PLC and HSBC Bank plc, and international banks' capital markets-focused entities.

NWG unveiled an updated groupwide strategy in February 2020 that included plans to downsize and refocus NWM. Specifically, NWM is reducing activity with institutional clients, particularly in rates products, and focusing on capital-efficient financing and flow trading for corporate customers. Based on figures for the legal entity, NWM represented 16% of NWG's regulatory risk-weighted assets (RWAs) at Sept. 30, 2020, down from 20% at year-end 2019. This is ahead of NatWest's original target and it plans to further reduce NWM's contribution to about 10% in the medium term. It intends to achieve the majority of the planned reduction in RWAs by year-end 2021, and expects to incur about £400 million of disposal losses in 2021 on top of about £200 million this year.

In our view, NWM's earnings record is poor. In favorable market conditions, the legal entity reported a £94 million pretax loss for the first nine months of 2020. Strong customer activity led to a 77% year-on-year increase in revenues, despite the disposal losses. However, expenses were 82% higher primarily due to a litigation charge, the non-recurrence of certain cost recoveries in the prior year, and restructuring costs linked to the change in strategy. We could revisit our view of NWM's importance to NWG's future strategy if it struggles to improve its cost efficiency and earnings under its updated strategy.

NWM's common equity tier 1 ratio was a strong 22.3% at Sept. 30, 2020, well above its medium-term target of at least 15%. The 5.4% regulatory leverage ratio was similarly above management's target of at least 4%.

NWM's 302% liquidity coverage ratio at Sept. 30, 2020 indicates a healthy position. Reflecting its business model, its funding profile lacks insured retail deposits but it has good wholesale market access, a growing volume of relationship-driven customer deposits, and a sizable stock of term securities issued to the parent to meet NWM's minimum regulatory requirement for own funds and eligible liabilities (MREL).

We include ALAC uplift in the ratings on NWM because, through internal downstreaming, we believe its senior creditors will benefit from NWG's substantial ALAC buffer. NWM's reported a very strong 49.6% MREL ratio at Sept. 30, 2020.

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 Banks Globally: Methodology And Assumptions, July 17, 2013

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 23, 2020 4 NatWest Markets Plc

• 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, Nov. 23, 2020

• National Westminster Bank Plc, Nov. 23, 2020

• Preparedness And Resilience Keep The U.K.'s Banking Industry In BICRA Group 3 Despite The Second National Lockdown, Nov. 17, 2020

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

• United Kingdom 'AA/A-1+' Ratings Affirmed; Outlook Stable, Oct 23, 2020

• How COVID-19 Is Affecting Bank Ratings: October 2020 Update, Oct 22, 2020

• Economic Research: The Second Wave And Brexit Will Test The U.K. Recovery, Oct. 1, 2020

• U.K. Banks' Creditworthiness Will Be Tested As Fiscal Support Ebbs, Aug. 13, 2020

• COVID-19 Effects Might Quadruple U.K. Bank Credit Losses In 2020, May 4, 2020

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

• Bulletin: Royal Bank Of Scotland Unveils Plan To Shrink Capital Markets Business And Cut Costs, Feb. 14, 2020

• Banking Industry Country Risk Assessment: United Kingdom, Dec. 5, 2019

Ratings Detail (As Of November 23, 2020)* 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- Short-Term Debt A-2 Subordinated BB+ Issuer Credit Ratings History 23-Apr-2020 A-/Negative/A-2 16-May-2019 A-/Stable/A-2 31-May-2018 BBB+/Positive/A-2 15-Nov-2017 BBB+/Stable/A-2

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Ratings Detail (As Of November 23, 2020)*(cont.) 05-Oct-2017 BBB+/Negative/A-2 07-Jul-2016 BBB+/Stable/A-2 19-Jan-2016 BBB+/Positive/A-2 Sovereign Rating United Kingdom AA/Stable/A-1+ Related Entities National Westminster Bank Plc Issuer Credit Rating A/Negative/A-1 Resolution Counterparty Rating A+/--/A-1 Commercial Paper Local Currency A-1 Junior Subordinated BB Junior Subordinated BB+ Preference Stock BB Senior Unsecured A Short-Term Debt A-1 Subordinated BBB- NatWest Group plc Issuer Credit Rating BBB/Negative/A-2 Commercial Paper Foreign Currency A-2 Junior Subordinated B+ 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 Securities Inc. Issuer Credit Rating A-/Negative/A-2 Resolution Counterparty Rating A-/--/A-2 Senior Unsecured A- Royal Bank of Scotland International Limited Issuer Credit Rating A-/Negative/A-2

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Ratings Detail (As Of November 23, 2020)*(cont.) 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 Ulster Bank Limited Issuer Credit Rating A/Negative/A-1 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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