Annual Report and Accounts 2017 Financial review Page Strategic report 3 Report of the directors 73 Statement of directors’ responsibilities 79 Independent auditor’s report to the members of National Westminster Bank Plc 81 Consolidated income statement 95 Consolidated statement of comprehensive income 96 Balance sheet 97 Statement of changes in equity 98 Cash flow statement 100 Accounting policies 101 Notes on the accounts 113 Additional information 187 Forward-looking statements 231 Abbreviations and acronyms 232 Glossary of terms 233 Principal offices 240 1 NatWest Plc Annual Report and Accounts 2017 Strategic report Page Board of directors and secretary 3 Presentation of information 4 Top and emerging risks 5 Financial review 6 Capital and risk management 14 Approval of Strategic Report The Strategic Report for the year ended 31 December 2017 set out on pages 2 to 72 was approved by the Board of directors on 22 February 2018. By order of the Board. Aileen Taylor Company Secretary 22 February 2018 Chairman Executive directors Non-executive directors Howard Davies Ross McEwan Frank Dangeard Ewen Stevenson Alison Davis Morten Friis Robert Gillespie Penny Hughes Yasmin Jetha Brendan Nelson Baroness Noakes Mike Rogers Mark Seligman Dr Lena Wilson 2 NatWest Plc Annual Report and Accounts 2017 Board of directors and secretary Chairman Auditors Howard Davies Ernst & Young LLP Nominations (Chairman) Chartered Accountants and Statutory Auditor 25 Churchill Place Executive directors London E14 5EY Ross McEwan Executive (Executive Committee Chairman) Registered office 135 Bishopsgate Ewen Stevenson London, EC2M 4RB Executive Telephone: +44 (0)20 7085 5000 Independent non-executive directors Head office 135 Bishopsgate Frank Dangeard London EC2M 4RB Risk, Technology Telephone +44 (0)20 7085 5000 Alison Davis National Westminster Bank Plc Technology (Chairman), Remuneration, Sustainability Registered in England No. 929027 Morten Friis Audit, Risk Robert Gillespie Remuneration (Chairman), Nominations, Sustainability Penny Hughes Sustainability (Chairman) Nominations, Risk Yasmin Jetha Sustainability, Technology Brendan Nelson Audit (Chairman), Nominations, Risk Baroness Noakes Risk (Chairman), Audit, Nominations Mike Rogers Remuneration, Sustainability Mark Seligman Senior Independent Director Nominations, Remuneration Dr Lena Wilson Sustainability Chief Governance & Regulatory Officer and Board Counsel Aileen Taylor (Company Secretary) Audit member of the Group Audit Committee Executive member of the Executive Committee Nominations member of the Group Nominations and Governance Committee Remuneration member of the Group Performance and Remuneration Committee Risk member of the Board Risk Committee Sustainability member of the Sustainable Banking Committee Technology member of the Technology and Innovation Committee 3 NatWest Plc Annual Report and Accounts 2017 Presentation of information In the Report and Accounts, and unless specified otherwise, the On 1 January 2017, the RBS Group made a number of key term ‘Bank’ or ‘NatWest’ means National Westminster Bank Plc, changes to the legal hierarchy of its subsidiaries to support the the ‘Group’ or ‘NatWest Group’ means the Bank and its move towards a ring-fenced structure. As part of continuing subsidiaries, ‘NatWest Holdings’ or ‘the holding company’ means preparation to deliver a fully compliant ring-fencing structure by 1 NatWest Holdings Limited, ‘the Royal Bank’, ‘RBS plc’ or ‘the January 2019, it plans to undertake a further series of actions. intermediate holding company’ means The Royal Bank of For further details of these actions see the Report of the Scotland plc, ‘RBSG’ or ‘the ultimate holding company’ means directors. The Royal Bank of Scotland Group plc and ‘RBS Group’ means the ultimate holding company and its subsidiaries. Disposal groups and discontinued operations NatWest Group Holdings Corp. Segment reporting NatWest Group Holdings Corp (NWGH) which wholly owns RBS The Group continues to deliver on its plan to build a strong, Securities Inc (RBSSI) is due to be transferred to RBS plc (which simple and fair bank for both customers and shareholders. To is due to be renamed NatWest Markets plc in 2018) by 1 January support this, and in preparation for the UK ring-fencing regime 2019 in preparation for ring-fencing. NWGH is a direct subsidiary the previously reported operating segments were realigned in Q4 of NatWest. NWGH is classified as a disposal group at 31 2017 and a number of business transfers completed. For full December 2017 and its assets and liabilities presented in details see the Report of directors. aggregate in accordance with IFRS 5. NWGH was mainly reported in the former NatWest Markets and Capital Resolution Reportable operating segments operating segments, which are no longer reportable operating Following the Q4 2017 changes detailed, the reportable operating segments but presented as a discontinued operation and segments are as below. For full business descriptions, see Note comparatives have been re-presented accordingly. 36 on the accounts. Ulster Bank (Ireland) Holdings Unlimited Company Ulster Bank (Ireland) Holdings Unlimited Company (UBIH) was UK Personal & Business Banking (UK PBB) sold to NatWest Holdings Limited (NatWest Holdings) on 1 Commercial Banking January 2017 in preparation for ring-fencing under ICB. NatWest Private Banking Holdings is a direct subsidiary of RBS plc. UBIH is classified as a Central items & other disposal group at 31 December 2016 and its assets and liabilities presented in aggregate in accordance with IFRS 5. UBIH, which RBS Group ring-fencing The UK ring-fencing legislation requiring the separation of was mainly reported in the Ulster Bank RoI operating segment, is essential banking services from investment banking services will no longer a reportable operating segment but presented as a take effect from 1 January 2019. discontinued operation and comparatives have been re- presented accordingly. UBIH wholly owns Ulster Bank Ireland To comply with these requirements it is the RBS Group’s Designated Activity Company (UBI DAC) which is regulated by intention to place the majority of the UK and Western European the Central Bank of Ireland. banking business in ring-fenced banking entities under an intermediate holding company. NatWest Markets Plc (NatWest Markets) will be a separate non ring-fenced bank and The Royal Bank of Scotland International (Holdings) Limited (RBSI Holdings) will also be placed outside the ring-fence, both as direct subsidiaries of RBSG. 4 NatWest Plc Annual Report and Accounts 2017 Top and emerging risks Top and emerging risks More detail on these issues can be found in the Litigation, The RBS Group employs a continuous process for identifying and Investigations and Reviews and Risk Factors sections. To managing its top and emerging risks. These are defined as prevent future conduct from resulting in similar impacts, the RBS scenarios that could have a significant negative impact on the Group continues to embed a strong and comprehensive risk and RBS Group’s ability to operate. A number of scenarios attracted compliance culture. particular attention in 2017 that relate to the RBS Group but Failure of information technology systems which are also applicable to the Group. The factors discussed The RBS Group’s information technology systems are complex. below and elsewhere in this report should not be regarded as a As such, recovering from failure may be challenging. To mitigate complete and comprehensive statement of all potential risks and these risks, a major investment programme has significantly uncertainties facing the Group. Refer to the Risk Factors section improved the resilience of the systems and further progress is on pages 199 to 231. expected. System sustainability has improved as we continue to Macro-economic and political risks simplify and modernise our infrastructure and applications. The RBS Group remains vulnerable to changes and uncertainty An increase in obligations to support pension schemes in the external economic and political environment, which have The value of pension scheme assets may not be adequate to intensified in the past year. Stress testing and scenario planning fund pension scheme liabilities. The actuarial deficit in the RBS is used extensively to inform strategic planning and risk mitigation Group pension schemes may therefore increase, requiring the relating to a range of macroeconomic and political risks. RBS Group to increase its current and future cash contributions. Scenarios identified as having a potentially material negative An acceleration of certain previously-committed pension impact on the RBS Group include: the impact of the UK’s exit contributions was made in Q1 2016 to reduce this risk. from the EU; a second Scottish independence referendum; a UK Depending on the economic and monetary conditions and recession including significant falls in house prices; global longevity of scheme members prevailing at that time, the financial market volatility linked to advanced economy interest actuarial deficit may increase at subsequent valuations and is rate increases or decreases; a protracted period of low interest also expected to be affected by ring-fencing. rates in the UK; vulnerabilities in emerging market economies resulting in contagion in the RBS Group’s core markets; a Operational and execution risks eurozone crisis; and major geopolitical instability. Increased losses may arise from a failure to execute major projects successfully. These