NatWest Group plc

Good morning and welcome to the NatWest Group Q3 Results 2024 management presentation. Today's presentation will be hosted by CEO Paul Thwaite and CFO Katie Murray. After the presentation, we will take questions.

Good morning and thank you for joining us today. I'll start with a brief introduction before Katie takes you through the financial performance and then we'll open it up for questions. You will have seen that we are upgrading our full-year income and returns guidance this morning as we continue to make good progress on our three strategic priorities, discipline growth, bank-wide simplification, together with active balance sheet and risk management. This progress, together with our ongoing support of customers, is reflected in our performance. So let's turn to the financial headlines for the first nine months of the year. Healthy levels of customer activity continue on both sides of the balance sheet. Customer lending growth of 8.1 billion to 367 billion was broad-based. In commercial and institutional, this was driven by both our large corporate and commercial mid-market customers, including lending to the social housing sector. We provided 23.5 billion of climate and sustainable funding and financing, bringing the total to 85.4 billion since July 2021, in reach of our 100 billion 2025 target. Our existing mortgage book returned to growth in the third quarter, as volumes and margins improved during the year, making returns more attractive. The acquisition of a 2.3 billion prime residential mortgage portfolio from Metro Bank completed last month and is included in these numbers. In addition, we grew our share in credit cards from 8.5% to 9.3%. On the other side of the balance sheet, customer deposits increased by 8.3 billion to 427 billion, with growth across all three of our businesses and migration to term deposits continuing to slow. In our private bank, assets under management increased by 5.7 billion to 46.5 billion, including 2.2 billion of net new inflows. This activity clearly underpins our financial performance. We generated income of 10.8 billion for the first nine months. Costs were 5.7 billion, and we remain on track to meet our full year guidance. Together, this resulted in operating profit of 4.7 billion and attributable profit of 3.3 billion. Return on tangible equity was 17%. Our strong capital generation allows us to continue supporting our customers, investing in the business and making distributions to shareholders. We generated 197 basis points of capital in the first nine months through strong earnings and actively managing our risk-weighted assets. Our CET1 ratio of 13.9% includes an accrual for final dividends in line with our ordinary payout ratio of around 40%. Strong earnings together with a lower share count have increased tangible net asset value per share to 316 pence. Earnings per share were 38 pence, up 12% year on year. We'll also be aware that the government has reduced its shareholding from 38% at the start of the year to under 16%, in line with their stated intention to exit fully by 2025-26. With that, I'll now hand over to Katie.

Thank you, Paul. I'll comment on the third quarter using the second quarter as a comparator. Income, excluding all notable items, increased 5.1% to £3.8 billion. Operating expenses were 9% lower at £1.8 billion, mainly reflecting lower severance and other staff costs. And there was an impairment charge of £245 million, or 25 basis points of loans. Together, this delivered operating profit before tax of £1.7 billion. Profit attributable to ordinary shareholders was £1.2 billion and return on tangible equity was 18.3%. Turning now to income. Income excluding notable items of £3.8 billion was up 5.1% with growth in both net interest income and non-interest income. Across the three businesses, excluding the benefit of an extra day in the quarter, income grew by £206 million. All three businesses delivered higher net interest income. Balance sheet growth was supported by margin expansion as tailwinds from the product structural hedge and Treasury more than offset the impacts of the first base rate cut. Group net interest margin increased 8 basis points to 218 basis points, with expansion across deposits, funding and other. Growth in non-interest income was driven by commercial and institutional, reflecting continued strong lending and payment fees as well as foreign exchange. The first cut was in line with our expectations, and we continue to assume rates will fall further in the fourth quarter, reaching 4.75% by the end of the year, with a further five cuts in 2025 to 3.5%. Of course, the actual outcome may differ from this assumption. We are pleased with the year-to-date income of £10.8 billion, reflecting a strong performance across the balance sheet. As a result, we now expect 2024 total income excluding notable items to be around £14.4 billion and we are upgrading our 2024 return on tangible equity guidance to greater than 15%. Moving now to lending. We continue to be disciplined in our approach and to focus on deploying capital where returns are attractive. Lending growth was broad-based across our businesses. Gross loans to customers increased by £8.6 billion, or 2.4%, to £367.2 billion. Taking retail and private banking together, our mortgage book returned to growth as expected, with balances up by £3.8 billion, supported by a higher gross new year lending and the addition of a £2.3 billion mortgage book from Metro Bank at the end of September. We continued to grow our share of unsecured lending and balances increased by 500 million to 16.6 billion across both credit cards and personal lending. Within commercial and institutional, lending to mid-market customers grew by 1.5 billion, driven by increased term lending. There was also strong growth of 3.2 billion in corporate and institutions, including demand for supply chain finance and sustainable finance. I'll turn now to deposits. Deposits increased by 2.2 billion to 427 billion with growth across all three businesses. In retail banking, there was strong growth in savings driven by instant access products and variable rate ISAs. In private banking, there was also good demand for instant access savings. In commercial and institutional, deposits grew across both commercial mid-market and business banking customers. Migration from non-interest-bearing to interest-bearing deposits continued at a slow pace, as expected, and there was no material change in customer behaviour following the first base rate cut. Non-interest-bearing balances remained at 32% of the total, and term accounts remained at around 17%. The average rate of interest we pay on our customer deposit funding has remained flat, reflecting the lag effect on pass-through and small changes in mix. Turning now to costs, we remain on track for other operating expenses to be broadly stable with 2023 at the full year, excluding the increase in bank levies of around £100 million and costs associated with the retail share offering. Other operating expenses of £1.8 billion for the third quarter were 7.5% lower than the second, mainly as a result of lower severance and other staff costs. You will remember that severance and property exit costs were elevated in the first half as we accelerated our work on simplification, including our announced exit from Poland. Other operating expenses for the first nine months were up 0.7%, excluding bank levies and the retail share offer costs. As we look ahead to the fourth quarter, other operating expenses are expected to be higher than the same quarter last year, as we expect to incur further severance and property costs, as well as a higher bank levy charge of around £120 million. Turning now to impairments. Our diversified prime loan book continues to perform well. We are reporting a net impairment charge of £245 million for the third quarter, or 25 basis points of loans. This takes the nine-month charge to £293 million, equivalent to 10 basis points. Key drivers of change from the second quarter are the absence of post-model adjustment releases together with a single name charge. Our balance sheet provision for expected credit loss still includes 299 million of PMAs for economic uncertainty, similar to the second quarter. In retail banking, the third quarter charge of 28 basis points reflects both the absence of a PMA release and unsecured growth, along with a charge of 31 basis points in commercial and institutional. However, we still expect a full year loan and payment rate below 15 basis points. Turning now to capital. We ended the third quarter with a common equity tier one ratio of 13.9%, up 30 basis points. We generated 57 basis points of capital pre-distributions, driven by attributable profit, which added 65 basis points. RWAs increased by £0.9 billion to £181.7 billion, consuming seven basis points of capital. Strong lending growth and the addition of the Metro Mortgage Portfolio added £3.4 billion of RWAs, and this was partly offset by a £1.3 billion reduction, mainly as a result of another significant risk transfer transaction. As usual, we accrued 40% of attributable profits towards our final ordinary dividend. We are pleased to receive the PRA's policy statement on Basel 3.1 and have spent time digesting this. We estimate this will result in RWA inflation of around £8 billion on 1 January 2026, largely driven by the removal of the SME and infrastructure support factors. The outcome of the PRA's Pillar 2 consultation will give us a better understanding of how this RWA inflation will be mitigated as the PRA intends. We continue to expect RWAs of around 200 billion at the end of 2025, including the impact of Basel 3.1 on the 1st of January 2026. And we continue to target a CET1 ratio in the range of 13 to 14%. Turning now to tangible equity per share. Tangible net asset value per share increased 12 pence to 316 pence. Earnings added 14 pence and the unwind of the cash flow hedge reserve added a further five pence as rates came down in the quarter. This was partly offset by the payment of our interim dividend of six pence. TNAV per share has grown 26% over the last two years, supported by a 14% reduction in share count in that time. Finally, turning to the full year guidance. As I mentioned earlier, we are upgrading our income and returns guidance and for the full year we now expect income excluding notable items to be around £14.4 billion. Other operating costs to be broadly stable with 2023, excluding additional bank levies of around £100 million and the retail offer costs of £24 million. a loan impairment rate below 15 basis points, and a return on tangible equity greater than 15%. And with that, I'll hand back to Paul.

Thank you, Katie. So to conclude, we're pleased with the continuing momentum in the business. As you've heard, we have upgraded our 2024 income and returns guidance today, and we're increasingly confident about the future. As we continue to grow income, control costs, and actively manage both our balance sheet and risk, the business remains well positioned to deliver strong shareholder returns. We'll update you on our guidance for 2025 at the full year in February. Thank you. We'll now open it up for questions.

We will now take your questions. If you'd like to ask a question today, you can do so by using the raise hand function on the Zoom app. If you're dialing in by phone, you can press star nine to raise your hand and star six to unmute once prompted. Today's call is scheduled for one hour, so we ask that you limit yourselves to two questions each to allow more of you a chance to ask a question. We will pause for a moment to give everyone an opportunity to signal for questions. We will now take our first question from Guy Stibbings, BNP Paribas Exxon. Guy, please unmute and go ahead.

Hi, Guy. Morning, Guy. Do that.

Guy, please unmute. Apologies for that. Hopefully you can hear me now.

We got you now.

Brilliant. Sorry about that. The first question was on margins, and then they had a second question on NatWest markets. So on margins, slide 21, deposit spreads are positive again, presuming that's the hedge more than compensating for the base rate impact. But I was wondering if you could perhaps talk a little bit more about the timing of the base rate cut, the timing of the past to help us think about it in future periods. Or perhaps another way to ask it is looking at slide 23, where the deposit caps were pretty flat, queue on queue, if we're still yet to see sort of the benefit from the August rate cut work through there. And then on the funding and other line, all basis points positive this quarter. It feels like quite a hard one to model from the outside. So just any help there as to how to think about that into future periods? And then on NatWest markets, another good quarter, capital markets are up, I think, 50 percent. And year to date, we're at about a billion or so already. And that's more than you used to talk about in terms of the contribution from NatWest markets. I recognize you sort of report it a bit differently or talk about it a little bit differently than you used to in the past. But how should we think about the contribution there? And if that's the base we can we can grow into next year? Thank you.

Thanks, Guy. Katie, I'll take the markets one, then you come in on this. Yeah, sure. Perfect. So, Guy, on markets, I'd encourage, I wouldn't encourage you to think about that any differently. It's an important part of the commercial and institutional franchise. As you know, we've done a lot to simplify that business over many years. It's got a strong FX franchise. It's got a strong capital markets franchise and a smaller rates business. Obviously, market conditions this year have been supportive. You can see that the business has traded well through quarter three in respect of the capital markets business. Its performance will be very much dependent on market conditions, but we feel like we've made progress. over the last 18 months, two years, big steps in terms of right-sizing that business and aligning it with the opportunity there is in our core commercial base. So that's how you should think about it. Katie, deposits?

Yeah, sure. There was a lot in that one question, Guy, so I'll try to make sure I pick the right things off. So what I would say in terms of the kind of flatness of that customer rate that we're seeing, It has been impacted by the rate cut. But what you've also seen is that we've also had a benefit coming through in terms of the instant access. I said in my prepared comments earlier that we've seen, for example, within the private bank, customers having greater preference for that. And the problem is when you're playing with these kind of margins at this sort of level, it wasn't enough to kind of move the piece. So you do have a couple of different things going on within that line. In terms of the base rate cuts, you know that we have it in our sensitivity. We model the delay within there. The way to kind of think about it is, you know, obviously there's a kind of statutory 14 days that everybody has. We found that when you, for our retail bank, that when you cut the rate, it's about a month until it hits the customer from when we first start that decision or when the rate cut goes down and we make the decision to when it actually hits the customer first. The commercial is a little bit longer in terms of that time, but you can see them kind of coming through. So I think you've started to see the impact of it, but obviously not a whole quarter of the impact given where it was. And then your last question around the funds and other. So that was increased by four basis points, as you can see on the slide, very much supported by active treasury management. There's a few things within there that I would kind of highlight that have kind of helped that treasury tailwind with an income, which you see coming through in the in the NIMWOC. So we have had strong deposit growth, as I mentioned already, that led to 2 billion growth in our average interesting earning assets. We've also done some redeployment of a part of the liquid asset buffer from short-dated gilts during Q2 to the whole quarter benefit of those in Q3. And we see most of those gilts maturing off during Q4. And then we've also benefited a little bit from the spread widening that we've seen in the Treasury repo activity. And those kind of combine together to kind of show that strength of that funding and other line. Thanks, Guy.

Thanks, Katie. Thanks, Guy. Thank you very much. Our next question comes from Chris Kant from Autonomous. Chris, please unmute and go ahead.

Good morning. Thank you for taking my questions. I had two, please. The first was on your revenue guidance for 24 and specifically the implied decline in revenues sequentially into the fourth quarter versus 3Q on a clean basis. I was just wondering if you could unpick your thinking there for us. how much of a sort of normalization in other income you're expecting within that, because obviously it has implications as to how we'll think about 2025. And the other question I had was in respect of Basel 3.1 and your capital target. So your 13 to 14 range, as within it, headroom to your sort of effective group MDA of 130 to 230 basis points. And that's a bit above your UK peers. So how should we think about how much a pillar to a reduction would convert into a potential reduction in those target bands in your case? Would we see more or less a full pass through of a pillar to a reduction given the comparatively high level of headroom you currently allow for. Thank you.

Thank you, Chris. Katie. Sure. Lovely. Thanks very much. So if I look at the kind of Q4 income versus Q3, there's a couple of things I would sort of unpick in there. So in Q3, all three businesses delivered higher income, supported by the balance sheet growth and margin expansion. And it's also important to remember there was one extra day in the quarter. That gives a benefit in that quarter of about £31 million. Non-interest income was also strong given the markets activity that Guy was referring to and also the transaction and lending related fees as well. And also those income tailwinds that we saw in Treasury I spoke about a moment ago. When I do look at Q4 income, I do expect it to be lower than Q3. I expect some seasonality in that non-interest income as market activity normalises further. The income tailwinds from Treasury are not expected to repeat. And also remember that in our assumptions, we've got a further base rate cut, which we're expecting in November. I do think it's important before we all overly focus on that Q4 income being lower than Q3 is to remind you that we have upgraded guidance today to around 14.4. Part of that upgrade is also because of the strength that we've seen coming through in our own view of Q4 from when we last spoke in July. And it's been a big contributor to the upgrade of the guidance as well. So although the shape is maybe not what you exactly like, it's important to feel that and to remember that. And that's also why we feel positive as we move forward from here. In terms of your question on other income. I know the other income line is more frustrating in terms of that centre income. What I do say is that you should always work to this number being roughly zero, since we do seek to allocate this out to the business. In Q3, it was minus 9 million down from 46 million in Q2. What we try to do, so in Q2, there's income left in the centre. We would normally allocate that out. We kind of did a bit of a catch up in Q3. So I do think if you think about that, that line is to think about it as zero. And I know that that's a little bit frustrating for you all as well when we have little bits left within there. If I move on to Basel and 3.1. You know, I'm not going to surprise you too much here, I suspect, Chris, by sort of saying, you know, we're looking at Pillar 2, the guidance is out. We're obviously talking with the regulators and things like that. But at the moment, it's really too early to give you a guidance on that. We're comfortable with the 13 to 14 headroom target that we're working with just now. And we've always said that we'll look at that in time and we just need to go a bit further on with Pillar 2. So we'll talk, we'll update you as soon as we feel comfortable to and we've got a bit more clarity on how the actual mechanisms will work to achieve the aim that the regulator is seeking. Okay, thanks very much, Chris.

Yeah, thanks, Chris. The consultation, obviously, Chris, is ongoing. Thanks.

Our next question comes from Benjamin Toms at RBC. Benjamin, please unmute and go ahead.

Morning, both. Thank you for taking my questions. Your cost of risk number has been a bit erratic year to date, but given that you still have about 300 million in overlays, is it sensible to assume that the rate trends are below through the cycle levels over the next 12 months? That's the first question. And secondly, the Sainsbury's transaction is due to close next year in the first half. Can you help us with the potential contribution this might have to the P&L? And will there be any day one impacts to impairments that we should think about in our modelling? Thank you.

OK, thanks. Thanks, Ben. I'll say a few words on impermanence and cost of risk. So if you look at year to date, our cost of risk is 10 basis points. So relatively low. The performance of the portfolios remains very strong. Customers have been very resilient. There is a delta between quarter three and quarter two. You'll remember that we had some releases in quarter, the PMA releases in quarter two, both on the retail and the C&I side. There's no material releases in the quarter three number. So that explains some of the differences between quarter two and quarter three. We upgraded our guidance or improved our guidance at the half year around cost of risk, obviously less than 15 basis points. Katie outlined in her pre-prepared words that we confirmed our guidance on that. We believe we've got a... A good business mix that's low risk, high quality prime assets. And we're very confident in the credit performance of the portfolios. On Sainsbury's, you're right, the acquisition is planned to close in the second half of the year. We said at the time of the announcements that it's roti accretive. It's around two and a half billion of loans and deposits. We haven't given any more detail at this stage, but I'd emphasise that at the point of announcement, we said it's roti accretive upon completion.

Thanks. Just one thing, Ben, on your specific question there. We will recognise an ECL on day one. That's absolutely standard, as you know. It'll be a good book charge that we'll bring in at that time as we complete it in H1 next year. Thanks, Ben.

Thank you. Our next question comes from Armin Rakar from Barclays. Armin, please unmute and go ahead.

Armin, do we have you?

Armin, please unmute if you can. Thank you. Hey, guys. Hopefully you can hear me. We can. Sorry for that. Thank you very much. I've got two questions, but sorry, I have to just ask 0.5 of another one because I'm just getting loads inbound on it. Um, Katie, just on this funding and other four bits positive, um, I guess not to repeat next quarter. I mean, I'm never quite sure if that's a headwind because you know, the non-repeat of income to me is a headwind. So should I be shaving off a couple of bits on my name as I go into Q4 or is it literally, this is not a, you know, don't expect to plus four in the Nimbridge in Q4. I need to get that one out of the way because I've had about four or five questions on that this morning.

Well, I don't deal with that one very quickly for you. So I would say we're not guiding on damage you know, but we don't expect that to repeat. But I would think of it more in the way that you're describing it is don't expect another four bips uplift from it. And because we're also not expecting it to reverse. I want to go to your real question one.

My real question. OK, cool. Two hopefully quick ones. On your RWA guide for 25. So thank you very much for the clarification on Basel. There presumably is some other bits and pieces as well though, right? CRD4 and other. So is there any color? I mean, ideally, if you could tell us a number, it'd be great, but really helpful. And the more pertinent point to that question is there is an implied loan growth that you're kind of pointing to, which is pretty decent. And I know we've got a couple of billion coming from Sainsbury's, but to me, it looks like you could comfortably budget for mid-single-digit loan growth. Given the performance in Q3 and I think forward lead indicators that are building from here, presumably you're confident on your line growth prospects next year. A mid single digit sounds very achievable. That's a question. The second question is on the capital. 13.9 is a great print. You have the capacity to participate in a directed buyback if there was one to come in November and December. My question is, how comfortable are you running your CET1 ratio at the bottom end of your target? Indeed, would you tolerate it being below 13.0% intra quarter? Because presumably you're very confident in cap generation. I guess I'm trying to get a sense of to what extent you'd be willing to participate in the DBB and what the kind of range is around that. Thank you very much.

OK, so I'll take the capital one and then I'll do RWAs and lending. So I'm on capital, as you've highlighted, it's a very strong print, 13.9 percent. We're very pleased with the capital generation through the quarter, 57 basis points in the quarter before distributions and obviously around 197 basis points year to date. That's good. You know, As you highlighted, given the change in the UK listing rules and obviously the shareholder approval we got at our AGM, that does provide another DBB opportunity before the one year anniversary next May. That, as I always say, is ultimately a decision for the government on the timing of that in terms of directed buybacks. But our preference hasn't changed. Our preference is DBBs and we remain keen to support the government's exit and participate if indeed that's what they want to do. In terms of where we're happy to operate, Yeah, Katie's talked in the past about being happy to toggle within the range. But what I wouldn't say is you shouldn't expect us automatically to pay down to 13%. We've got to think about the wider path to our RWA target of 200 billion. And obviously, as you alluded to, some of the capital will be consumed by the growth given the momentum we've got in our three businesses.

Perfect. On RWAs and loan growth. So let me talk about RWAs a little bit more widely. I mean, as you say, there's a number of different things that will come to us on RWAs. CRD4, we obviously have the operating charge that we have in every quarter. One, Sainsbury's is coming in. I think one of the things as I look at the walk we've got given you for RWAs, you know, we had book growth of two and a half billion pounds in Q3. We're very pleased to have seen that. What we're pleased about is really across the broad book and across the whole bank, which I think is really demonstration that the machine is working and our customers are responding to kind of more positive economic scenarios. We also were pleased to mitigate that with the RWA management. We've done a lot of RWA management this year. We're close to kind of £6 billion. I wouldn't take that as a run rate necessarily. There's obviously when you start, you get a natural kind of first sort of push, but it is something that we do expect to see as a feature as we go through here. CRD4, you know, we've not quoted numbers on that. Our philosophy always is to tell you things when we are comfortable to do that. And we will as that goes through. But we are very pleased today to confirm, reconfirm that around 200 billion number reflecting, you know, the acquisitions we've done since the start as well. And I think the clarity that we've now received on Basel 3.1 is very helpful to us. Thanks very much, Amit.

Thanks, Amit. Thank you. Our next question comes from Alvaro Serrano from Morgan Stanley. Alvaro, please unmute and go ahead.

Hello. Hopefully you can hear me OK. Good morning. Good morning. Can you give some details on the hedge in the quarter? And because and going forward, you've now sort of posted. several quarters of deposit growth can we start thinking about growth in the hedge next year and where i'm coming from is obviously your guidance uh is pretty cautious for q4 on revenues and it sounds like nii sort of is part of it um what we've seen here um in q3 among uk banks and you in particular is it what component is is front loading of growth versus sustainable growth in 2025 as we think about 2025. Any commentary there would be appreciated. And then a quick one on the provision and the single name provision. Can you reassure us or give us any details on coverage on that single name? Are we going to see more top-ups in coming quarters? Anything you can reassure us on there would be appreciated. Thank you.

Okay. Thanks, Alvaro. Katie, I'll let you talk to the hedge. But Alvaro, just to comment, I guess, in our view, it's not cautious guidance. We're obviously upgrading today both on previous expectations and consensus. So that doesn't sound too cautious to me. Katie, hedge?

Sure, I'll do the hedge and I'll pick up that little impairment question at the end as well. So in terms of the hedge, I don't have much more to say than I've already shared with you quite extensively. You know, we've repeated the H1 disclosure in the at the back of the pack as well. So you don't need to go searching for that. But at the moment, the product hedge H1 175, we're expecting that to reduce to 170 by the end of 2024. We do expect to continue to have that moderate increase in the hedge income year on year in 24. And then that tailwind really increasing as the notional stabilises. You know, a stabilisation of deposit supports that expectation. And we do think the hedge income will grow into 2025 and continue to improve as into 2026. We talked about 800 million in 2025. And our real confidence in that comes from the mechanistic approach that we continue and the amount of income we've already got locked into both of those years. When I think of the C&I impairment, I think, you know, in any quarter where you're recognising impairment, naturally you see a bump up in that quarter. If I look at the C&I impairment charge for the year to date, it's five basis points. So it really reflects an incredibly strong group that is performing well. And when you compare, as I'm sure you will, overall, the kind of where we were Q3 and where we are Q2 in terms of their impairment, you can see that in C&I, our stage three loans have gone up by 148 million in Q3. Our ECL has gone up by 123 million. And our ECL coverage has gone from 37.5 to 40.3. So really, we're well provided for in there. And there's a real strength of the book within those provisions. And the five basis points for the year is really a historically very low number. Yeah.

And we wouldn't, Alvaro, comment on individual clients. But I think it's fair to say we believe that we're very well covered in respect of that particular name. Thanks.

Thank you. Our next question comes from Jonathan Price from Jefferies. Jonathan, please unmute and go ahead.

Hi, Jonathan. Good to have you back.

Hello. There you go. Thank you. It's it's good to be back. I've seen the numbers this week and yours today. I've just got a couple of small ones, actually, in the scheme of things. But I'm interested nonetheless in the answers. The the customer funding rates across the three divisions in the third quarter are only down about a basis point. if you wait by the deposits of the businesses versus Q2. And obviously that's because you hadn't passed on much in the way of the rate cut until later in August on the retail side. And then I think October on the corporate side. Can you give us a sense as to what the impact of that deposit repricing lag was In Q3, I mean, I presume it's going to be a bit bigger in Q4, but I'm just thinking a bit more out into next year when this becomes, you know, possibly at some point a tailwind rather than a headwind. So the deposit repricing lag in Q3. The second question, obviously, last summer, I think in Q3, your term deposit base increased by about 20 billion pound net. So, you know, a very big set of inflows in those three months and a lot of those, I guess, matured in the third quarter of this year. I think the default was for those customers to drop into a primary saver account, which has got about 200 basis points of margin. Maybe you can tell us what those customers did in the third quarter and whether there's a sort of bit of a temporary benefit in Q3 as well from a brief period whilst customers decided what to do with their money. And at the same time, we're earning you 200 basis points of margin. Thanks a lot.

Okay, Katie, why don't you take the deposit repricing lag and then I'll talk more generally about the customer deposit trends.

Sure, perfect. Thanks, Paul. So as I look at it in terms of the funding rates, you're absolutely right, we've seen very little kind of movement in those rates in the quarter. They do vary a bit by franchise. It's largely the impact of the lag effect, but it also reflects kind of net flows and importantly, as you understand, the mix of where those flows are going. I'm not quantifying the repricing lag, but one of the things I think that you could look at and work out from is some of our disclosures. You can see on the deposit margin expansion that we've had within the NIM that if I looked at Q2 and I compared that to Q3, it's gone from six basis points to four basis points. So that would be a little bit of a proxy, I think, that could help you in terms of kind of quantifying what that might look like. Paul, do you want to...

Yeah, thanks, Jonathan. On deposits generally, we're very pleased with the growth in all three of our businesses, actually. And that's three quarters, consecutive quarters for all three businesses. So we're pleased with that. You can see, as you alluded to, that the level of term deposits has stabilized over the last couple of quarters. On your point around automatically defaulting into instant access, that actually isn't correct. Customers had a choice. uh at at origination around which account they'd go into but more more interestingly and more importantly uh is a high proportion of customers are renewing into fixed term accounts obviously the pricing of those counts has changed uh given we're a year on but a significant majority are are renewing We've done an awful lot of work over the course of the last 12 or 18 months in terms of developing our savings product range. Our customer journey is making it much easier for customers to understand that the products are available. And I'm really pleased those investments are paying off. We've also invested considerably in our savings kind of analytics, which has given us great insight into kind of customer behaviours. So I think we're seeing the benefits of that, both in terms of overall growth in deposits, but also surfacing offers to customers and allowing them to renew if they want to. Hopefully that gives you a sense of it. Thanks, Jonathan.

Yeah, thank you very much. Thank you, Jonathan. Our next question comes from Benjamin at Cave and Roberts from Goldman Sachs. Benjamin, please go ahead.

Yes. Good morning, both. And thank you for taking my questions. Just one on the macro front. So looking ahead to the budget on the 30th of October, And what is the key outcome that you're monitoring as a management team? And are there any particular areas which give you either cause for confidence or cause for concern? And then just one follow up on non interest income. So overall, that was notably stronger than expected in the quarter and grew obviously 5% year on year. In looking beyond the net worth markets element, is there anything within that which you would not consider underlying growth? And how should we think about sort of run rating that forward?

Thanks, Ben. Good to hear you. I'll take the first one, Katie. So on the budget, You won't be surprised, Ben, I'm not going to get drawn on individual measures. I think there's enough speculation and it will continue to be over the course of the next four or five days. In terms of what I'd like to see and what we'd like to see at NatWest from the budget, I think we'd like to see a budget that helps support growth and investment in all the regions and all the countries of the UK. So we'd like to see a a pro-growth budget. Obviously, that needs to strike a balance between stability in the public finances, but also supporting and driving investment. So we're monitoring all the measures that would contribute to that at a macro level. Obviously, there's a broad range of individual measures that will affect different parts of our client base, whether that's our wealth client base, whether that's our retail customer base, whether that's our businesses looking to invest. So we have, I guess, a set of a set of data points and a set of metrics at a more micro level as well. So we're prepared for that. But I guess we'll all find out next Wednesday exactly which measures the budget will contain or not.

Katie? Sure. Perfect. Thanks very much, Paul. So because I look at non-interest income, we are pleased with our performance in non-interest income. You know, we increased by 7.1% over the last nine months. which I think is a very kind of strong print. You know, for the quarter across our three businesses, that was up by 3.8% compared to Q2. That was driven payment services, lending and finance fees, currencies, incomes and markets and also the AUM fees. As I look forward from this, you know, Ben, that we don't, We don't guide on non-interest income specifically. We give you total income guidance. There is obviously some seasonality that we see that comes through more in Q4, but has different reactions. Obviously, when you get to Q1, that capital markets activity has slowed down a little bit in the run up to the budget and US election. Markets activity does normally reduce a little bit in December. So we'll see how that kind of flows through. And obviously within retail, some of the things like FX related spend is just less within the outside of the summer months. But over the medium term, we are confident in our investment initiatives for non-interest income that they can deliver growth for us. Some of the areas that we're working on is investment fees as we grow our AUM stack. You saw some really strong growth in that this last quarter. Our payment services offerings and areas of our markets businesses such as FX where we perform really very well. You know, obviously, there's other things around customer confidence and GDP growth, as well as the kind of markets environment being conducive for C&I. So there are a few things to think about as you take that non-interest forward. Thanks very much, Ben.

Thanks, Ben. I think it's another example of where our focus and our investments, we're now starting to see the benefits as we get into delivering the strategy that I talked to earlier in the year. Thanks, Ben. Thank you very much.

Our next question comes from Robert Noble of Deutsche Bank. Robert, please unmute and go ahead.

Hey, Robert. Morning. Thanks for taking my questions. Just something you said, the point you made on short-term gilts maturing in Q4, what impact does that actually have? Presumably the gilts are at lower yield than cash at the moment. So all else equal, doesn't that improve income? And then secondly, can you just walk us through the economics on the credit card product? So how much of the lending is balance transfer, what rate you book it in at, and how do the returns work against 100% risk weight on the assets there? Thanks.

Yeah, sure. So if I look at the Treasury tailwind, first of all, so just to kind of be really clear on what I said, what we did in Q2 was that we moved some of our liquid asset buffer from cash into short-dated gilts, and we're seeing them maturing in Q4. So what you had there was the benefit of a whole quarter in Q2, sorry, in Q3, forgive me, and then obviously some of them have already matured. We'll continue to look at that. um as we move forward in that but we're comfortable that that has given us um you know a real benefit you know we do look at it on a spread basis as we as we do some swapping out as well in terms of the the credit card growth you know as as we see them coming on obviously a portion of a large portion of the growth of the initial part is done by the six um month um transfer and then so that's the kind of zero percent lead so at the moment you're obviously your income is kind of delayed for those sort of six months. We reflect that in the EIR and things like that. And then as they mature, we have assumptions of how many we retain. And then obviously, you can start to see with improvement that we're seeing in the returns within that area that we're getting the benefit of that. It is interesting, we've also just launched our travel card, which has been launched now. That's not 0% balance transfer, and it's working quite well. We're pleased with its launch within there. So obviously, it's generating income as you go through. I think what Paul and I are pleased about with the credit card book is it's really maturing very well in terms of from where we started to the share it has of market today up to 9%. The addition of Sainsbury's when it comes on in next year will be important to really build that growth. And we do see this as an important contributor as we move forward from here.

And Katie had just added, we've consistently maintained a very high quality credit book. So it's very much a prime book. We haven't needed to change our risk appetite in terms of our ability to grow that. A lot of the growth comes from our existing customers and providing great credit card facilities to existing banking customers.

Thanks, Rob. Thank you. Our next question comes from Andrew Coombs at Citi. Andrew, please unmute and go ahead.

Hey, Andrew.

Good morning. If I could just tick off, I think, the one line item we haven't addressed yet, which is OPEX. You obviously haven't changed your full year guidance, but the Q3 has come in somewhat better than consensus expectations. I appreciate that Q3 is always usually a lower year. seasonal OPEX charge, given where the levy gets booked and given when severance usually gets booked. But it does look like there is an underlying headcount reduction in the quarter, notably in the retail bank. You talk about some lower severance, lower property exit costs. So just anything you can say in terms of trajectory on the OPEX space, not only into Q4, but into 2025 as well, given some of the steps you've been taking.

Yeah, sure. Absolutely. So I think you'll have heard me in my comments is when you think about Q4, we do expect our costs to be higher in Q4 than they were in the fourth quarter of 2023. So I would compare them there, I think, as you're doing, Andrew. I think it's important to kind of take a step back and think about what we're trying to do on costs. But we're working really hard in terms of simplification is to make sure that we can create capacity within the costs. so that we can deliver on our full year guidance, but still do the structuring and simplification changes that we want to make. We're not looking to add additional costs on top. So very clear that we will deliver on our full year guidance of broadly flat. And then some of the changes that you'll see coming through in terms of severance and property and things in the fourth quarter are all built into that guidance so that we can make a head start on the 2025 numbers. I'm not going to give you guidance today on what we're going to do on 2025. But I think what's really important is, you know, this is something that Paul and I are incredibly focused on. And we do see that it's really important that we make sure we create capacity within our cost base to be able to enable the investment that we want to do within the business. Thanks very much, Andrew.

Our next question comes from Amit Goel of Mediobanker. Amit, please unmute and go ahead.

Hi, thank you. So I have maybe one main kind of follow-up question. Um, it just, just coming back actually on the RWA progression, um, and thank you for the, the guidance on the inflation of the, the 8 billion. Um, so, so I guess that gives you about 10 billion, um, you know, factory in Sainsbury and so forth. Just, just curious how much, um, RWA management you think you could achieve, um, whether that kind of steps up or whether a lot of RWA management is done. So just thinking about that in terms of your capacity for incremental loan growth. And then also what you're thinking about the pacing as we get rate cuts. Are you expecting it to kind of step up later or is it kind of fairly even as we move forward? Thank you.

Okay, I'll take... Thanks, Amit. So on... I guess, capital management in RWA. So it's clearly one of our key strategic priorities to work the balance sheet harder. You can see the progress that we've made this year, the capital management actions that have happened in quarter two and quarter three. We will have a systemic approach to that. So we will be driving more capital management activity. We don't guide on the exact amounts. But I guess if your question was kind of, is it done? The answer is no. We believe there's more opportunity around capital management activity. If you look at our relative position compared to our peers, that would suggest we do have the ability to drive more good capital efficient business. activity. We'll continue to do that. As you know, the way these transactions work, I wouldn't read forward from a particular quarter that that's going to be the output for the next quarter. But we definitely have potential to drive capital management harder and we will do over the course of the plan. Katie on rate cuts.

Yeah, so rate cuts, we've got five for next year. First one is in line with the first MPC meeting in February. And they all kind of, they're spread sort of out throughout the year. The kind of various meetings that come up is some that we don't, we're not assuming any, but we do assume that they start early in the February meeting. Thanks, Amit. Thanks, Amit.

Our next question comes from Ed Firth of KBW. Ed, please unmute and go ahead.

Hi, everybody. Thanks so much for taking the questions. I had one, but just one sort of supplementary. There have been a few questions on the impact of the rate cut. But just to be absolutely clear, in your sensitivity, I think you said it was about 160 million for a 25 basis point cut. That's an annualised number. So I guess 40 for a quarter. Just to be clear, that is broadly what you saw in Q3. Should we assume that maybe a little bit more because of the delay on the deposits? But orders of magnitude, your sensitivity is playing out as expected. I guess that's my that's a question of the statement. That's my first question. And then the second question is slightly more left field. Looking at your balance sheet, you've still got about 15% of your assets now sitting with the Bank of England, even after quite a lot of QT has gone on. Am I right in thinking that as we roll that forward, you would expect... that to come down as the Bank of England continues with its tightening, firstly. And secondly, if we do see that come down, how should we expect that to impact the P&L? I mean, is that like a headwind or a tailwind for the margin? And what sort of spreads? How do you actually manage that as a revenue pod? Thanks very much.

Thanks. I'll take the first one, first of all. So in terms of that sensitivity, we've repeated it at the back of the slides on slide 26. So you're absolutely right. So it's 167, 42 on the structural hedge and 125 on the managed margin. Obviously, you're right, that's what happens on day one. We've got assumptions of 60% pass-through. We've got, you know, there's then the lag effect. In theory, 40 a quarter, but actually the rate cut only came in August, so you're halfway through the quarter. But everything's there for you to be able to do that as we go through. If I look at it, cash balances will come down. What we will see is allocation back into securities from cash. You saw us do a little bit of that as we took the opportunity in Q2. The income impacts will be driven by the market dynamics and by credit spreads as well. Thanks very much, Ed.

But sorry, is that just in sort of conceptually? I mean, is that a positive contribution to your margin at the moment? Do you make a good spread on that?

I mean, yes, absolutely. And that's what you saw in those Treasury tailwinds coming through in this quarter is that additional four basis points coming through in funding and other. So and what, you know, Donald, our Treasurer does is he looks very much to try to make sure that we're managing that kind of liquid asset buffer in the right way so that we're within the rules we set, which are very strict, but that we do a little bit of margin maximisation.

OK, thanks. Thanks, Ed. Our next question comes from James Invine of Redburn Atlantic. James, please unmute and go ahead.

Hey, James.

Hi, Katie.

Hi. Good morning, Paul. I just had a question on loan growth. I mean, generally, you sound pretty positive on it. But one area in particular that's been growing really well is that corporate institutions line. So up very strongly in the quarter, I think, versus a year ago as well. It's a double digit percentage increase. Is that kind of growth sustainable? I mean, you really think this kind of momentum can continue?

OK, thanks, James. So as you say, I think the lending growth we've shown this quarter and year to date has been encouragingly broad based. Actually, you can see that the mortgage portfolio growing in quarter three. You can see the cards business. But as you rightly point out, the commercial and institutional franchise has been growing well. I'm particularly pleased, actually, that the mid market business has grown significantly. for three quarters on the run, because to me, that's the barometer of the UK economy. You know, that's the kind of the mid-market customers all around the UK. So to see that growing three quarters in a run is very encouraging. And I think testament to some of the development work we've done around the product and the lending journeys. On the true, you know, the very large corporate and institutional market, The nature of that business, as you know, is it can be a little lumpy. It depends on big transactions. The growth was particularly strong in quarter three. It might not be so strong in quarter four, given the growth that we've seen in quarter three. But what I would say more broadly is if you think about. The lending demand there, it's for things like the energy transition. It's for infrastructure, whether that's physical or digital infrastructure. It's supporting large corporate clients. So you would expect through the cycle, assuming a healthy economy, demand in that segment to remain robust. And we're very well placed to take advantage of it, given the expertise we have in some of those specialist areas I mentioned. Thanks, James.

OK, perfect. Thank you. We'll now take our final question from Jason Napier from UBS. Jason, please unmute and go ahead.

Good morning. Well done on a very good set of results. All the right trends are there and I think we've probably handled most of the P&L line items so far. Just one area I wanted to probe if I could. The question on CNI growth and the budget next week, there's a lot of talk about quite a lot of investment going into things like infrastructure, a place where banks have a strong heritage. I wonder whether there are two things you could talk about. One, does private credit change any of that in terms of competitive dynamics, the share of the debt growth that the banking sector can sort of own? And then secondly, things have changed on that front. You know, there are probably, I don't know, 15 or 20 banks that have now got linkups with private credit funds that they put in place to originate the distributed infrastructure. Is

the right sort of plan to have is that part of the srt future for netwest thanks thanks jason i i think i got most of that for your for your benefit the line was a bit distorted i think that i'll i'll answer what i thought the questions were and you can come back and tell me if i mean one was around just a general view on private credit and then i think you're alluding to uh I guess the series of announcements there's been on kind of private credit partnerships. So I'll try and cover those two points. But do let me know if that wasn't it. I think generally, obviously, there's been a lot of coverage around, I guess, the private credit market. given the increasing role that non-banks are playing, whether that's capital to real economy, residential mortgage, resi loans, corporate loans, be that real estate or infrastructure. So there's no doubt it's an important asset class. I think for large incumbent banks like ourselves, it's important to remember that We've been engaging with, I guess, with these customers for an extensive period of time. Many of them are customers in themselves. All the participants that you know are customers of ours. Some of those have been customers actually for over 20 years and both for financing, but also for risk management. So from our perspective, it's not really a new area, we think. In terms of the business we do, we're very comfortable. We understand the risk and the returns profile. We've also been very considered in the past around the partnerships that we do have. So we do we do have and have had for quite a long time, almost 10 years, actually, some distribution partners in terms of the private credit space to support our commercial lending business. The lending business, but also, as I think you alluded to in your second question, to support our RWA and risk management activities. So, yeah, we've got a number of partnerships in that space. It helps us from the lending front, helps us on the risk management space. There's obvious benefits for us. It allows us to originate and distribute products. improves our balance sheet velocity for the partners. It's very attractive because obviously they can access the distribution that our bankers and relationship managers have across the whole of the UK. So it's multiple benefits. We've participated and had partners for a while. My personal view, it's an asset class that's only going to expand over the course of the the historic change in regulations, but also the funds that are flowing into those private credit funds. So I hope, Jason, because it was quite difficult to hear, I hope that was the sense of it.

Sorry, that's perfect. Thank you. Thanks, Jason. I'd now like to hand back to Paul to close the session.

OK, thanks, Matt. Thanks, everybody. Thanks for joining. Thanks for being very diligent around two questions each. We appreciate that. I hope you have a good Friday and I hope you enjoy your weekend when it comes. Good to speak to you. Thank you.

Thanks, guys.