NatWest Group PLC

Good morning and thank you for joining us today for our third quarter results announcement. I'll start with the headlines and an update on our strategic priorities before handing over to Katie to take you through the results in more detail. We'll then open it up for questions. So starting with the headlines. Whilst the economic outlook remains uncertain as a result of the pandemic, our primary focus has been on supporting our customers and protecting the business whilst continuing to make good progress against our Against this backdrop, we have delivered a resilient performance. Taking into account impairments, we're reporting an operating profit before tax of £355 million and an attributable profit of £61 million for the third quarter. Impairments in the third quarter were low compared to the second at £254 million. Turning to look at the first nine months of the year, we're reporting a pre-impairment operating profit of £2.7 billion, an attributable loss of £644 million. Impairment charges for this period stand at £3.1 billion. Our strategic execution remains strong and we are on track to meet our 2020 cost reduction target of £250 million. Excluding operating lease depreciation, expenses for the first nine months were £4.8 billion, down from £5 billion for the same period last year. Importantly, we continue to operate with one of the strongest capital ratios amongst our European peers at 18.2% and with a liquidity coverage ratio of 157%. We take comfort from this capital strength, which gives us flexibility to navigate an uncertain environment. I want to talk briefly about the strategic priorities I set out in February on slide four. These priorities underpin our purpose of helping people, families and businesses to thrive. And we have been putting this into operation in challenging times. Our branch network has remained open in order to support customers up and down the country. And I'd like to thank all my colleagues who are working hard on behalf of our customers, whether that is face to face in branches or our offices, working from home or via digital and video channels. I'll talk more about each of our priorities in turn, starting on slide five with supporting our customers. Inevitably, our main focus this year has been on helping customers manage through the pandemic. Activity levels have increased across both our retail and commercial businesses, and gross lending grew 31 billion to 371 billion for the first nine months. In retail banking, mortgage activity has grown since July, with applications up 91% and new lending up 10% on the second quarter. Debit and credit card spending has also continued to increase, with debit card spending now above pre-COVID-19 levels. The number of customers taking a mortgage repayment holiday has been steadily decreasing, and trends suggest they acted through caution at the start of the pandemic rather than need. Initial mortgage holidays have declined from 33.6 billion, or 22% of the book, to 6.2 billion, or 4% of the book, in the third quarter. 85% of mortgage holidays have now ended, and almost all these customers have returned to normal payments with just a small number in arrears. I would, however, caution that it is early days in an ongoing pandemic, and we continue to monitor this closely. You can see on slide 6 that commercial banking activity levels are also starting to normalise. Revolving credit facility utilisation is now 26%, down from a peak of about 40% as government lending schemes kicked in and customers accessed capital markets. We're also seeing the number of customers on payment holidays decline in commercial banking. They now represent about 8% of the book, with a value of around 9.5 billion, down from 11% and 12.9 billion in the second quarter. We continue to support businesses through the government support schemes, though demand has tapered from about 48,000 applications on the first day to an average of 800 a day in September and 700 a day in October. We approved lending of 2.8 billion during the quarter, taking our total lending to 12.8 billion for the first nine months, in line with our share of commercial customers. As you know, there have been significant changes to these support schemes announced, allowing more time and flexibility in repayments. And we are working closely with customers to understand their response to these changes. We remain comfortable with the risk and diversification of our lending books. In retail, just 7% of our lending is unsecured and stage migrations remain low. In commercial, you will recall there were several sectors we monitor closely, including retail, leisure and transport. £900 million of loans in these sectors are stage three, and we are comfortable with our coverage ratio of 52%. Our priority has rightly been on helping customers to manage during the pandemic. But you'll see on slide seven that we are also focused on meeting evolving customer needs in order to generate future growth. We continue to have capacity to grow across our sizeable franchises in retail, commercial and private banking. For example, in retail banking, we have a 16% share of current accounts, but just 10.6% stock share of overall mortgage lending. This is an attractive area where we have added resource to support our strong performance. We have also a low share of unsecured lending with a relatively small cards business, giving us scope to grow carefully within the limits of our current risk appetite. We announced in August that we are bringing our wealth businesses together under Peter Flavel, our CEO of Private Banking. By combining the expertise of our premier and private banking teams, we can fully leverage our asset management expertise to support saving and investment needs for customers across the group. In commercial banking, our investment in innovation and fee-based products continues with our merchant acquiring platform, Till, and our new payment platform, PayIt. And in NatWest markets, the refocus business is now better placed to support our strong corporate and commercial business with foreign exchange and access to financing. So we see plenty of scope to serve our customers more effectively and grow by extending the full capabilities within the bank across our business. I'd like to move on now to our next priority on slide eight. Our focus on simplification and leveraging our technology and digital investment has been supported by accelerating change in customer behavior this year. We now have 9.3 million active digital users, and we added almost a quarter of a million newly active mobile users during the third quarter, taking the total to 7.6 million. Use of our chatbot Quora has accelerated with over 6 million interactions from both retail and business customers. And video banking is now available across our entire network with interactions up from less than 100 a week in January to almost 9,000 a week now. Digital acceleration makes it easier for customers to access our services and for us to serve them cost efficiently. It is one reason we have been able to reduce costs. We remain on track to achieve our 2020 cost reduction target of 250 million and continue to expect strategic costs in the region of 800 million to a billion. I've touched briefly on some of our innovations, but we are also continuing to develop partnerships with others. We recently announced a new agreement with BlackRock, who will support our wealth management activities with their investment management processing. This delivers two major benefits for our customers. First, we make savings we can pass on to them. And secondly, our wealth managers can put greater focus on asset allocation. Agreements like this allow us to concentrate on activities where we are able to excel, whilst at the same time benefiting from the expertise of others. On slide nine, I want to talk about capital allocation, which is key to ensuring we maintain discipline on returns. We continue to refocus NatWest Markets to better align it with the needs of our corporate and institutional customers, and we are now ahead of our plan on our RWA reduction target. Our year-end target was initially 32 billion, and as a result of disciplined execution, we have exceeded this. RWAs were 30 billion at the end of the third quarter, and we expect to end the year at around this level and to achieve most of the reduction to our 20 billion medium term target by the end of 2021, with associated disposal losses of around 600 million over the two years. We have been able to do this by continuing to simplify the business in order to focus on fixed income, currencies and capital markets. So in summary, our third quarter results represent a resilient performance and we continue to execute on our strategic priorities. We are taking advantage of our strong franchises to support customers, simplifying our business to make it more effective and efficient, powering our organisation through innovation and partnerships, and sharpening our capital allocation to allow us to drive sustainable returns over time. With that, I'll hand over to Katie to take you through the results.

Thank you, Alison, and good morning, everyone. I will start today with the Group Income Statement. We reported total income of £2.4 billion for the third quarter, down 9.5% from the second quarter. Within this, net interest income was up 1% at £1.9 billion and non-interest income was down 35% to £500 million. This decrease reflects a number of notable items, including a loss of £324 million on the liability management exercise carried out in September, which we have already announced. Excluding all notable items, income was down 3% on the second quarter, mainly driven by the normalisation of market conditions in NatWest markets. We reduced overall operating costs by 5% in the quarter to £1.8 billion. And we are reporting operating profit before impairments of £609 million, down 21% from the second quarter, as a result of the notable items I referred to earlier. The impairment charge for the third quarter was significantly below the second at £254 million, which represents 28 basis points of gross customer loans. Taking all of this together, we reported an operating profit before tax of £355 million, an attributable profit to ordinary shareholders of £61 million. I'll move on now to net interest income on slide 13. Group net interest income for the third quarter was £60 million higher than the second. If you look at the columns for the second quarter on the left and the third quarter on the right, you can see that bank net interest income grew £43 million, or 2%. This is the result of higher volumes and one extra day in the quarter. Turning to bank net interest margin. This decreased two basis points in the third quarter to 165 basis points. This is the result of three factors. First, the lower yield curve accounted for three basis points, the majority of which is due to the structural hedge in line with guidance. Second, increased central liquidity accounted for a one basis point fall. And third, change in mix of lending and pricing competition added two basis points to the net interest margin. Moving on now to look at the drivers of net interest margin. On slide 14, we show customer loan and deposit rates for retail and commercial banking, which together account for around 85% of group net interest income. We also show the overall group gross yield and cost of interest earning banking assets, which includes the rest of the balance sheet. Notably, the lower yielding liquidity portfolio and the higher cost wholesale funding. On the asset or lending side, yields across the Group have continued to fall, reflecting the pass-through of lower interest rates. However, the pace of reduction has slowed during the third quarter. Gross yield declined by 13 basis points to 194 basis points, versus a 20 basis point decline in Q2. On the liability or deposit side, costs reduced by a further eight basis points in the third quarter to 67 basis points. We have now repriced most of our deposits to the floor and I did not expect much further benefit from this going forward. Looking to the fourth quarter, there are four main factors to consider. First, ongoing pressure from a lower yield curve through our structural hedge. Our guidance of around two basis points per quarter is unchanged. Second, a change in liquidity, which as you know, affects average interesting earning assets and therefore NIM. Third, mix and pricing. Mortgage margins on the front book improved to 140 basis points in line with the back book. Application margins in Q3 averaged 160 basis points, close to bank net interest margin of 165 basis points. As a result, mortgage lending will be less dilutive to bank them in the fourth quarter. However, our expectation is that as high demand tapers, current applications margins may not be sustainable. Finally, on mix and pricing. Naturally, customer behaviour will impact higher margin unsecured and commercial balances. Moving on now to look at volumes. Gross banking loans increased by £1.5 billion in the third quarter, driven by mortgages, which grew by £2.4 billion, or 1.3%, reflecting increased demand after the easing of lockdown. Our flow share in the third quarter was 11%, down from 14% in Q2, reflecting our temporary absence from the 80 to 85% loan-to-value segment. Nevertheless, it averaged 14% for the first nine months of 2020, well above our stock share, which has further improved to 10.6%. Secured personal balances make up 50% of total customer loans across the bank. Unsecured balances in aggregate declined in the third quarter. But as you can see, we saw some small growth in our credit card book. In commercial banking, demand for government schemes has slowed from the second quarter, but this still accounted for £2.9 billion of additional lending. However, this was countered by the repayment of RCFs, which now sit at around 26% utilization, broadly in line with our pre-COVID levels. Average interest earning banking assets grew by 10 billion pounds in the quarter as a result of the averaging effect of strong loan growth in the second quarter and further liquidity build in the third. Moving on now to look at non-interest income on slide 16. Third quarter non-interest income excluding notable items was 18% lower than the same period last year and 11% down on the second quarter this year. There are two different trends to highlight. First, fees and commissions. The reduction from last year mainly reflects regulatory changes in retail banking. We maintain our guidance over 200 million pounds impact on group income for 2020. rising to £300 million for 2021. In addition, customer activity levels have been subdued as a result of COVID-19. You can see this in our fee and commission receivables breakdown. We have seen a noticeable reduction in payment services and credit and debit card fees year on year due to lower spending levels. However, relative to the second quarter this year, customer activity levels have increased, resulting in growth in these segments as well as lending fees. The second trend to highlight is trading income. NatWest Markets has had a strong first nine months of 2020, although we saw a return to more normalised customer activity and volatility levels in the third quarter. Looking ahead, we expect the ongoing refocus of NatWest markets and the reduction in RWAs down to our 20 billion medium target to weigh on trading income. The outlook for fees and commissions is more uncertain given changing government measures to restrict COVID-19. However, we would expect these to grow as the economy recovers. Moving on now to look at costs on slide 17. Other expenses excluding operating lease depreciation were 1.5 billion pounds for the third quarter. That's 78 million pounds lower than the second and 152 million pounds lower than the third quarter of last year. This brings our total cost reduction to 193 million for the first nine months. And we are on track to achieve our 250 million pound target for the full year. It is worth reminding you that these cost savings are net of inflation. In the fourth quarter, we will incur the UK bank levy, which we expect to be around 160 million pounds. Strategic costs in Q3 were 223 million pounds, which includes 90 million pounds of redundancy costs across the group. Moving on now to look at impairments on slide 18. We reported an impairment charge of £254 million for Q3, or 28 basis points of gross customer loans. This is substantially lower than the first half, as we have made no changes to the economic assumptions presented in July, and there has been a very limited number of customer defaults or stage migrations. We now expect the impairment charge for full year 20 to be at the lower end of our £3.5 to £4.5 billion range. Expected credit loss provisions were broadly stable in the quarter, reflecting additional Stage 1 and Stage 2 provisions, which were partially offset by the utilisation of Stage 3. So let me show you how our loan book is performing on slide 19. There was little change in the quarter, reflecting ongoing government support measures and corporate's healthy cash balances. 97% of our loan book is in Stage 1 and Stage 2 not past due, where customers remain up to date on payments. Stage 2 past due is 0.9% of the book, down from 1.3% at Q2. And Stage 3 is 1.8%, down from 1.9% at Q2. Our ECL coverage ratio is stable at 1.7%, with Stage 3 coverage of 41%. As Alison mentioned, we have a small proportion of wholesale loans in sectors that we monitor closely. These amounted to £28.8 billion in Q3, which represents 8% of gross loans. In these sectors, similar to the trend at group level, Stage 3 gross loans were broadly stable at around £900 million, and we remain comfortable with coverage at 52%. Turning now to look at risk-weighted assets and capital on slide 20. Risk-weighted assets decreased £7.6 billion in Q3, with reductions across credit, counterparty and market risk. Credit risk weighted assets decreased £3.3 billion. This includes a £1.8 billion benefit from the infrastructure and SME factors and an impact from pro-cyclicality of £0.9 billion. The largest decrease by business was in NatWest markets, where we reduced RWAs by £5.1 billion, bringing them down to £30 billion, which is ahead of our full-year reduction target. Looking forward, we now expect RWAs to be below our previously guided range of 185 to 195 billion at the end of 2020. This is due to the acceleration in NatWest markets and a relatively low level of pro-cyclical inflation. We ended the quarter with a common equity tier one ratio of 18.2% on a transitional basis under IFRS 9. This is 100 basis points higher than Q2 due to lower RWAs, which added 58 basis points, the infrastructure and SME factors, which added 17 basis points, and IFRS 9 transitional relief, which added 8 basis points. We expect the software intangibles benefit to be around 20 basis points in the fourth quarter. Moving on to my final slide, which demonstrates the strength of our balance sheet. Our CET1 ratio is now 420 to 520 basis points above our 13 to 14% target range and more than double our maximum distributable amounts. Our UK leverage ratio of 6.2% is 295 basis points above the Bank of England minimum requirements. We have also maintained strong liquidity levels with a high quality liquid asset pool and a stable, diverse funding base. Our liquidity coverage ratio decreased in the quarter to 157% as we repaid a further £5 billion of TFS. Headroom above our minimum requirement is £62 billion. So to conclude, we have delivered a resilient operating performance in the third quarter with higher net interest income and continued progress on both cost and RWA reductions. As we've made limited change to our guidance, this is summarised in the appendix. And with that, I'll hand back to Alison.

Thank you, Katie. Before we open it up for questions, let me wrap up with a brief conclusion. Whilst the economic outlook remains uncertain, our focus continues to be on supporting our customers at the same time as protecting the business. We are making good progress on our strategic priorities. In particular, I want to highlight the refocusing of NatWest Markets, where we are ahead of plan on our RWA reduction target. Most importantly, we have a capital generative business with a strong CET1 ratio of 18.2%, well above our target ratio of 13 to 14% over the medium to long term. This capital strength gives us the flexibility to navigate an uncertain outlook, to resume dividend payments as soon as this is possible, and to consider options that create compelling shareholder value. Thank you very much, and we're now happy to open it up to questions.