NatWest Group PLC

Good morning and thank you for joining us today. As this is a quarterly update, we'll be relatively brief this morning. I'll cover progress on our performance and strategy before handing over to Katie to take you through the financial performance in more detail. We'll then open it up for questions. So let me begin with the headlines on slide three. We delivered a profitable performance in the first quarter as we continue to support our customers to advance our strategy and to accelerate our digital transformation in response to changing customer needs. We are reporting operating profit before impairments of 844 million and have made an impairment release of 102 million during the quarter as defaults continue to remain low with little change in stage migration. Taking this release into account, we delivered an operating profit of £946 million and an attributable profit of £620 million, up from £288 million for the same period last year. We are seeing the potential for a more rapid recovery taking shape. However, at this point, our economic assumptions remain unchanged and we will review them at the half-year. Net lending grew £2.2 billion, driven mainly by mortgage growth. We reduced costs by £72 million year-on-year, ahead of our targeted reduction rate. And we continue to benefit from a strong capital position with a CET1 ratio of 18.2%, after a £1.1 billion directed buyback from the government of almost 5% of our share capital, the maximum amount possible in any given year. This capital strength continues to give us flexibility to navigate ongoing uncertainty, to consider options for creating shareholder value and to return capital to shareholders. As you know, we intend to maintain a payout ratio of 40% of ordinary shares with distributions of at least 800 million each year up to and including 2023. The purpose-led strategy we set out last year, shown on slide four, is designed to drive long-term sustainable shareholder returns by serving customers across their lifetime, powering the organization through innovation and partnerships, simplifying and digitizing the business, and maximizing capital efficiency. Our purpose is also exemplified by three focus areas, enterprise, financial capability, and climate change, all of which strengthen our ability to drive returns. I'm not proposing to cover these focus areas in detail today, but I do want to mention our €1 billion affordable housing social bond, the first of its kind issued by any UK bank. This is the third issuance under our green social and sustainability bond framework. Our first social bond in 2019 has helped to create almost 7,000 jobs to date, and our first green bond issued last year has allocated proceeds to renewable energy projects around the UK, supporting customers transition to a low carbon economy. So let me move on now to how we are serving customers to generate growth on slide five. It is too early to comment on the impact of this month's easing of lockdown, but credit and debit card activity has already been trending towards more normal levels. Spending on debit cards is now above levels in March last year, before we saw any impact from COVID-19, whilst credit card spending is approaching those levels. We're also seeing recovering demand for personal loans and new cards. Across the retail and commercial businesses, net lending grew by £2.2 billion during the quarter, excluding government schemes. And we continue to see strong deposit growth of £12.1 billion, bringing the total to £415 billion. In the retail bank, gross new mortgage lending was resilient at £9.6 billion, with healthy margins as we maintain strong pricing discipline. Commercial banking lending has been more muted as businesses take a cautious approach during ongoing uncertainty and continue to deleverage. Demand for government support schemes continues to taper, and the majority of those who asked for payment holidays have now returned to normal payments in both retail and commercial banking. Two new government schemes were introduced in early April, Pay As You Grow and the Recovery Loan Scheme. Pay As You Grow enables businesses which have started repaying their bounce-back loans to request an extension of their term from six to ten years, take a repayment holiday or pay interest only for six months. We have received around 14,000 applications to date, the majority of which are to extend the term of the loan. But this number could increase as we have recently contacted over 100,000 customer accounts to advise it is 60 days or less to the first repayment date. On the recovery loan scheme, we received around 3,000 applications in the first week, although demand has dropped since then to between 100 and 150 applications a day. I want to move on now to talk about how we are using innovation and in particular digital transformation on slide six. The acceleration of digital adoption that we saw last year has continued during the quarter. 61% of our retail customers now use only digital means to interact with us, up from 50% a year ago. This means people are able to access our services at any time of day from any place they want, making their lives easier and more convenient. In commercial banking, 68% of sales are now via digital channels. And use of our chatbot Quora has grown 58% year on year, with over 40% of interactions completed without human intervention. We're also using video banking for an average of 13,000 interactions a week, up from around 7,000 a week in the fourth quarter last year. This enables us to deliver personalized customer service efficiently despite the pandemic and without the need for customers to travel. These are all good examples of how we are creating a relationship bank for a digital world. We are also actively managing capital to drive returns, which I will cover on slide seven. As I mentioned earlier, in March, we announced a directed buyback from the government of almost 5% of share capital for 1.1 billion, the maximum amount possible in any given year. We have also made strategic choices in relation to capital in NatWest Markets and Ulster Bank. In NatWest Markets, we're ahead of plan as we reduce risk-rated assets which are now 26.5 billion. And we expect to achieve the majority of the remaining RWA reduction by the end of the year. On Ulster Bank, negotiations are ongoing with AIIB about the performing commercial loan book, as well as with other third parties about retail and SME assets, liabilities and operations. We will update you in due course when we have anything new to report. In addition, we are actively managing portfolios and using synthetic trades across the business to reduce capital consumption and to manage risk. For example, in commercial banking, active capital management has resulted in a reduction in RWAs of 600 million in the quarter. We also optimise our regulatory capital with ongoing liability management exercises, and we repurchased 1.6 billion of Tier 1 and Tier 2 securities during the quarter. So before I hand over to Katie, let me update you on slide 8 on the progress we're making towards the targets we announced in February. We're pleased to report that our progress is on track, but of course we do not expect this to be linear on a quarterly basis. Net lending of £2.2 billion in the quarter equates to annualised lending growth of 3%. costs fell by 72 million or 4.5% ahead of our targeted reduction rate of about 4% per annum. And our CET1 ratio of 18.2% is down from 18.5% at the year end as we move towards our target ratio of 13 to 14% by 2023. Our intention remains to return capital to shareholders or pursue other options that create value as we move towards that target. though bear in mind we have yet to experience any pro-cyclicality. And with that, I will hand over to Katie to take you through our performance in more detail.

Thank you, Alison, and good morning, everyone. I will start with the group income statement, taking the fourth quarter as a comparator. Total income of £2.7 billion was up 4.9% on the fourth quarter. Within this, net interest income was down 2% to £1.9 billion, and non-interest income was up 29% to £728 million. This increase reflects seasonally higher trading income and higher lending volumes. Operating expenses fell 22% to £1.8 billion, driven by the absence of the annual UK bank levy, lower strategic and conduct costs and, of course, ongoing cost reduction. This means we are reporting an operating profit before impairments of £844 million, up from £194 million in the fourth quarter. The net impairment release for the first quarter of £102 million represents 11 basis points of gross customer loans and compares to a charge of £130 million, or 14 basis points, in the fourth quarter. This release reflects improvements in underlying credit metrics. Taking all of this together, we reported an operating profit before tax of £946 million. An attributable profit to ordinary shareholders was £620 million, equivalent to a return on tangible equity of 7.9%. I'll move on now to net interest income on slide 11. Banking net interest income for the first quarter was £35 million lower than the fourth. as strong mortgage growth and improved mortgage margins were offset by lower commercial balances and two less days in the quarter. Turning to bank net interest margin, this reduced by two basis points to 164 basis points. The lower yield curve accounted for a three basis point decline due to the structural hedge, which was partially offset by one basis point increase for mix and pricing as a result of stronger mortgage margins. As you can see, liquidity had no impact as our TFSME repayment was offset by an increase in deposits. Turning to the drivers of net interest margin on slide 12. Asset yields and funding costs were stable in the quarter after a period of decline following base rate cuts in March last year. On the asset or lending side, gross yield for the group was broadly stable at 184 basis points, despite a slight reduction in the retail banking loan yields as a result of lower unsecured balances. On the liability or deposit side, group funding costs were broadly stable at 49 basis points, with a further small reduction in retail deposit costs to eight basis points. There are three main factors to consider in relation to net interest margin for the second quarter. First, ongoing pressure from the structural hedge. We have increased the hedge by £8 billion in the quarter due to increased deposit growth in line with our policy. If deposits stay broadly stable, we would expect to add a further £15 billion over the next 12 months. Taking into account the current yield curve and our expectations for the size of the hedge over 2021, we now expect a reduction of income of around £250 million from our hedge portfolio compared to 2020. This will not be completely linear and equates to around three basis points per quarter. Second, a change in liquidity, which, as you know, affects average interest earning assets and therefore NIM. The third factor is mix in pricing. In the first quarter, mortgage margins on the front book increased from 161 to 179 basis points. This is above the back book, which improved 12 basis points to 159. These improvements include around five basis points from our transition to Sonia from LIBOR at the beginning of the year, which has no impact on group income, but does affect individual product lines. Average application margins in the first quarter were 180 basis points. However, these reduced towards the end of the quarter due to higher swap rates and market pricing. And our March margin was around 165 basis points, slightly above the back book. MIX is also affected by demand for higher margin unsecured and corporate lending, which will ultimately depend on the shape of economic recovery. Moving on now to look at the volumes on slide 13. Growth banking loans were stable in the first quarter at £363 billion. Mortgage growth of £2.7 billion was 1.4% and reflects continued strong demand in the UK post the stamp duty extension. Our mortgage flow share in the first quarter was 13%, above our stock share, which increased from 10.9% to 11%. Gross new lending in the quarter was £9.6 billion. Unsecured balances declined in the first quarter across both personal advances and credit cards. Demand for Government schemes also slowed, but this still accounted for £600 million of additional lending. However, this was offset by repayments from commercial banking customers, including £300 million of RCF repayments and utilisation stable at 22%. Average interest-earning banking assets grew by £7 billion, or 1%, driven by mortgages. I'd like now to turn to non-interest income on slide 14. Non-interest income, excluding notable items, was up 15% on the fourth quarter. to £742 million. Within this, income from trading activities increased 33% to £162 million. This reflects stronger performance in fixed income with higher levels of customer activity, though it is clearly lower than the first quarter of 2020, given the volatility we experienced last year. Moving now to fees and commissions for the retail and commercial bank, which decreased 4.3% from the fourth quarter to £470 million. This was driven by lower card and lending fees as a result of lockdown. The outlook for fees and commissions is uncertain given the ongoing restrictions due to COVID-19 across Europe, but we expect them to grow as the economy recovers. So to round off my comments on income, there is no change to our guidance from February. We continue to expect income, excluding notable items, to be slightly lower this year than 2020 due to two main headwinds. the impact of the structural hedge and the lower income in NatWest markets as we refocus the business to better serve corporate and institutional customers. I will now move on to look at costs on slide 15. Other expenses, excluding operating lease depreciation and the direct cost base of Ulster, were £1.5 billion for the first quarter. That's £72 million, or 4.5% lower than the first quarter last year. Naturally, these cost reductions will not be linear and we continue to expect savings of around 4 per cent for the full year. Strategic costs in Q1 were £160 million and we expect these to be around £800 million for the full year. Turning now to impairments on slide 16. We are reporting a net impairment release of £102 million or 11 basis points of gross customer loans in the first quarter. This compares to a charge of 14 basis points in the fourth quarter. The release was driven by a continuing low level of defaults in the commercial book and stage 3 defaults broadly in line with our historical experience in the retail bank. Coupled with further positive migration of stage 2 loans back to stage 1 following improvements in the underlying credit metrics. The economic assumptions we presented in February are unchanged and we include these in the side appendix. We will update these in line with our usual practice in Q2. Our post-model adjustments for economic uncertainty are also broadly stable over Q4. We have not changed our guidance for impairments for 2021, and we do expect these to be at or below our cycle range of 30 to 40 basis points. Though clearly, if economic outlook continues to be favourable, then we would be below 30 basis points. Turning now to our credit risk profile on slide 17. There has been some positive migration during the quarter, reflecting improving credit metrics as Government support measures continue and customers build healthy cash balances. 80% of our loan book is in stage 1, up from 77% at year end, reflecting migration of stage 2 loans back to stage 1, in particular in the retail bank. Over 98% of loans are in stage 1 or stage 2. Stage 3 loans are slightly down, to £6.1 billion, or 1.6 per cent of gross loans. ECL coverage of 1.6 per cent is down slightly due to write-offs, with stage 3 coverage of 39 per cent. As you know, some of our wholesale loans are in sectors that we monitor particularly closely. These amounted to £27 billion, or 7 per cent of gross loans. Similar to the trend at Group, stage 3 gross loans in these sectors was down slightly at around £700 million. and we remain comfortable with coverage at 47%. Turning now to look at capital and risk-weighted assets on slide 18. We ended the quarter with a common equity tier one ratio of 18.2% on a transitional basis under IFRS 9, which is 30 basis points lower than Q4. The 1.1 billion directed buyback and associated pension contributions together accounted for an impact of 72 basis points. and an accrual of £200 million for the 2021 dividend reduced the ratio by a further 11 basis points. This was largely offset by a 48 basis point benefit due to lower RWAs and a further 31 basis points from a tangible profit. The impairment release had a negligible impact on our CET1 ratio as this relates to stage 1 and stage 2 expected credit loss that is currently added back to our capital position in line with the IFRS 9 transitional rules. RWA's decreased £5.6 billion in Q1, including a £1.3 billion benefit from currency exchange rates and a £900 million benefit from our annual operational risk recalibration exercise. Credit risk reduction of £4.8 billion was driven by lower commercial and unsecured retail balances, as well as a benefit of £1 billion from poor cyclicality largely arising in the retail bank. NatWest Markets RWA's reduced to £26.5 billion and, as Alison mentioned, we still expect to achieve the majority of our targeted reduction to around £20 billion this year. Our guidance on RWA's remains unchanged and we expect them to be in the range of £185 to £195 billion at the end of 2021, including all regulatory impacts effected on 1 January 2022. Where we are in this range will depend on pro-psychicality and loan growth throughout the balance of this year. Turning to my final slide on our strong balance sheet. Our CET1 ratio is now between 420 and 520 basis points above our 13 to 14% target range and more than double our maximum distributable amount despite the directed buyback and 2021 dividend accrual. Our UK leverage ratio of 6.2% is 295 basis points above the Bank of England minimum requirement. 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 158% due to the £5 billion of TFSME repayment, and our headroom above our minimum requirement is now So, to conclude, we have delivered a good operating performance with strong lending growth and continued progress on both cost reduction and capital optimisation. And with that, I'll hand back to Alison.

Thank you, Katie. So in summary, we have delivered an operating profit of £844 million in the first quarter, with an impairment release of £102 million as default levels remain low whilst government support schemes are still in place. We are comfortable with our position, but we recognise there may be economic challenges ahead and against this backdrop, we remain focused on supporting our customers whilst advancing our strategy and accelerating our digital transformation. We're making good progress on our targets and have increased net lending by 3% on an annualised basis, reduced costs ahead of our target reduction of about 4% a year, and used our capital strength to make a £1.1 billion directed buyback from the Government as well as meet our commitment to distribute a minimum of £800 million in dividends each year for the next three years. Our focus remains on driving improved shareholder returns by growing income, reducing costs and maximising capital efficiency And with disciplined execution in each of these areas, we aim to deliver a return on tangible equity of 9% to 10% by 2023. Thank you very much, and we're now happy to take your questions.