NatWest Group PLC

Ladies and gentlemen, welcome to the NatWest Group Q1 Resorts 2022 management presentation. I would like to remind you that the call today will be recorded. There is the opportunity to ask questions today, and you can do this by raising your hand on Zoom or by pressing star nine if you have dialed in. Today's conference call will be hosted by Alison Rose, CEO, NatWest Group. Please go ahead, Alison.

Good morning, and thank you for joining us today. As usual, I'll start with a brief strategic update. Katie will take you through the results, and then we'll open it up for questions. Clearly, since we last spoke, the world has changed considerably. Russia's invasion of Ukraine has led to greater macroeconomic and geopolitical uncertainty. And our customers now face higher inflation, rising rates and energy costs, as well as ongoing supply chain disruption. Whilst many of them have built up healthy savings and balance sheets during the pandemic, and we are not seeing any immediate signs of distress, we are acutely aware of the pressures our customers face. So just as we did during the pandemic, we are supporting them as they navigate this period of uncertainty. For example, we continue to deliver around a million free financial health checks a year. We help customers to understand the impact of different scenarios on their credit rating and improve their score, and we regularly refer our more vulnerable customers to Citizens Advice. Our business customers benefit from having access to dedicated relationship managers with sector expertise in all of our regions. As the invasion of Ukraine continues, together with our customers and colleagues, we have donated over £9 million to the Disaster Emergency Committee Ukraine Humanitarian Appeal. We are also offering practical assistance to Ukrainian refugees in the UK. For example, we are using one of our headquarters as a welcome hub and we are providing help with opening bank accounts. We have no operations in Russia or Ukraine and minimal direct exposure to Russia. We believe that our focus on building deeper relationships with our customers together with two years of strong strategic progress makes NatWest Group well positioned to deliver sustainable growth and returns in the years to come. So let me now turn to the financial headlines. We're reporting a strong performance with profit before tax of 1.3 billion, up 36% on the first quarter last year. We generated a tributable profit of 841 million, up 36%, and our return on tangible equity was 11.3%, up from 7.9% in the same quarter last year. We are delivering on our income growth, cost reduction and capital targets. Income was up 8.6%, costs were down 4.6%, though we continue to expect an annual reduction of around 3%, and this resulted in positive draws of 13.2%. Our CET1 ratio is now 15.2%, which includes £1.5 billion of distributions. As you know, we have committed to make annual dividend distributions of at least a billion pounds this year. Our CET1 ratio includes an accrual of 250 million towards that commitment. And we made another directed buyback in March of 1.2 billion, bringing government ownership to around 48%, which is clearly an important milestone. We have also executed 377 million of the additional 750 million on market buyback announced in February. We continue to focus on delivering our strategic plan and our targets. Despite the macroeconomic uncertainty, we are updating our income target as we now expect to deliver income that is comfortably above 11 billion as a result of faster than assumed rate increases. As I said earlier, we plan to reduce costs by roughly 3%, both this year and next, taking into account cost inflation and our investment in the business as we continue strong cost discipline. And we are targeting a CET1 ratio of 13% to 14% with a return on tangible equity comfortably above 10% by 2023. So let me turn now to other ways in which we are supporting our customers to drive sustainable growth. We want to deepen relationships with existing customers by serving them at all the key stages in their lives, whether it's to buy a house, save for the future, or set up and grow a business. We are also acquiring new customers by delivering a wider range of products and services more effectively across our franchises. For example, by successfully extending our asset management expertise to customers in retail as well as private banking, we increased our affluent investment customer base by 40% in 2021 and grew assets under management and administration 17% to £35.6 billion in the same period. Total AUMA were down in the first quarter as they were impacted by market volatility, but net new inflows were up 33% on the first quarter last year at 800 million, and this included 137 million via digital platforms. In retail banking, we added 159,000 new current accounts during the first quarter this year, and we continue to invest in the SME ecosystem. As the leading bank for small and medium businesses, we offer both digital solutions as well as an extensive network of locally based sector specialist relationship managers. As we build a comprehensive digital payments proposition for these businesses, the number of customers using our merchant acquiring platform TIL has more than doubled in each of the last three years. We are also diversifying our income through product innovation such as our Buy Now Pay Later proposition due to be launched this summer. Demand for Buy Now Pay Later has grown rapidly since the start of the pandemic, and we want to provide a product that is both better and safer for our customers. Our new proposition will offer a fixed credit limit, clear structured repayments, credit scoring and affordability checks, as well as the ability to keep track of payments on our mobile app. Unlike many providers, transactions will also be covered by all the protections customers expect from a fully regulated bank. Turning to slide 7, this is the second year of our £3 billion investment programme, 80% of which is being invested in data, digitisation and technology. The majority of our customers now interact with us digitally. 61% of retail customers are entirely digital, 90% of retail customer needs are met either online or via mobile, and 83% of customers in our commercial business use digital banking. We continue to make good progress on improving customer journeys. 79% of retail accounts are now opened with straight-through processing. 99% of unsecured applications are fully automated. And commercial customers made 73,000 digital service requests in the first quarter compared to just 6,000 in the whole of 2019. Our digital transformation is helping us acquire new customers. For example, our digital bank for business customers, Metal, has gained 50,000 new customers since launch. And our acquisition of Rooster Money last year, which provides families with an app that helps children to learn about managing money, added 130,000 new customers. Improving the customer experience has also resulted in a significant improvement in Net Promoter scores. with retail at 16 up from 4 in 2019, affluent at 26 up from minus 2 in 2019 and a business banking mobile MPS of 48. Of course this improvement creates a virtuous circle which results in the acquisition of more new customers. Turning now to capital management on slide 8. We continue to proactively manage capital and risk and have reduced the capital intensity of the business from 54% in 2019 to 48% in the first quarter this year. Our phased withdrawal from the Republic of Ireland is progressing and we are pleased with what has been announced. We are also managing risk well with a low level of defaults and strong risk profile. 94% of our personal lending is secured and we are growing unsecured in a responsible way. 92% of our retail mortgage book is fixed with an average LTV of 54% and we have a well diversified corporate portfolio with limited exposure to at-risk sectors that we monitor closely. We are focusing on capital efficiency in order to maximise shareholder returns. And as I said earlier, we have booked total distributions in the quarter of £1.5 billion for 2022. And with that, I'll hand over to Katie to take you through the results.

Thank you, Alison. I'm going to talk about the performance of the Go Forward Bank using the fourth quarter as a comparator. We reported total income of £3 billion for the first quarter, up 15.8% from the fourth. Within this, net interest income was up 5% at £2 billion and non-interest income was up 46% to £964 million. Excluding all notable items, income was £2.8 billion, up 9.8% from the fourth quarter. Operating expenses fell 22% to £1.7 billion, driven by the absence of the annual UK bank levy, lower conduct costs and of course ongoing cost reduction. The net impairment release of £7 million compares to a release of £328 million in the fourth quarter. This reflects a continued low level of defaults and an increase in our post-model adjustment for economic uncertainty of £69 million due to increased cost of living and supply chain challenges our customers are facing. Taking all of this together, we reported operating profits before tax of £1.3 billion for the quarter. Attributable profit to ordinary shareholders was £841 million, equivalent to a return on tangible equity of 11.3%. I'll move on now to net interest income on slide 11. Net interest income for the first quarter of £2 billion was £104 million higher than the fourth, as a result of the higher UK base rates and strong lending. Net interest margin increased by 15 basis points to 246 basis points, driven by wider deposit margins which added 22 basis points. This reflects the benefit of the higher UK base rates which increased to 75 basis points on the 17th of March from 25 basis points at the start of the year and higher swap rates on our hedge deposits. lower mortgage margins on the front book, reducing them by four basis points, and was partly offset by a positive mix in unsecured, which added two basis points. However, as you can see, these impacts were more than offset by higher personal deposit margins and net interest margin in both retail banking and private banking has increased in the quarter. In commercial and institutional, changes in loan mix reduced bank NIM by three basis points as growth was driven by lower margin large corporates, while smaller businesses continued to repay. As in retail, wider commercial and institutional deposit margins more than offset this, and the CNI NIM increased in the quarter accordingly. Turning to the yield and cost trends on slide 12. You will be familiar with this slide, but this quarter we have presented the customer loan and deposit rates for our new CNI franchise. I want to highlight two key points. First, commercial and institutional loan yields increased by 8 basis points to 283 as the majority of these loans are variable rate with an automatic reprice. And secondly, deposit costs were broadly stable. We expect deposit costs to increase further in the second quarter following rate changes taking place in April. Turning now to look at mortgage margin dynamics on slide 13. The chart at the top will be familiar to you. However, we are now showing you quarterly average metrics for the Group and not just retail banking. We have increased average customer mortgage rates by around 30 basis points in the first quarter. Of course, we also recognise there is considerable pressure from the swap curve. The average five-year swap increased by around 60 basis points in the quarter. Customer deposit rates, however, were broadly stable as customer rate changes only took effect in early April. This led to an increase in customer spreads, the difference between what we charge customers for their mortgage and what we pay for deposits. Of course, higher swap rates are good for hedge deposit income. As you know, we increased the product and other hedge notional by £39bn to £185bn during 2021, reflecting growth in customer deposits. In the first quarter, we increased this by a further £8 billion. If we assume deposits remain at the same level as the first quarter, then we expect this to increase by a further £5 billion over the next 12 months. The structural hedge yield of 72 basis points is up slightly from 71 in the fourth quarter. Moving on now to look at volumes on slide 14. Gross loans increased by £6.6 billion or 1.9% in the quarter to £362 billion. In retail and private banking, mortgage lending grew by £2.8 billion or 1.5% and unsecured balances increased by a further £100 million despite typical seasonality. In commercial and institutional, gross customer loans increased by £2.3 billion. This comprised £3 billion of growth in large corporate and institutional customers as a result of increased capital markets activity and higher facility utilisation, as well as an increase of £500 million in invoice and asset financing within our commercial mid-market businesses. This growth was partially offset by the continued repayments on government lending schemes. I'd like to turn now to non-interest income on slide 15. Non-interest income, excluding notable items, was £740 million, up 24% on the fourth quarter. Within this, income from trading and other activities increased fivefold to £205 million, as we benefited from higher volatility in our currencies business and good issuance volumes in capital markets. Fees and commissions fell overall by 4% to £535 million, driven by normal seasonality. I will look on now to look at costs on slide 16. Other operating expenses were £1.6 billion for the first quarter. That's down £78 million, or 4.6% on the same period last year, as we continue to work to meet our targets, which, as you know, is a reduction of around 3% for the full year. And I remind you that this will not be linear. Turning now to impairments on slide 17. We're reporting a net impairment release for the Go Forward Group of £7 million, compared to a release of 328 million or 37 basis points in the fourth quarter. This reflects a continuing low level of defaults across the Group. We continue to see further improvements in underlying credit metrics in the Good Book, with positive migration of Stage 2 loans back to Stage 1, driving ECL releases. However, we have decided to allocate these releases to our post-model adjustment for economic uncertainty, which increased by £69 million to £653 million. As we recognise our customers face both increased cost of living and supply chain challenges that are yet to impact the data. The economic assumptions we presented in February are unchanged and we include these on the slide appendix. We will update these in line with our usual practice in the second quarter. We continue to expect a loan and payment rate below 20 to 30 basis points in both 2022 and 2023. 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 15.2%, down 70 basis points since January the 1st. This includes 1.5 billion of 2022 distributions, which reduced the ratio by 83 basis points. The redemption of legacy equity preference shares reduced the ratio by a further 14 basis points in line with our guidance. This will deliver an annual saving of £19 million from Q2 onwards. Higher RWAs reduced the ratio by 5 basis points and fair value movements on our liquid asset portfolio reduced it by a further 9 basis points. These reductions were partially offset by a 44 basis point increase from attributable profit net of changes to IFRS 9 transitional relief. Our IFRS 9 transitional relief is 23 basis points down from 39 basis points at Q4 as relief decreased from 100% at the end of the year to 75%. RWA's increased by 500 million pounds to 177 billion. This was driven by higher credit and market risk, partly offset by 1.9 billion benefit from our annual operational risk recalibration exercise. Turning to slide 19, which shows the strength of our balance sheet. Our CET1 ratio of 15.2% is now 120 to 220 basis points above our 13 to 14% target range. Our UK leverage ratio of 5.5% is down 40 basis points over Q4 and 225 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 to 167% due to the redemption of legacy preference shares and the directed buyback, taking the headroom above our minimum to £83 billion. And turning to my final slide, we are making strong progress and now expect to deliver income excluding notable items comfortably above £11 billion for 2022. This assumes UK base rates reach 1.25% in the fourth quarter and reflects faster rate increases than we had in the plan. We reaffirm all our guidance on expenses, impairments and capital. And taking all of this together, we continue to expect to deliver a 2023 return on tangible equity comfortably above 10%. And with that, I'll hand back to Alison.