NatWest Group PLC

Good morning and welcome to NatWest Group H1 Resorts 2022 Management Presentation. Today's presentation will be hosted by CEO Alison Rose and CFO Katie Murray. After the presentation, we will open up for questions. Alison, please go ahead.

Good morning and thank you for joining us today. I'm joined by our Group CFO Katie Murray this morning and I'll start with a business update before Katie takes you through the results. We'll then open it up for questions. So let's start with the headlines on slide three. We're announcing a strong first half performance today with operating profit before tax of 2.8 billion, up 12.8% on the first half last year and attributable profit of 1.9 billion. Our return on tangible equity was 13.1% up from 11.7. We're reporting strong income growth of 16.2% and costs were down 1.5% resulting in positive draws of 17.7%. We continue to target a reduction in costs of around 3% for the year and remain on track to deliver that. In a challenging macroeconomic environment, we maintain a strong balance sheet and disciplined risk management. We have a well-diversified wholesale loan book, 93% of our personal lending is secured and we are well provisioned. We continue to deploy credit to support our customers and net lending grew 2.6% to £362 billion during the first half. The bank is also highly capital generative. Our common equity tier 1 ratio is now 14.3% and we have been clear about our intention to return excess capital to shareholders. We are declaring an interim dividend of 3.5 pence per share which represents £366 million towards our distribution of at least a billion pounds this year. We're also announcing today a proposed special dividend of 1.75 billion with a share consolidation. In addition to the directed buyback of 1.2 billion in March, this brings total distributions announced for the first half to 3.3 billion. And we have also recently completed the 750 million on-market buyback announced in February. Just over two years ago, we set out our purpose-led strategy, placing customers at the heart of our business, as you can see on slide four. The rationale was simple. By helping our customers to thrive, we too will thrive. Against the backdrop of economic uncertainty, we continue to focus on our four strategic priorities in order to drive long-term sustainable value. And that starts with supporting our customers, which I'll talk about more on slide five. While we are not currently seeing any immediate signs of stress, we are acutely aware of the pressures customers face this year with higher inflation, rising interest rates, a steep increase in energy costs and supply chain disruption. The strength of our capital generation and balance sheet enables us to stand alongside customers and colleagues as they face into these challenges. Many of our customers built up savings during the pandemic. so household finances are in a relatively good shape and businesses have healthy balance sheets. To date, we are not seeing an increase in arrears or requests for help, but we do know that spending on utilities and fuel bills is up between 20% to 30%, so we are proactively targeting support to help customers navigate the economic uncertainty. We have launched a £4 million hardship fund to provide support for individuals and businesses delivered through organisations such as Citizens Advice, Money Advice Trust and StepChange. We are also proactively contacting 2.7 million personal and business banking customers to offer information on managing the increased cost of living, as well as support on supply chain and working capital management. And we're taking a range of actions if people do get into difficulty, including waiving fees where appropriate, agreeing repayment plans and loan forbearance. In addition, we continue to carry out free financial health checks, as well as helping customers to understand and improve their credit rating. For commercial customers, we are tailoring support to sectors most likely to be impacted. For example, in agriculture, which has been hit by rapidly increasing fertilizer prices, we are helping 40,000 customers, including providing an additional £1.25 billion in lending for UK farmers. We also have a well-established ecosystem for small and medium businesses with sector specialists and business hubs around the UK. We are monitoring our customers carefully to identify early those who are having difficulties and have frozen any increase in business tariffs for our smaller customers. We cannot support our customers without also supporting our colleagues who face the same challenges, so we are making targeted pay rises for our lowest paid employees across the Group. So let me turn now to how we're delivering on our strategic priorities on slide 6. We have an extensive franchise. We currently serve 19 million customers and we are the largest business bank in the UK. This means we start from a position of strength with opportunities to grow even in an uncertain economic environment. I'm going to focus on three areas in particular this morning. First, deepening our relationships with existing customers as well as acquiring new ones. supporting customers as they transition to a low-carbon economy, and third, diversifying our income streams. I'll talk about each one in turn, starting on slide 7. We're working to deepen relationships with customers by serving them at all the key stages of their lives and by engaging more effectively with them. Our recent acquisition of Rooster Money is a good example. Rooster Money helps young children learn to manage money with real-time notifications of their spending. and gives parents the assurances they need by being able to block payments and freeze lost cards. We acquired Rooster along with 130,000 customers last October and by connecting it with our own app have gained 17,000 new customers during the first half. This is a perfect example of how we can serve the needs of our customers in a responsible way whilst also generating grace for the bank. Our share of the youth segment has grown from 13.8% to 14.5% since 2019. Another way in which we're deepening our relationships is by using data analytics to make our communications much more personalized. Data-driven prompts now play an important role for customers across banks. For example, 5.7 million personalized messages have been acted upon by customers to date this year, compared to 1.4 million for the whole of 2021. We're also acquiring new customers, by delivering a wider range of products and services across our franchise, and by improving the customer experience through our digital transformation. For example, in retail banking, we opened 310,000 new client accounts during the first half. In private banking, we added over 1,000 new customers, of whom 20% were referred from other parts of the group. And in commercial and institutional, we opened 49,000 new accounts for startups, almost 40% of which were via our digital-only business bank, Metal. This takes our share of start-up banking to 12.4%, up from 10.4% in 2021. Turning to slide 8, another way in which we're meeting customers' needs is by helping them transition to a low-carbon economy, where there is a strong commercial, economic and social imperative. In retail banking, we have completed 1.4 billion of green mortgages since they were launched in Q4 2020, which give a slightly discounted interest rate to energy-efficient properties. This is a 90% increase from 736 million at the year end. We also have a carbon tracker on our app, which over 300,000 customers have accessed so far this year. Our private bank is well recognised as having one of the best sustainability offerings in the UK and in February this year we committed to achieve net zero alignment in at least 50% of the assets in each fund by 2025. We are also UK's leading underwriter of green social and sustainability bonds. Last year we set the target of delivering £100 billion of sustainable funding and financing by 2025. and have contributed 20 billion towards that target to date. We also led a collaboration with other banks to launch CarbonPlace, the world's first transparent global marketplace for carbon offsets using blockchain to offer customers consistent carbon pricing, a liquid market and seamless post-transaction settlement. Turning to smaller businesses, we launched the NatWest Carbon Planner at the end of June. which is a free platform to help SMEs work out their carbon footprint and then prioritise actions and targets to reduce it. We're also helping smaller businesses with green loans to finance solar panels, electric vehicles or heat pumps with no arrangement fees. The investment we're making to improve our customer propositions is also helping us to diversify income streams by both product and customer, as you can see on slide 9. We have relatively little unsecured lending, which we are growing judiciously within strict risk parameters and in line with our prime appetite. For example, our credit card balances have grown 8% during the first half to over 4 billion, and we have issued 168,000 new credit cards, taking our share in cards to 6.5%. We have strengthened our offering for affluent customers by extending our asset management expertise to customers across the Group. Our affluent assets under management and administration have grown 4% since the year end to $2.6 billion. This contributed to net new inflows of $1.4 billion in the first half, on a par with net new inflows for the entire year in 2020. Another area where we're benefiting from serving more customers across the Group is foreign exchange, where we now offer our expertise to commercial as well as institutional customers. As a result, we have added around 350 new corporate customers since April last year, and income from our foreign exchange business has grown 37% year-on-year. Turning to slide 10, we're also working hard to improve the customer experience and increase productivity through our digital transformation. We're now in the second year of our £3 billion investment programme, most of which is being invested in data, digitalisation and technology. and the benefits are increasingly clear. The majority of our customers now interact with us digitally. 61% of our retail customers are entirely digital and almost 90% of retail customer needs are met digitally. 84% of our commercial customers are active digitally and 93% of all our youth accounts are opened online or via a mobile app. We are also continuing to improve customer journeys to make it easier for customers to interact with us. 70% of retail accounts and almost all credit card accounts are now opened with straight-through processing. Retail customers used our chatbot Quora 5.3 million times during the first half, almost half of which required no human intervention. And commercial customers made 157,000 digital service requests compared to just 6,000 in the whole of 2019. By improving the customer experience, we have significantly increased customer satisfaction, and this is reflected in net promoter scores. For example, retail is at 17, up from 4 in 2019. Our affluent score has increased to 28 from minus 2, and we have one of the leading scores in commercial banking at 23. And of course, this also helps to attract new customers. We continue to proactively manage capital allocation and risk in order to maintain a strong balance sheet on slide 11. We have a well-diversified wholesale book and 93% of our personal lending book is secured. 92% of our retail mortgages are fixed with an average loan-to-value of 53% and the level of defaults across the group remains low. Our phased withdrawals from the Republic of Ireland continue to progress and we now have binding agreements in place for 90% of the book. Deposits reduced 16% to €18 billion during the first half as customers moved their accounts to other providers. We continue to expect the majority of sales to complete in 2022 and for our withdrawal to be capital accretive. Turning now to slide 12. This is a highly capital-generative business. demonstrated by the fact that we delivered operating profit before impairments of 2.8 billion in the first half, which is broadly in line with the entire year in both 2020 and 2021. This capital strength gives us the flexibility to invest in the business for growth, consider other options that create value, as well as return capital to shareholders. The proposed special dividend announced today of 1.75 billion, together with the interim dividend and Directed Borrowback brings total distributions announced for the first half to 3.3 billion. On the back of our strong performance, combined with lending growth, a robust balance sheet, well-managed risk and significant capital strength, we are upgrading our guidance today on slide 13. We now expect income in the region of 12.5 billion in 2022, We continue to target a reduction in costs of around 3% this year, but have revised our target for 2023 when we expect them to remain broadly stable. We remain committed to growing the business whilst managing cost growth to deliver positive tools. Our aim is still to achieve a CET1 ratio of 13 to 14% next year, and we are close to our target of around 14% for this year. Taking all this together, We are upgrading our 2023 return on tangible equity target to 14% to 16%. With that, I'll hand over to Katie to take you through our financial performance.

Thank you, Alison. I'll start with the performance of the Go Forward Group in the second quarter, using the first quarter as a comparator. We reported total income of £3.2 billion for the quarter, up 7.1% from the first. Excluding all notable items, income was £3.1 billion, up 12.3%. Within this, net interest income was up 13.9% at £2.3 billion and non-interest income was up 7.7% to £797 million. Operating expenses fell 1% to £1.7 billion, driven by lower conduct costs. We made a net impairment release of £39 million compared to a release of £7 million in the first quarter. which reflects a continued low level of defaults. Taking all of this together, we reported operating profit before tax of £1.5 billion for the quarter. A typical profit to ordinary shareholders was £1.1 billion, equivalent to a return on tangible equity of 15.2%. I'll move on now to net interest income on slide 16. Net interest income for the second quarter of £2.3 billion was 13.9% higher than the first. as a result of higher margin and strong lending. Net interest margin increased by 26 basis points to 272 basis points, driven by wider deposit margins, which added 34 basis points. This reflects the benefit of higher UK base rates, which increased by a further 50 basis points in the quarter and higher swap rates on our structural hedge. These increases were partly offset by lower mortgage margins on the front book, which reduced net interest margin by four basis points and by the repayment of higher margin loans in commercial and institutional which decreased it by a further three basis points. Turning to our interest rate sensitivity on slide 17. You can see here the strength of our balance sheet and the positive tailwind from rising interest rates. The UK base rate has increased 115 basis points since December which has added around £0.4 billion of managed margin benefit in the first half of the year, compared to the same period last year. We are projecting a year-on-year increase for the full year of £1.1 billion, reflecting the full run rate in the second half. We have reviewed our economic assumptions as usual at this time of year and now assume the UK base rate will reach 2% by the end of 2022 and remain there through 2023, our revision upwards from 1.25%. Using an illustrative 50% pass-through, this would add a further £0.2 billion of managed margin benefit this year, with the full run rate benefit flowing through in 2023. Turning now to the structural hedge, total hedge income for the first half increased by £0.1 billion compared to the first half last year, as notional balances grew by £40 billion to £230 billion at the end of June. Assuming balances and UK swap rates are in line with levels at the end of June, we expect this to result in year-on-year income growth of circa £0.6 billion. This brings the total year-on-year benefits in 2022 to £1.9 billion. Clearly, the actual benefit depends on the timing and size of rate increases, changes in deposit balances and pass-through decisions, but this is how I am currently thinking about the potential impact of higher interest rates on our 2022 income. If we move on now to look at volumes on slide 18. Growth loans to customers across our three franchises increased by £4.4 billion or 1.3% in the quarter to £338 billion. In retail and private banking, mortgages balances grew by £3.6 billion or 1.9% and unsecured balances increased by a further £500 million. the strongest quarterly growth since the onset of the pandemic. In commercial and institutional, growth customer loans also increased by £500 million. While lending to larger corporate and institutional customers increased by £1.4 billion, driven by growth in our fund business and greater use of credit facilities, this was partly offset by continued repayments on government lending schemes. I'd like to turn now to non-interest income on slide 19. Non-interest income excluding notable items was £797 million, up 7.7% on the first quarter. Within this, income from trading and other activities increased a further 8.3% to £222 million as we benefited from ongoing volatility and increased customer activity across our suite of market products. Fees and commissions increased by 7.5% to £575 million driven by higher card and payment fees as consumer spending increased and demand for corporate credit generated higher lending and financing fees. I'll talk now about what this means for 2022 income on slide 20. We are strengthening our guidance and now expect 2022 income excluding notable items of around £12.5 billion up from £10.1 billion in 2021. As I explained earlier, our year-on-year interest rate benefits through managed margin and the structural hedge adds around £1.9 billion. You then need to consider the impact of lower mortgage margins, which will partially offset this. We've also had the additional net benefit of higher average lending volumes and higher non-interest income. This guidance is underpinned by our assumptions that the UK base rate increases to 2% by the end of the year and UK swap rates remained broadly in line with where they were at the end of June, leading to a net interest margin above 270 basis points for the full year. Turning now to costs on slide 21. Other operating expenses for the Go Forward Group were £3.3 billion for the first half. That's down £50 million, or 1.5% on the same period last year, as we continue to work to meet our targets This cost reduction combined with the improvement in income has supported a 9 percentage point improvement in the cost income ratio to 55% in the half. Like other businesses, we are experiencing the impacts of inflation on our cost base. Despite this, we are confident that we can deliver a reduction of around 3% for the full year. Though this will not be linear and you should expect costs to be higher in Q3 than Q2. with the savings weighted to the fourth quarter. Looking now to 2023, we expect some of the current inflationary impacts to be more significant next year. We are protecting our investments then and remain committed to delivering the same gross cost savings in the plan. However, the net effect of this is that we now expect our cost base to be broadly stable in 2023. We remain committed to maintaining cost discipline and improving operating leverage with positive jaws across income and expenses. Turning now to repairments on slide 22. As you know, we have a well-diversified loan group and we are not yet seeing any significant signs of stress. In the first half, we saw ongoing improvement in the performing book with migration of balances from stage 2 back to stage 1. This underlying set from the loan book with low levels of default has resulted in a reduction in ECL provisions and coverage to 93 basis points at the end of June, down from 103 basis points at the end of the year. This has driven a net impairment release for the Group of £54 million in the first half. We are strengthening our guidance for the full-year loan impairment charge from below 20 to 30 basis points to under 10 basis points. This guidance is underpinned by our updated economic assumptions on slide 23. We have summarised the changes to our base case and our economic assumptions at the top of the slide. While we have not changed the 45% weighting to our base case scenario, we have increased our weighting to the extreme downside from 5% to 14%. We have also adjusted down our expectations for GDP growth and UK unemployment to reflect the latest consensus of economists. And as I said earlier, we've increased our UK base rate outlook to 2% by the year end to reflect higher inflation. All the details can be found in the appendix and IMS. The net effect of these changes was a £41 million increase in the ETL provision as shown at the bottom of the slide. The post-model adjustment for economic uncertainty is stable over the first half at £583 million. However, the components have changed as we reduce COVID-19 overlays and increase provisions to reflect the challenges our customers face, including the increased cost of living and supply chain disruption. We continue to be cautious on the release of these provisions as we have yet to see the full impact of these challenges playing out. Turning now to our progress on Ulster Bank on slide 24. We now have binding agreements for around 90% of the Ulster Bank loan book. The Irish Competition and Consumer Protection Commission announced last week that it has cleared the asset sales to permanent TFB, which means we have now received clearance for around 60% of the loan book. We expect the majority of these asset sales to be largely complete by the end of 2022. We expect the mortgage sales to AIB to complete in the first half of 2023, subject to any necessary regulatory approvals. Both income and direct costs associated with these new sales are now in discontinued operations and will roll off in line with completion. We continue to expect to incur exit costs associated with asset sales and restructuring of around €900 million, with the majority incurred by the end of 2023. Around half of these exit costs will be booked in discontinued operations and the other half through continuing. We expect to recognise €350 million of these exit costs through discontinued operations in the third quarter as the mortgage book is reclassified to fair value. Ulster Bank remains very well capitalised and we continue to expect the withdrawal to be capital accretive. As transactions complete, we will look to restart dividend payments from Ulster Bank back to the Group. Turning now to look at capital and risk-weighted assets on slide 25. We ended the second quarter with a common equity Tier 1 ratio of 14.3%, down 90 basis points from the first quarter due to capital distribution. This includes the IFRS sign transitional relief of 16 basis points, down from 23 basis points at Q1, We generated 53 basis points of capital from accumulatable profits, net of changes to IFRS 9 transitional relief. This was partially offset by higher RWAs which are up £3 billion to £180 billion driven by growth in lending balances and updated models. This reduced the ratio by 25 basis points. A reduction from shareholder distributions of 111 basis points includes a further accrual of £250 million to the ordinary dividend towards our stated £1 billion minimum commitment and the proposed special dividend of £1.75 billion. Turning to my next slide on the special dividend. The decision to announce a special dividend with share consolidation enables us to distribute more capital than an in-market buyback. It reduces the share count and offsets the dilution to tangible net asset value per share of the special dividend, while also treating all shareholders equally and ensuring the government's shareholding remains below 50%, which the Board has determined is in the interest of all shareholders. We will publish a general meeting notice and start there with full details on August 9th, ahead of the general meeting on August 25th. Shareholders on the record date on August 26th will receive the special dividend payment on the 16th of September. However, the consolidation of shares will be effective on August 30th. Turning now to our balance sheet strengths on slide 27. Our CET1 ratio of 14.3% is moving towards our target range of 13 to 14% of plans. Our UK leverage ratio of 5.2% is in line with the first quarter. and 195 basis points above the Bank of England's minimum requirements. We have maintained strong liquidity levels with a high-quality liquid asset pool and a stable, diverse funding base. Our liquidity coverage ratio of 159% is down from Q1 due to growth in customer lending, redemption of own debt and share buybacks. Headroom above our minimum is £76 billion. Turning to my final slide, As you heard from Alison, we have strengthened our guidance. We now expect to deliver income, excluding notable items, of around £12.5 billion for 2022. This assumes UK base rates reach 2% by year-end, supporting net interest margin for the full year of greater than 270 basis points. On costs, we expect to deliver a reduction of around 3% this year and to keep them broadly stable in 2023 with positive jobs. On loan impairments, we still expect to remain below the through-the-cycle level of 20 to 30 basis points in 2023, but now expect to be below 10 basis points in 2022. And we reaffirm our guidance on capital. Taking all of this together, we expect to deliver a 2023 return on tangible equity between 14 and 16%. And with that, I'll hand back to Alison.