NatWest Group PLC

Good morning and welcome to the NatWest Group Q2 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 here with Katie Murray, our CFO, and I'll start with a business update before Katie takes you through our financial performance and we'll then open it up for questions. So let's start with the headlines on slide three. Against a volatile and challenging economic backdrop, we continue to demonstrate the strength and resilience of our business, delivering a strong financial performance while supporting our customers. Operating profit for the first nine months of the year was 4.1 billion, up 15% on the same period last year, and attributable profit was 2.1 billion. Our return on tangible equity was 10%, and we are reporting positive draws of 21% as a result of strong year-on-year income growth of 23% generated across our core customer franchises, along with cost growth of 1.8%. We maintain our cost reduction target of around 3% for the full year and are on track to deliver that. Our cost income ratio for the nine months was 54%. We continue to lend responsibly and support our customers with strong net lending growth of 5.4% since the year end to 372 billion. Our strong capital generation gives us confidence in our ability to continue delivering for all our stakeholders in challenging times. Our common equity tier one ratio of 14.3% is approaching our 2022 target of around 14%. And we continue to return excess capital to shareholders. We have now paid or accrued 750 million towards our committed dividend distribution of at least a billion pounds in 2022. And together with the special dividend of 1.75 billion announced at the half year and the directed buyback of 1.2 billion in March, this brings total distributions accrued or paid in the nine months to 3.7 billion. Clearly, the macroeconomic environment has become more uncertain since we spoke with you in July. Inflation, interest rates and energy costs have increased further amidst heightened market volatility, while supply chain disruption continues. The outlook is now more challenging for our customers, with a drop in business and consumer confidence together with lower economic growth. In light of this, we have revised the combined weighting to our downside scenarios to 55% compared to 34% at the half year. As a result, we have taken an impairment charge of £242 million in the third quarter compared to a release of £39 million in the second. However, we are not revising our full year impairment guidance. While we believe our economic scenarios are conservative, it is important to note that we have not yet seen any material signs of stress from customers. We continue to grow our lending responsibly with disciplined risk management. We have remained open for business, deploying capital in the mortgage market whilst pricing appropriately. We have a well diversified, high quality loan book with limited exposure to areas such as unsecured personal lending, mortgages with a high loan to value and commercial real estate. We are on track to deliver our 2022 targets on cost and capital and have increased our income guidance for this year to around £12.8 billion, based on the current Bank of England interest rate of 2.25%. In this uncertain economic environment, our purpose-led strategy puts us in a position of strength. Our four strategic priorities remain as relevant as ever, and we continue to deliver against them to create and protect long-term value for all our stakeholders. Let me talk more about how we're supporting our customers on slide six. Though we are yet to see signs of customer stress in our credit metrics, we know that many people, families and businesses are worried about the pressures they face, and we are doing what we can to stand alongside them as they navigate through this economic uncertainty. Our strong balance sheet and capital generation enable us to lend a helping hand to those most in need. So we have created a £4 million hardship fund to support individuals and businesses through charities such as Citizens Advice and Money Advice Trust. This includes £2 million to fund a dedicated team at the debt charity Step Change, helping small businesses that are struggling to manage their finances. We are supporting mortgage customers who face higher financing costs by extending the refinancing window from four to six months. Some eligible customers who took advantage of this early window during the quarter saved around 2% on their next mortgage rate. We have also carried out around 600,000 free financial health checks in the first nine months this year via our app, whilst also helping people to understand and improve their credit rating. This month, we launched a benefits calculator which enables customers to check their eligibility for state benefits and access income they may not have realised they were entitled to. And year to date, we have made over 8 million approaches to personal customers with information to help them manage the increased cost of living. For commercial customers, we are tailoring support to sectors that are most likely to be impacted. For example, we're helping 40,000 customers in agriculture, which has been hit by rising prices, especially in fertilizers. And this includes making available a 1.25 billion lending package for UK farmers with capital repayment holidays where appropriate. We have a well-established ecosystem for SMEs, providing them with sector specialists as well as business hubs around the UK. In July, we froze SME current account fees for 12 months and we continue to monitor our customers carefully to identify those that are having difficulties early on. We have also reduced till transaction fees from micro-businesses to help them weather the increased cost of living. We're also supporting our colleagues by making targeted pay rise for the lowest paid across the group, as well as investing in learning and development programmes and parental leave. So we are working with our customers, colleagues and communities to alleviate the worries of those who are most vulnerable. Let me turn now to how we are delivering our strategic priorities on slide seven. Notwithstanding the near-term challenges, we continue to invest for the long term and grow across our core franchises by acquiring new customers and broadening our product offering to meet more of their needs. In doing so, we are diversifying our income by customer, by product, and by generating more fees and commissions. We are also actively supporting our customers in their transition to a net-zero economy. A good example of how we're investing for the future is the strategic partnership we recently announced with Verdino, which aims to create a leading UK banking as a service business. This will enable other businesses to embed digital banking services such as payments, deposits, point of sale credit and merchant cash advances directly into their own propositions and customer journeys. Our new strategic partnership combines Videna's technological capabilities and cloud platform with banking technology developed in Metal, our digital bank for small businesses. This allows us to leverage our position as a leading supporter of UK businesses in order to meet the evolving needs of our corporate customers and expand our client base in a rapidly growing market. It also enables us to grow our fee income and diversify our revenue streams. As importantly, we will continue to lend responsibly and support our customers and in turn the wider UK economy. We're delivering a wider range of our products and services more effectively across our franchises. For example, by extending our asset management expertise to customers in retail as well as private banking, we have increased our affluent investment customer base and attracted new net inflows, which amount to 1.7 billion for the first nine months of 2022, of which 17% was via digital channels. And finally, on slide seven, as the UK's leading underwriter of green, social and sustainability bonds, we are well placed to help our customers transition to a net zero economy. Last year, we set a target of delivering 100 billion pounds of climate and sustainable funding and financing by 2025. And we have contributed 26 billion towards that target to date. Slide 8 shows how our investment in digital transformation is continuing to improve the customer experience as well as increase our own productivity. 90% of retail customers and 84% of commercial customers now interact with us digitally and we are making this easier and simpler as we continue investing to improve customer journeys. 72% of retail bank accounts and 96% of credit card applications are now opened with straight through processing. And we're seeing this feed into continued improvement in customer satisfaction. For example, our retail MPS is now 20 compared to just four in 2019. Our affluent score has increased to 29 from minus two. And we have one of the leading schools in commercial banking at 22. In the current environment, a strong balance sheet, disciplined risk management and effective capital allocation are important differentiators. Our loan book is well balanced between personal and wholesale lending and well diversified by sector, and the level of defaults across the group remains low. Our personal lending book is largely secured and 93% of our mortgage book is fixed. We have limited mortgages with a high loan to value. Those above 80% represent less than 3% of our book. Commercial real estate represents around 5% of our total loan book and the average loan to value is 48%. Looking at liabilities, deposits remain elevated in both personal and commercial banking, supporting our strong liquidity position. We continue to actively manage our liabilities, offering strong propositions for youth and digital savers and fixed term accounts for business customers. We're managing our capital allocation to maintain a strong balance sheet and our phased withdrawal from Ulster Bank Republic of Ireland, which we expect to be capital accretive, is on track. We have binding agreements in place for 90% of the loan book and deposits have reduced 42% since the year end as customers move to other providers. Our strong capital generation gives us the ability to support our customers in difficult times, as well as invest for growth, consider other strategic options that create value and return capital to shareholders. As I outlined earlier, capital distributions accrued for or paid in the nine months amount to 3.7 billion. And with that, I'll hand over to Katie to take you through our Q3 results.

Thank you, Alison. I'll start with the performance of the Go Forward Group in the third quarter, using the second quarter as a comparator. We reported total income of £3.3 billion for the quarter, up 2.1% from the second. Excluding all notable items, income was £3.4 billion, up 10.7%. Within this, net interest income was up 14.3% at £2.6 billion, and non-interest income was broadly stable at £800 million. Operating expenses rose 5.3% to £1.8 billion and we made a net impairment charge of £242 million compared to a release of £39 million in the second quarter. This reflects an increased weighting to our downside economic scenarios rather than any underlying deterioration in the book, which remains robust. Taking all of this together, we reported operating profits before tax of £1.2 billion for the quarter. Attributable profit to ordinary shareholders was £187 million after the impact of losses in Ulster Bank associated with our withdrawal from the Republic of Ireland. And the return on tangible equity for the Go Forward Group was 12.1%. I'll move on now to net interest income on slide 12. We saw continued strong momentum in net interest income which increased 14.3% to 2.6 billion as a result of strong lending and higher margins. Net interest margin increased by 27 basis points to 299 basis points driven by wider deposit margins which added 47 basis points. This reflects the benefit of higher UK base rates, which increased by a further 100 basis points in the quarter, and higher swap rates on our structural hedge, net of pass-through to customers. These increases were partly offset by lower mortgage margins on the front book, which reduced net interest margin by seven basis points, and by the mixed effects in commercial and institutional, which decreased NIM by a further eight basis points. Net interest margin of 273 basis points for the first nine months was supported by the faster than expected pace of interest rate rises. And at current interest rates, we now expect NIM to be above 280 basis points for the full year with strong momentum into 2023. I'll move on now to look at volumes on slide 13. We are pleased to have delivered another quarter of balanced growth across the Group. Gross loans to customers across our three franchises increased by £9.2 billion, or 2.7%, to £347 billion. Taking retail banking together with private banking, mortgage balances grew by £4.2 billion, or 2.2%, with flow share of 13% and good retention. Unsecured balances increased by a further £200 million across credit cards and personal loans. In commercial and institutional, gross customer loans increased by £4.8 billion. Lending to large corporates and institutional customers was up £5.6 billion, driven by growth in working capital and supply chain finance, as well as funds lending. This was partly offset by continued repayments on government lending schemes of £600 million. I'll turn now to look at deposits on slide 14. Our robust deposit profile with a loan to deposit ratio of 76% has allowed us to support our customers through this period of market volatility, maintain our mortgage offering and provide lending across the economy. Customer deposits across our three franchises decreased by 7 billion pounds or 1.5% in the quarter to 448 billion. This was driven by outflows of £8 billion across commercial and institutional, reflecting the withdrawal of short-term institutional inflows made in the second quarter, coupled with some seasonality. Across retail banking and private banking, deposits increased by £1 billion, a slower rate of growth than in prior quarters. We are not seeing any significant change in customer behaviour in terms of switching balances between non-interest bearing current accounts and savings. In retail, we saw some seasonal reductions in saving balances over the summer holidays, offset by higher current account balances. We have provided new disclosure on the split for deposits for commercial and institutional by customer segment to match our loan disclosure. You will also see on the slide the cumulative pass through on our interest bearing deposits by franchise, including customer rate changes effective on October the 18th. This equates to an average pass through of 25 to 30% across interest bearing deposits, which account for around 60% of total go forward group customer deposits. Our deposit pass through decisions consider current and expected behavior across all our customer accounts. We continue to expect pass-through rates to increase with higher levels of interest rates, and our interest rate sensitivity disclosure, provided at the half-year, which incorporates a 50% pass-through, remains relevant. Turning now to our hedge, where we have an ongoing income tailwind into 2023, as maturing swaps are being reinvested at higher yields. As you know, we hedge the majority of our current accounts and a small portion of savings, so £205 billion of balances are included in the structural hedge. The notion will increase by £1 billion during the quarter, reflecting growth in balances over the last year. And if deposits were to remain broadly flat from here, we would expect the hedge to increase a further £5 billion over the next three to six months. I'd like to turn now to non-interest income on slide 15. Non-interest income, excluding notable items, was £800 million, stable on the second quarter. Within this, income from trading and other activities increased further 28 million to 250 million, driven by higher foreign currency cash management in Treasury. Fees and commissions decreased by 25 million to 550 million due to seasonal lower financing fees and to our no-fee foreign exchange offer for our retail customers through the summer. Turning now to costs on slide 16. We have delivered strong operational leverage or positive jaws of 21% over the first nine months. Other operating expenses for the Go Forward Group were 4.9 billion pounds for the first nine months. That's up 87 million or 1.8% on the same period last year, reflecting higher strategic spend in areas such as financial crime and data. Along with strong income growth, this has contributed to a 10 percentage point improvement in the cost income ratio to 54%. We continue to expect to reduce costs by around 3% for the full year. As we told you at the half year, we expect inflationary impacts on our cost base to be more significant next year. But inflation is now forecast to be higher than projections at the half year, so we no longer expect costs to be broadly stable year on year in 2023. As you would expect, given our strong track record, we remain committed to maintaining cost discipline and improving operating leverage. Turning now to credit risk on slide 17. We have a well-diversified prime loan book. Over 50% of our go-forward group lending consists of mortgages, where the average loan-to-value is 53%. 64% of balances are on five-year fixed rates, 27% at two-year, and just 9% are on variable rates, including SVR. Our personal unsecured credit exposure is less than 4% of group lending and is performing in line with expectations. On the wholesale side, we have de-risked over the past decade to bring down concentration and single-name exposures. You can see this from the reduction in our RWA intensity, which is down 15 percentage points since the end of 2019. For example, our commercial real estate exposure represents less than 5% of group loans with an average LTV of 48%. Our corporate book is well diversified and we've shown here selected exposures that we expect to be more vulnerable to cost of living pressures. So our strategy has delivered a well-diversified, high-quality loan book, which is not showing any significant signs of stress. However, we recognise the economic outlook has deteriorated. So let me tell you how we've addressed this on slide 18. We will update our economic forecast at the end of the year. But you can see at the top of the slide that we have increased our weightings to the downside and extreme downside scenarios from 34% to 55%. This has driven a deterioration in our weighted average expectations for GDP growth and unemployment, the key drivers of expected loss sensitivity. You can find details in the appendix and the IMS. The net defect of these changes is a £127 million increase in the Good Book expected credit loss provision, which was more than offset by the reclassification of Ulster mortgages to fair value. The post-model adjustment for economic uncertainty reduced slightly in the quarter to £545 million due to further releases of COVID-related adjustments. We continue to be cautious on the release of these provisions as we have yet to see the full impact of the economic challenges play out. We reported a net impairment charge for the Group of £247 million in the third quarter, equivalent to an annualised 26 basis points of loans. While the economic outlook remains uncertain, we continue to expect the full-year loan impairment charge to be under 10 basis points, given the current performance of the book. As you know, our through-the-cycle impairment guidance is 20 to 30 basis points. And as I sit here today, I see this as an appropriate level to think about for 2023. Turning now to look at capital and risk-weighted assets on slide 19. We ended the third quarter with a common equity tier one ratio of 14.3%, in line with the second quarter, as go forward group earnings were offset by Ulster exit costs, as well as dividend and linked pension contributions. This includes IFRS 9 transitional relief of 19 basis points, up from 16 basis points at Q2. We generated 46 basis points of capital from go-forward group earnings, net of changes to IFRS 9 transitional relief. This is partially offset by higher RWAs, which increased by £1.5 billion due to growth in lending balances and market volatility. Progress on our phase withdrawal from the Republic of Ireland consumed nine basis points of capital in the quarter as we incurred 514 million euros of the 900 million expected exit costs. This is net of a 2.8 billion reduction in RWAs due to the ongoing transfer of the corporate loan book to AIB. Turning now to our balance sheet strength on slide 20. Our CET1 ratio of 14.3% is moving towards our target range of 13 to 14% as planned. Our UK leverage ratio of 5.2% is in line with Q2 and 195 basis points above the Bank of England minimum requirement. We have maintained strong liquidity levels with a high quality liquid asset pool and a stable, diverse funding base. Our liquidity coverage ratio of 156% is down from Q2 due to growth in customer lending and dividend payments of £2.1 billion. Headroom above our minimum is £68 billion. We are pleased that Moody's has recognised our strong balance sheet by upgrading both NatWest Group PLC and NatWest Markets by one notch. Turning to guidance on my final slide. As you heard from Alison, we have strengthened our income guidance for 2022. We now expect to deliver income excluding notable items of around £12.8 billion, with net interest margin of more than 280 basis points for the year. This assumes UK base rates remain at the current level of 2.25%, though we clearly expect UK base rates to increase further before the end of the year. Rather than predicting that increase, I suggest you look at our interest rate sensitivity disclosures to help understand the benefit this may bring in the final two months of the year. On costs, we expect to deliver a reduction of around 3% this year, and on loan impairments, we still expect to remain below 10 basis points for the full year, given the current performance of our book, and we reaffirm our guidance on capital. As we look ahead to 2023, we are confident in our plan to deliver a return on tangible equity of 14-16%. However, we expect the make of these returns to change given the evolving macroeconomic outlook. Inflation is pushing up interest rates and in turn we expect both income and costs to be higher next year, together driving an improved cost-income ratio. And based on the current performance of the loan book, we expect impairments to be within our 20 to 30 basis points through the cycle average. And with that, I'll hand back to Alison.