NatWest Group PLC

Good morning and welcome to the NatWest Group Q1 Resorts 2023 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'll start with a business overview and then Katie will talk about our financial performance. Our strategy continues to deliver against a backdrop of increased market volatility since we last spoke in February. In an uncertain environment, we're well positioned both for the upside as we build on our strong customer franchise to drive targeted growth and for any downside as a result of our strong balance sheet and liquidity, high quality deposit base and disciplined risk management. I'll start with the financial headlines. We delivered operating profit of 1.8 billion in the first quarter, an increase of 49% on the same period in 2022. Attributable profit was 1.3 billion, up 52% on the first quarter last year. Our return on tangible equity increased from 11.3 to 19.8% and income grew 37% to 3.8 billion. Costs increased by $214 million, which includes the one-off payments we made to staff in January to help manage the rising cost of living. We continue to focus on tight cost discipline and are on track to achieve our 2023 cost guidance of around $7.6 billion. We told you at the full year that we expect to generate and return significant capital to shareholders this year and intend to maintain our 40% payout ratio. A common equity tier one ratio of 14.4% includes an accrual of just over 500 million for the full year ordinary dividend. We have also completed more than half of the 800 million on market buyback announced in February. The government shareholding now stands at just over 41% and we have regulatory permission to undertake a directed buyback, though any transaction remains at the government's discretion. Recent market volatility has had little impact on the bank and the average UK consumer. We have seen an expected reduction in deposits during the quarter. Customer tax payments have increased about £8 billion from the fourth quarter as more people fall into higher tax brackets. And customers also continue to pay down debt, including government lending. We are actively balancing value and volumes, taking into account customer behaviour as well as competition in the market. Our funding is well diversified and our loan to deposit ratio is 83%, resulting in surplus deposits of 53 billion pounds. Our deposits amount to 422 billion across the three businesses, and our primary liquidity includes over 120 billion of cash. This gives us a liquidity coverage ratio of 139%, well in excess of minimum requirements, with headroom of 43 billion. On the asset side, We have a well-diversified loan book where our top 10 wholesale customers account for around 5% of total loans. We have limited exposure to commercial real estate, which is less than 5% of the book, with an average loan-to-value of 47%. 93% of personal lending is secured, and our retail mortgage book has prudent loan-to-value ratios with an average of 53%. Our book's performance demonstrates our strong risk management with low levels of arrears and impairment. Pro-cyclicality remains at low levels and we continue to monitor this closely. The quality of our balance sheet and risk management enables us to continue to support our customers and the economy in these uncertain times. We are growing lending responsibly. with an increase across our three business segments of 5.7 billion to almost 356 billion. Within this, we have seen strong growth in mortgage lending with flow share increasing from 15% to 17%. In commercial and institutional, lending to large corporates grew 2.4 billion to 56.1 billion. And we also continue to support entrepreneurs and small businesses which represent over half the UK economy. In March, for example, we issued our third social bond dedicated to women-led enterprises, the first of its kind from a European bank. Over the past three years, we have successfully delivered an organisation that is more capital efficient, growing responsibly, and increasingly easy for our customers to deal with. This enables us to shift the balance of our investment over the next three years, and as we outlined in February, we will focus on growth, First, by increasing our engagement with customers at every stage in their lives. Secondly, by supporting customers in their transition to a net zero economy. And third, by embedding our services further in customers' digital lives. Our purpose-led strategy and priorities remain unchanged, so we will continue to focus on creating a simpler organization that is highly cost-efficient, to deploy our capital effectively in order to generate the best returns for shareholders, and to foster innovation and digital transformation to serve our customers better. I'd like to give you a brief update on how we're delivering on these priorities. I'll start with some examples of our growth initiatives. We continue to deepen customer engagement through tailored propositions for customers at every stage of their lives. A good example is our youth and family offering. We are the only high street bank with a tailored proposition supporting children from the age of three upwards, building on the success of our acquisition of Rooster Money, which helps young people manage money. Last year, we connected Rooster with our own app, and we have extended our offering by making a free Rooster debit card available for all our customers between the ages of six and 17. As a result, we opened 19% more youth accounts in the first quarter compared to the fourth, taking our flow share to 18.1%. In our private bank, we are leveraging our expertise in asset management to serve more customers across the group. We attracted 600 million of net new money in the first quarter, which is double that of the fourth quarter last year. We are also the number one UK high street bank for startups, with a share of 16.4%. We continue to enhance our propositions to help high growth businesses scale up and have increased volumes 9% during the quarter. And as a leading provider of sustainable financing, we play an important role in helping our customers transition to a net zero economy. We have delivered just over £40 billion of climate sustainable funding and financing since July 2021 to meet our £100 billion target. Within this, we set a name in January to provide at least £10 billion of lending for homes with an energy efficiency rating of A or B, and have contributed £1.3 billion during the first quarter. As we continue to embed our services in customers' digital lives, 93% of our retail customers' needs are now met digitally, and 64% of retail customers are entirely digital. We are also focused on expanding our services and have recently extended our cards offering beyond our own customers to the entire market whilst maintaining our prudent approach to risk. As a result, we have acquired 30,000 new car customers during the quarter and this has contributed to an increase in share from 6.9% to 7.2%. In addition to our focus on driving targeted growth, we continue our strong track record of disciplined cost management and investment. We are on track to meet our cost guidance for the year of around 7.6 billion and our guided cost income ratio of less than 52%. And we expect to invest in the region of 3.5 billion over the next three years, continuing our digital transformation, which includes improved customer journeys, data analytics, machine learning and robotics. We continue to allocate capital effectively across the business, as we progress our phased withdrawal from Ulster Bank Republic of Ireland. RWAs have reduced a further £800 million in the quarter to £4.6 billion. Around 95% of accounts are now closed or in the process of closing. We have shut all our branches in the Republic of Ireland and we expect the agreed asset sales to complete by the year end. You can see from this slide we are making good progress on our objectives and are on track to meet our 2023 guidance on income, costs and capital. And as I said earlier, we expect to make significant distributions to shareholders in 2023 and to maintain our payout ratio of 40% with capacity for additional buybacks. By focusing on targeted growth, disciplined management of costs and the effective allocation of capital, We plan to operate with a CET1 ratio of 13% to 14% over the medium term and deliver a sustainable return on tangible equity of 14% to 16%. With that, I'll hand over to Katie to talk about our financial performance in more detail.

Thank you, Alison. I'm going to talk about the performance in the first quarter using the fourth quarter as a comparator. Total income increased 4.5% to 3.9 billion pounds. Income excluding all notable items was 3.8 billion, up 1.4%. Within this, net interest income was stable at 2.9 billion and non-interest income was up 7.1% at 918 million. Operating expenses fell 7% to £2 billion, driven by the absence of the annual UK bank levy, partly offset by the one-off cost of living payment to staff in January. This delivers a cost-income ratio of 49.8% for the quarter. The impairment charge approximately halved to £70 million, or seven basis points of loans. Taking all of this together, we delivered operating profits before tax of £1.8 billion. Profit attributable to ordinary shareholders was £1.3 billion, and return on tangible equity was 19.8%. I'll move on now to net interest income on slide 11. Net interest income, excluding notable items, was broadly stable at 2.9 billion. This was the result of two fewer days in the quarter, which offset the benefit from higher average lending volumes. Net interest margin, excluding notable items, increased two basis points to 327. Wider deposit margins added 12 basis points by reflecting the benefit of higher average interest rates, partly offset by lower average deposit balances, ongoing pass-through to savers for which there is a timing lag, and ongoing customer migration to higher interest paying accounts. This was partly offset by lower lending margins, which reduced NIM by nine basis points driven by the mortgage front book. We continue to expect net interest margin for the full year of around 320 basis points. This assumes the current UK base rate remains at 4.25% throughout 2023, up from 4% in our previous projections. And the average reinvestment rate of our product structural hedge for the full year is 3.6%, up from 3.3%, which is largely offset by our expectation of lower average deposit balances. So let me turn now to deposits on slide 12. Customer deposits across our three businesses were 422 billion at the end of the first quarter, down 2.6%, or 11 billion pounds. This was mainly driven by tax payments, which were around 8 billion pounds higher than the fourth quarter. This is a larger share of overall additional UK tax payments than our deposit share. We saw increased competition for balances, breaking this down by business, Retail banking deposits reduced 4.4 billion driven by tax payments and higher customer spending. In private banking, the impact of tax was most pronounced given the customer demographic. We also saw continued reallocation of cash into investments. In commercial and institutional, deposits reduced 2.8 billion pounds, mainly reflecting the reduction in system liquidity. Within central and other, we saw a further £8.7 million reduction. Half of this is the result of Ulster Bank's customers' migration to other banks, as expected, and it also includes normal treasury activity. Turning now to how we think about deposits on the next slide. Customer behaviour in the first quarter was broadly in line with expectations. We saw limited change between interest-bearing balances, which account for 60%, and non-interest-bearing balances, which make up the remainder. Within interest-bearing balances, we continue to see migration from instant access to term accounts, which is positive from a relationship perspective, but clearly has an impact on deposit margins. Term deposits across the three businesses are now around 8% of the total, up from around 6% at the year end and around 3% at the end of 2021. Around 40% of total deposits are insured. Clearly, this varies by customer type. For our personal customers, 68% are insured. This is higher for retail banking than private banking, as you would expect, given larger average balances. However, we view deposits in Coutts as more stable as a result of our private banker model for this customer base. For our corporate customers, around 11% of balances are insured. However, this will be higher for our smaller business banking customers and lower for our market and funds banking customers. Our commercial and institutional business is relationship manager-led with regional and product expertise. We serve a broad customer base with a comprehensive product set, providing core transaction, clearing and cash management services. This provides us with significant relationship-led operational balances. Future deposit flows will be determined by macroeconomics, including ongoing quantitative tightening as well as changes in net lending. Customer behaviour and competitive dynamics will also play a significant role. The evolution of deposit balances is difficult to predict, but in light of higher tax payments in the first quarter, we now think deposit balances at the end of 2023 are likely to be broadly stable or modestly lower than the end of 2022 when they were £433 billion. We remain competitive across our customer savings rate and continue to pass through higher interest rates. Our cumulative pass-through is now around 40% across interest-bearing deposits, up from 35% at Q4. This includes pricing decisions after the base rate increase to 4.25% in March. As you can see on the bottom of the slide, customer deposit repricing has lagged the increase in base rates. The change in the cost of deposit funding is accelerating as there were more significant pass through in the first quarter. This compares to the change in the average UK base rate, which is decelerating. This negative lag effect has meant less deposit margin expansion than in prior quarters. Turning now to loans on slide 14. We are pleased to have delivered a strong quarter of balanced lending growth across the group. Gross loans to customers across our three businesses increased by 1.6% or £5.7 billion to £356 billion. Taking retail banking together with private banking, mortgage balances grew by 3.9 billion, or 2% in the quarter. Gross new mortgage lending was 10 billion pounds, representing flow share of around 17%. This is higher than normal, reflecting our decision to stay in the market during the volatility in Q4, where others withdrew, as well as a shorter period between application and completion that we saw in the first quarter. This is a good demonstration of how we have positioned this business for growth. Unsecured balances increased by a further 200 million to 14.4 billion, driven by new card issuance and market share gains. In commercial and institutional, gross customer loans increased by 1.5 billion. At the mid to large end, we saw good demand across revolving credit facilities, term lending and fund banking. At the small end, Demand remains muted and we have seen some deleveraging by customers with surplus liquidity, including the ongoing repayment of government scheme lending. I'd like to spend a bit of time explaining how these balance sheet dynamics feed through into our strong liquidity position on slide 15. We have a highly liquid balance sheet with a diverse and robust funding base. This allows us the strategic flexibility to manage our deposit book for value in a considered and disciplined manner. We ended the quarter with a loan-to-deposit ratio of 83%, demonstrating the strength of our capacity to grow. Our liquidity coverage ratio was 151% on a 12-month rolling average view and 139% at the end of Q1. This decrease was driven by a reduction in deposit balances and strong lending growth. Our primary liquidity was £149 billion at the end of the quarter. Four-fifths of this is cash and most of the remainder is government bonds held at fair value. This means that we are very well prepared to manage any unexpected changes in customer behaviour. I'd like to turn now to non-interest income on slide 16. It was a good start to the year with non-interest income excluding notable items up 61 million to 918 million. We are pleased with the performance of our markets business which delivered higher fixed income revenues and also benefited from currency volatility. Our capital markets income grew as we supported more commercial customers with their issuance. Fees and commissions decreased 32 million to 583 due to seasonally lower spending. Going forward, non-interest income will be influenced by economic activity and customer confidence as you would expect. Turning now to costs on slide 17, where my comparison will be with the first quarter of last year. Other operating expenses were £1.9 billion for the first quarter. That's up £214 million or 12.5% on the same period last year. including a one-off cash payment to staff in January of around £60 million to help with the cost of living pressures and an increase in strategic costs of around £40 million relating to our withdrawal from the Republic of Ireland. Excluding these items, cost growth was around 7% year-on-year. As we have often said, costs are inherently lumpy across the year. However, we continue to expect other operating costs of £7.6 billion for the full year equivalent to around 4% annual cost growth, in line with our guidance at the year end. I'd like to turn now to credit risk on slide 18. We have a well-diversified prime loan book which is performing well. Over 50% of our group lending consists of mortgages, where the average loan-to-value is 53%, or 69% for new business. Overall, we have low levels of arrears and forbearance in our mortgage book. 91% of our book is at fixed rate, 5% are trackers and 4% is on a standard variable rate. Over two thirds of mortgage balances are fixed for five years and less than a quarter are fixed for two. Our personal unsecured exposure is less than 4% of group lending and is performing in line with expectations. Our corporate book is well diversified and we have brought down concentration risk over the past decade. As Alison said earlier, our top 10 wholesale customers represent around 5% of wholesale loans. Our commercial real estate exposure represents less than 5% of group loans with an average loan to value of 47%. We have carefully managed this for several years by reducing absolute exposure and pivoting away from retail towards industrial. So we are comfortable with the risk in this portfolio. Turning now to look at impairments on slide 19. We are reporting an impairment charge of £70 million in the first quarter, equivalent to seven basis points of loans on an annualised basis. This includes a net release of £44 million in our commercial and institutional business. We have not updated our economic scenarios this quarter, as we are comfortable that they adequately reflect the range of potential outcomes. So this charge largely reflects stage three impairments, which remain stable. As you know, our through the cycle impairment guidance is 20 to 30 basis points. And I continue to see this as an appropriate level for 2023, given both the economic outlook and the relatively benign trends in our book. Our expected credit loss coverage is broadly stable at £3.4 billion, equivalent to 89 basis points of loans. This includes £333 million of post-model adjustments for economic uncertainty, which are also broadly stable in the quarter. We remain comfortable with the coverage of the book, which is not showing any material signs of stress. Turning now to look at capital and risk-weighted assets on slide 20. We ended the quarter with a common equity tier one ratio of 14.4%, up 20 basis points on the fourth quarter. We generated 50 basis points of capital before distribution. This includes 72 basis points of capital from earnings, partly offset by the change in the IFRS 9 transitional relief on the 1st of January, which absorbed eight basis points and RWA growth consuming 16 basis points. In line with our commitments to distribute 40% of earnings by the ordinary dividend, we have accrued 40% of the first quarter attributable profit, equivalent to 29 basis points. RWA has increased by £2 billion due to stronger lending, which added £1.8 billion, and an impact of £1.1 billion from our annual operational risk recalibration exercise. This was partly offset by a reduction of 0.8 billion in market risk. Turning now to our balance sheet strengths on slide 21. Our CET1 ratio of 14.4% is above our target range of 13 to 14%. So we are well positioned to participate in a directed buyback from the government when they choose to sell. Our total capital ratio of 19.6% is above our minimum requirements. We operate with a management buffer at the CET1 level and hold additional Tier 1 and Tier 2 securities broadly in line with our minimum requirements. We have 3.9 billion of AT1 securities outstanding, equivalent to 2.2% of RWAs and a minimum requirement of 2.1%. Our next AT1 call date is not until August 2025. Our UK leverage ratio of 5.4% was stable in the quarter and remains well above the Bank of England minimum requirement. Turning to 2023 guidance on my final slide. We continue to expect income excluding notable items to be around 14.8 billion. Net interest margin of about 3.2% and group operating costs excluding litigation and conduct to be around 7.6 billion, delivering an improvement in the cost income ratio to below 52%. We anticipate a loan impairment rate in the range of 20 to 30 basis points. And together we expect this to lead to a return on tangible equity at the upper end of our 14 to 16% range. And with that, I'll hand back to Alison.