NatWest Group PLC

Good morning and welcome to the NatWest Group H1 Results 2023 management presentation. Today's presentation will be hosted by Chairman Howard Davis and CFO Katie Murray. After the presentation, we will open up for questions. Howard, please go ahead.

Good morning and thank you for joining us today. I'll start with a short introduction before Katie takes you through our financial performance. On Wednesday, we announced that Alison Rose had agreed with the board to step down as chief executive with immediate effect by mutual consent. It was a sad moment. She had dedicated all her working life to date to NatWest and leaves many colleagues who respect and admire her greatly. Subject to regulatory approval, the board has appointed Paul Thwaite, the current CEO of our commercial and institutional business, as interim group chief executive. Before Paul became CEO of our commercial institutional business, he led the group's commercial banking division. He's a very experienced banker with a track record of success in senior roles in wholesale, corporate, international, retail, banking and risk, and has worked across the UK, in Europe and in the US. He's been a member of our executive committee since 2019 and has played an important role in delivering our current strategy, which remains unchanged. Paul will present results from Q3 onwards and looks forward to meeting investors on a one-to-one basis in the near future. The board began the process of appointing my successor in April, as I will have been in post for nine years by July 2024, the maximum recommended tenure under the UK Corporate Governance Code. And my successor will be responsible for leading the process to select a permanent CEO. And we fully expect Paul to take part in that process. With that, I'll hand over to Katie to run through the results.

Thank you, Howard. The business continues to perform well and we have delivered a strong first half with growth and lending of £6 billion and new customer acquisition in key areas. We delivered first half operating profit of £3.6 billion and attributable profit of £2.3 billion. Income grew to £7.4 billion and costs were £3.8 billion. Our strong capital generation gives us flexibility to invest in the business, consider other value-creating strategic options and return capital to shareholders. We are proposing an interim dividend this year of 5.5 pence, up from 3.5 pence last year. We have completed the £800 million on-market buyback announced in February, and today we are announcing another on-market buyback of up to £500 million, which we expect to start next week. Together with a directed buyback of 1.3 billion in May, this brings our CET1 ratio to 13.5% within our target range of 13 to 14% for the first time. Our return on tangible equity was 18.2%. We have updated our economic forecasting since we last spoke. Although the UK economy has been stronger than expected, inflation remains relatively high and rates have continued to rise, resulting in ongoing economic uncertainty. We now expect peak rates of 5.5% this year, up from 4.25% in our previous forecast. We are also seeing liquidity in the banking system reduce. In the face of ongoing inflation and rising interest rates, customers are behaving rationally, corporates are deleveraging, overall demand for borrowing is muted, we are seeing customers adjust their spending habits, and some are using deposits to pay down more expensive debt. Given the macroeconomic environment and higher rates, we have taken the decision to strengthen payment reserves by around £210 million. Against this backdrop, our strong balance sheet is more important than ever, with robust liquidity, a high quality deposit base and well diversified loan book, enabling us to continue to support our customers and fueling the UK economy. I'll now take you through the second quarter performance using the first quarter as a comparator on slide six. Total income was stable at £3.9 billion. Income excluding all notable items was £3.6 billion, down 6.7%. Within this, net interest income was 2.7% lower at £2.8 billion and non-interest income was down 19.5% at £739 million. Operating expenses fell 3.1% to £1.9 billion. The impairment charge increased to £153 million, or 16 basis points of loans driven by higher post-model adjustments. Taking all of this together, we delivered operating profit before tax of £1.8 billion. We incurred some notable charges, bringing profit attributable to ordinary shareholders to £1 billion. And return on tangible equity was 16.4%. We are pleased to have delivered further net lending growth in the quarter. Gross loans to customers across our three businesses increased by £0.3 billion to £356 billion. Taking retail banking together with private banking, mortgage balances grew by £1.9 billion or 1% in the quarter. Gross new lending was £8 billion, representing flow share of around 15%. And our stock share has increased from 12.3% at the start of the year to 12.6%, demonstrating how we are delivering on our growth strategy. Given volatility in swap rates during the quarter, our average application margin was below our intended range of around 80 basis points. But we're back at this level at the beginning of July as we have repriced customer rates. Unsecured balances increased by a further £600 million to £15 billion, driven by additional card issuance and ongoing share gains. In commercial and institutional, gross customer loans decreased by £2.3 billion. At the mid to large end, we saw some demand for asset finance and revolving credit facilities. And at the smaller end, demand does remain muted and customers with surplus liquidity continue to deleverage, including repayment of governance scheme lending. So let me now turn to deposits on slide eight. Customer deposits across our three businesses were stable in the quarter at £421 billion. As expected, outflows in retail banking and private banking slowed following tax payments made in the first quarter. In commercial and institutional, deposits increased by £1 billion. Our loans deposit ratio of 83% allows us to manage our deposit base for value and importantly, allows us to support customers and grow our share in target areas. The UK base rate has increased by 75 basis points to 5% since we presented Q1 results and customers are increasingly moving balances from non-interest bearing to term accounts. Non-interest bearing balances have reduced from around 40% of the total to 37%. And term deposits are now 11% of the total, up from 6% at the beginning of the year. Customer behavior is difficult to predict. However, we do assume some level of ongoing migration. Turning now to what this means for income on slide 9. Income excluding all notable items was £3.6 billion, down 6.7% on Q1. Net interest income was 2.7% lower at £2.8 billion, driven by lower bank NIM in the quarter of 3.13%, driven by lower margins on mortgages and deposits. and lower group average interest earning assets, which reduced by 1.5% to 514 billion, driven by a reduction of liquid assets, which more than offset loan growth. You will find our usual disclosure on net interest income in the appendix. Non-interest income excluding notable items was down 179 million to 739 million. Around half of this was due to lower market volatility. We continue to expect full year income excluding notable items of around 14.8 billion. However, we now expect bank net interest margin of around 3.15% down from 3.2%. This assumes the UK base rate increases by a further 50 basis points in Q3 to 5.5% and remains there for the rest of the year. And the average reinvestment rate of our product structural hedge for the full year is 4.4%, up from 3.6%. The benefit from higher rates to bank name is more than offset by our expectation of further deposit mix changes and pass through. And a reduction in the product hedge notional from 202 billion to around 190 billion by the year end, reflecting a catch up with eligible spot deposit balances. Moving on to costs on slide 10. Other operating expenses were 1.9 billion for the second quarter. That's down 57 million or 3% on the first quarter, driven by lower severance and consultancy costs. In Ulster Bank, we have incurred 163 million of direct costs in the first half, and we continue to guide to around 300 million for the full year. We continue to expect other operating costs of around 7.6 billion for the full year, in line with our guidance. This cost performance is delivering a cost income ratio of 49.3% for the first half, benefiting from the notable income gains. Excluding these, the cost income ratio is 51.6%. I'd like to turn now to impairments on slide 11. We booked a net impairment charge of £153 million in the second quarter, equivalent to 16 basis points of loans on an annualised basis. This was driven by an increase in our post-model adjustment for economic uncertainty of £129 million to £462 million, together with further reserve building that more than offset the £98 million expected credit loss release from the update to our economic assumptions. The PMA increase is largely against our wholesale book to cover any potential cash flow issues as a result of higher interest rates and inflation. Excluding this, we would have had further net impairment releases in our commercial and institutional business. In retail overall, stage three charges and defaults remain stable. The impairment charge driven by new day one provisions relates to unsecured lending growth. As you know, our 2023 impairment guidance is 20 to 30 basis points. We see this as prudent and we need to see a material deterioration in performance to be inside this range. I'd like to talk a bit more about the composition and quality of our loan book on slide 12. We have a well diversified prime loan book, which is performing well and which demonstrated its resilience in the recent Bank of England stress tests. Over 50% of our group lending consists of mortgages, where the average loan to value is 55% or 69% on new business. We continue to have low levels of arrears and forbearance in our mortgage book. 91% of our book is fixed, 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. The composition of our mortgage book means a lower proportion of our customers will face a change to their mortgage repayments in the second half relative to the sector average. the majority of our customers are rolling off five-year fixed rates, where the uplift is lower than those rolling off two-year rates. Since mortgage rates began to rise in Q4 last year, more than 70% of our customers in the pre-roll-off window have taken advantage of the opportunity to refinance early and had the advantage of lower rates. 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, including reducing commercial real estate, which is less than 5% of the group loans with an average loan to value of 48%. As one of the largest lenders to business in the UK, we were pleased to see in the Bank of England's recent financial stability report, recognise corporate indebtedness is at its lowest point in the past 20 years. Turning now to look at returns and capital generation on slide 13. We are pleased to have delivered 16.4% return on tangible equity this quarter, driving capital generation of 50 basis points, excluding non-recurring impacts such as our acquisition of Cushion. This brings capital generation to 100 basis points for the first half. We ended the quarter with a common equity tier one ratio of 13.5%, down 90 basis points on the first quarter. This was driven by distributions which account for 114 basis points in the quarter. Our 1.3 billion directed buyback consumed 71 basis points of capital. We accrued 40% of second quarter attributable profits equivalent to 15 basis points in line with our 40% payout ratio. This excludes the foreign exchange recycling gain, which is neutral for capital. And finally, our 500 million on market buyback programme announced today is accrued in our 13.5% CET1 ratio. Turning now to our balance sheet strength on slide 14. Our CET1 ratio of 13.5% is now within our target range of 13 to 14%, which includes a buffer above our minimum requirements. Our UK leverage ratio of 5% has reduced from 5.4% in line with the decrease in tier one capital and remains well above the Bank of England minimum requirements. Our liquidity coverage ratio was 141% at the end of the first half on a spot basis and 145% on a 12 month average basis. This remains well above our minimum requirements. Turning to 2023 guidance. We expect income excluding notable items to be around 14.8 billion at a UK base rate of 5.5 percent. Net interest margin of about 3.15 percent and group operating costs excluding litigation and conduct to be around 7.6 billion. Delivering a cost income ratio below 52 percent. 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. I'd like to now to talk more broadly about the first half and our strategy, which is delivering and remains unchanged. So we maintain our focus on responsible targeted growth, continued cost and investment discipline, together with effective capital allocation, enhanced shareholder returns. And I'll talk more about each of these areas in turn. I'll start with our progress against targeted growth on slide 17. The strength of our balance sheet and risk management means we retain capacity to grow and even in challenging market conditions. And we are doing this in three ways. First, we are focused on driving customer lifetime value. We are the leading high street bank for entrepreneurs and startups with a share of 17.7%, up from 13% this time last year. And we added 55,000 new startup accounts during the first half as we continue to strengthen our offering. In retail banking, we continue to grow our customer base with a focus on personalization and particular segments such as youth and affluent. For example, we have significantly strengthened our youth offering with the acquisition of Rooster Money, which we have extended by connecting it with our app. Rooster Card subscriptions increased by 93,000 during the first half, and we now serve around 20% of the youth market. In wealth management, despite more volatile markets, we grew assets under management and administration during the first half, including net new money of a billion pounds. Secondly, we are helping customers transition to a net zero economy, which remains a strong commercial opportunity. Across the group, we have delivered over 48 billion of climate and sustainable funding and financing towards our ambition of lending 100 billion between 2021 and 2025. This includes 16 billion in the first half this year. And thirdly, we continue our digital transformation, which is delivering value for customer employees and the bank. Our services for small businesses such as Metal and Till are great examples. Metal is our digital-only business bank account with a customer base of around 100,000, which includes 17,000 acquired during the first half. Our award-winning payments platform, Till, has carried out 2.2 billion of transactions in the first half, up 64% on the same period last year. In retail banking, we have recently extended our credit card offering to the entire market, not just our own customers, taking our flow share to 9.6%, up from 5.7% this time last year. So you can see from a range of measures, whether it's customer acquisition, net new money or share, how our targeted approach is delivering organic growth to achieve a sustainable medium term target of 14 to 16%. We continue our disciplined approach to cost and investment. We expect to invest around 3.5 billion pounds between 2023 and 2025 to future-proof the business as our ongoing digital transformation helps to drive efficiencies, improve customer experience and deliver future growth. We have been re-engineering customer journeys since 2019 and expect this to deliver run rate savings of around 250 million by the end of 2023. As a result of this simplification, 99% of our loans are delivered with straight through processing. And our net promoter score for this journey has improved from 42 at the end of 2020 to 57 today. We believe the responsible use of artificial intelligence will be a game changer as we embed it into our journeys and processes. So we are accelerating its deployments. We are now using natural language processing to analyze around 560,000 conversations a week, covering telephone and chat channels so that we serve our customers better. And we use AI to analyze around 36 million events a day to help predict patterns of behavior and identify financial crime or fraud. Finally, we are investing for long-term growth by deepening and diversifying future income streams. I've already spoken about how we're growing in startups, wealth, and the youth markets. We're also expanding into new areas. We recently announced the acquisition of a majority stake in a fintech called Cushion, which allows us to enter the fast-growing workplace savings and pension markets. We have also entered a strategic partnership with Vedeno Group in order to create a leading UK banking as a service business branded as NatWest Boxed. So while we continue to keep tight cost control, we're also investing in the future. Let's now turn to capital on slide 19. Over the past three years, we have significantly improved the allocation of capital to higher returning businesses. Our phase withdrawal from Ulster Bank has contributed to this. We have now closed all our branches, around 95 percent of deposit accounts in the Republic of Ireland. In July, we completed the transfer of the asset finance business to permanent TSB and we're migrating the majority of performing tracker and linked mortgages to Allied Irish Bank. We expect the remainder of this migration to complete by the year end. We have also received a dividend of 800 million euro in the second quarter, the first since 2019. We have made or accrued distributions of £13.5 billion to shareholders since 2019 and expect to make significant returns to shareholders this year as we continue to generate capital through organic growth. We are building on the strength of our existing franchise to create value for shareholders. We serve over 19 million customers across the group. We are the number one commercial bank supporting businesses and the UK economy. We play a leading role in sustainable financing. We are the second largest UK mortgage lender and we have a strong and growing wealth business. As we continue to grow our franchises organically, we are delivering a significant improvement in return on tangible equity, which in turn is driving strong capital generation, allowing us to deliver distributions to shareholders. Through our buybacks, we have reduced our share count by 26% since the end of 2019, which in combination with profitable growth means our interim dividend per share has more than doubled. The business continues to deliver a strong performance. This is underpinned by the strength of our balance sheet, which positions us well in the current economic environment and enables us to support our customers as well as the UK economy. We continue to drive operating leverage with disciplined investment in digital and technology transformation and cost management. We are benefiting from our focus on effective capital allocation with an 800 million euro dividend from Ulster Bank. We have significantly improved our return on tangible equity over the past three years and maintained a guided range of 14 to 16% over the medium term. This gives us scope to return significant capital to shareholders. We have made or accrued distributions of 2.5 billion during the first half, whilst remaining well capitalised. Thank you very much and we're happy to open it up for questions now.