NatWest Group PLC

Good morning and welcome to the NatWest Group H1 Results 2024 management presentation. Today's presentation will be hosted by CEO Paul Thwaite and CFO Katie Murray. After the presentation, we will take questions.

Good morning and thank you for joining us today. I'll start with a business update. Katie will take you through the financial performance and then we'll open it up for questions. You will have seen that it's been a busy first half. We announced our acquisition of a mortgage portfolio from Metrobank today, our transaction with Sainsbury's last month, and we've also grown our customer base organically by over 200,000. We are closing our hub in Poland as we continue to simplify the business, and our directed buyback in May further reduced the government shareholding, which is almost halved to less than 20%. These are good examples of our progress that I'll come back to later. At the same time, we've been working hard to support our customers, and this activity underpins our strong financial performance. So let me start with the headlines. We have had a strong first half with significant growth quarter on quarter. Income was $7 billion and costs were $4 billion, resulting in operating profit before tax of $3 billion, with attributable profit of $2.1 billion. Our return on tangible equity was 16.4%. Given the strength of our performance, together with our updated economic forecast, we are upgrading our 2024 guidance, which Katie will talk about later. Improving consumer and business confidence is reflected in good customer activity across both sides of the balance sheet. Customers are increasing their savings with deposit growth across our three businesses of more than £6 billion. Whilst we attracted record flows to ISA accounts, the overall mix of term deposits was stable. We've seen good activity in commercial and institutional banking, where lending grew by £3 billion, excluding government schemes. We provided 16 billion of climate and sustainable funding and financing, bringing the total to 78 billion since July 2021. Our target is to reach 100 billion by the end of 2025. Customers are also absorbing the impact of higher interest rates and arrears remain low. Our disciplined approach to lending is reflected in an impairment charge equivalent to three basis points of loans. We remain focused on generating capital in order to reinvest in the business and make shareholder distributions. Our CET1 ratio is within our target range at 13.6%. And we increased capital through earnings as well as active management of risk-weighted assets, which added 140 basis points during the first half. As a result, we're announcing an interim dividend of six pence today, up 9% on last year. This is in addition to the $300 million on-market buyback announced in February, which completed this week, and a directed buyback of $1.24 billion in May. I'd now like to outline our approach to creating long-term shareholder value. We serve 19 million customers meeting a wide range of needs across our three businesses – retail banking, private banking, commercial and institutional. By putting customers at the heart of our business, we create value for all our stakeholders. We are targeting disciplined growth by focusing on areas with attractive returns and by striking a careful balance between volume and margin. This growth, together with managing costs and capital, allows us to invest in the business and make attractive distributions to shareholders. we announced 1.7 billion of distributions during the first half, and the lower share count from buybacks has resulted in higher dividends per share. You can see on the right how the dividend has grown, while the number of ordinary shares has reduced from 8.9 to 8.3 billion year on year. This has supported a 16% improvement in tangible net asset value per share to 304 pence. And we expect continued growth into 2025 and 26. Turning now to our three strategic priorities, discipline growth, bank-wide simplification, and active balance sheet and risk management. I'll talk about each one in turn. We have continued to build on our strong market positions through both organic and inorganic activity. The growth in new customers of over 200,000 has contributed to growth across the bank. Lending and commercial banking to mid-market customers grew by 1.8 billion. Assets under management and administration are up 11% to over 45 billion. And our sharing credit cards grew half a percentage point to 9% due to our investments in technology to make us more competitive on price comparison websites. We are accelerating this organic growth by making acquisitions where we have opportunities to add scale in our target areas at attractive returns. We announced today that we are acquiring a 2.5 billion portfolio of prime UK residential mortgages from Metro Bank, and we expect the deal to close in the second half of this year. Our Sainsbury's transaction is expected to complete in the first half next year, adding around a million new customer accounts with about 2.5 billion of unsecured loans and 2.6 billion of savings. On completion, this transaction should increase unsecured balances in retail banking by 17% and grow our credit card share from 9% to 10.6% on a pro forma basis. We continue to simplify the bank to increase efficiency and improve customer experience. For example, we have three strategic hubs in the UK, India and Poland, which we are reducing to two by closing our operations in Poland. And the number of telephony systems we use across the bank has come down from 20 to five since the year end. We are also accelerating our digital transformation. I'll share just a few examples from many across the bank. We continue to digitize customer journeys to make it easier and simpler to interact with us. This year, we have transformed 11 customer journeys on our digital channel for commercial customers bank line. This includes the management and tracking of international payments online, which should free up our colleagues from thousands of inbound calls each year. We have also reduced onboarding times for clients who want to carry out foreign exchange transactions from seven days to one. As a result, our foreign exchange business serves an additional 300 customers from our commercial mid-market segments. To help both retail and business customers, we are enhancing our chatbot Quora, which handles over 10 million customer interactions a year by introducing generative AI. Our third priority is to allocate capital dynamically and maintain strong risk management. We reduced our flow share in mortgages at the end of last year in a competitive market with considerable pricing pressure. But we deployed additional capital in commercial and institutional banking, where first half lending grew by 3 billion, excluding government schemes. During the second quarter, we then increased the capital allocated to mortgages again, following improved market conditions reflected in a growing share of applications. In addition to disciplined origination, we are actively managing our risk-weighted assets and have delivered a 4.3 billion reduction in the first half, using a range of means, including significant risk transfers and credit risk insurance. By focusing on disciplined growth, improving efficiency, and managing our capital dynamically, we are driving capital generation in order to optimize shareholder returns. The positive momentum and progress made during the first half reflects the ambition across the bank to deliver its full potential, and we feel increasingly confident about the outlook. We continue to expect a return on tangible equity greater than 13% in 2026, whilst operating within a CET1 ratio of 13 to 14%. and we are targeting a payout ratio of around 40%, in line with our commitment to return surplus capital to shareholders. With that, I'll hand over to Katie to take you through our performance in the second quarter.

Thank you, Paul. All my comments use the first quarter as a comparator. Income, excluding all notable items, increased 5.2% to £3.6 billion. Operating expenses were 2.3% lower at £2 billion. We made an impairment release of £45 million, or five basis points of loans, which included post-model adjustment releases of £117 million. Together, this delivered operating profit before tax of £1.7 billion. Profit attributable to ordinary shareholders was £1.2 billion and return on tangible equity was 18.5%. I'd like to talk now about our updated assumptions. Overall, the UK economy has performed better than we expected at the start of the year and we are pleased to see consumer and business confidence returning. This means the Bank of England has not yet started to reduce interest rates. We initially assumed rates would start falling in May, reaching 4% by the end of the year and 3% by the end of 2025. We now assume rates will start to come down in the third quarter, reaching 4.75% by the end of the year, with a further five cuts in 2025 to 3.5%. Of course, the actual outcome may be different. The headline rate of inflation is now 2%, in line with Bank of England's targets, and we assume it will stay around this level. We continue to assume moderate real GDP growth and some increases in unemployment. I'll turn now to talk about our income performance. Income, excluding notable items, of £3.6 billion was up 5.2% on the first quarter, with growth in net interest income and non-interest income. Across the three businesses, income grew by £147 million, driven by higher deposit income and fees. All three businesses delivered higher deposit income as the tailwind from the structural hedge more than offset deposit mix changes. In retail banking, the pace of reduction in mortgage income slowed as the book has now largely repriced. Commercial and institutional generated higher lending and financing fees as well as payment service fees. And private banking reported higher investment management fees following growth in assets under management of 2 billion or 4.6%. Group net interest margin was 210 basis points, up five basis points from the first quarter. Given this positive performance and our updated economic assumptions, we are raising our guidance for 2024 total income, excluding notable items, to around £14 billion. Moving now to lending. We continue to be disciplined in our approach and focus on deploying capital where returns are attractive. We are pleased to see ongoing demand from our commercial mid-market customers, together with an improvement in gross mortgage lending. Gross loans to customers across our businesses decreased by £1.9 billion to £358.6 billion. Taking retail banking together with private banking, mortgage balances fell by 0.8 billion as customer redemptions more than offset new lending. The pace of reduction slowed in the second quarter, with gross new lending increasing over 20%, reflecting stronger market volumes and stable retention levels. We expect the book to return to net growth in the third quarter, given both stronger market volumes and an increase in our share of new applications during the second quarter. We have also announced the acquisition of a £2.5 billion prime mortgage portfolio for Metro Bank, which we expect to close in the second half. We continue to be disciplined in our approach to the mortgage market as we manage the business for returns. Unsecured balances increased by £0.3 billion to £16.1 billion, with growth in credit cards partially offset by lower personal lending. We continue to grow our share in unsecured lending, and the Sainsbury's Bank transaction supports this. Within commercial and institutional, lending to mid-market customers grew by £1 billion, driven by demand in social housing, asset financing and invoice financing. Balances in corporate and institutions decreased by £1.9 billion, partly due to customers taking advantage of stronger capital markets, which is reflected in the performance of our markets business. I'll now talk about deposits. Across our three businesses, these were up £5.2 billion to £425 billion. Migration from non-interest bearing to interest bearing deposits continued at a slow pace as expected. Non-interest bearing balances were 32% of the total, compared to 33% at the end of the first quarter. And term accounts remained around 17%. In retail banking, there was strong growth in savings, driven by record ISA inflows. In private banking, there was good demand for instant access savings, including some short-term transitory inflows. In commercial and institutional, both non-interest bearing balances and savings grew, driven by our commercial mid-market customers. Turning now to see how this is translated into the cost of our deposits. For the first time in two years, the average rate of interest we pay on our customer deposit funding has stabilised. It remained at 2.1% in line with the first quarter. This stabilisation reflects modest changes in mix and limited adjustments to deposit product rates. As UK base rates come down, we expect to pass through reductions on our customer deposit rates. But clearly, the quantum and timing of this is subject to competition, as well as contractual terms and conditions. We have updated our illustrative interest rate sensitivity disclosure on the right of this slide. The managed margin is the more relevant sensitivity for changes in the base rate and deposit pass-through. Based on our first half balance sheet, a 25 basis point downward parallel shift in the yield curve would reduce annual income by £125 million. This is mainly driven by our unhedged deposit balances and assumes a pass-through of around 60%. Turning now to the structural hedge. Many of you are familiar with our structural hedge and our mechanistic approach to managing it. It is an important driver of income, so I will recap a few points. 175 billion or 41% of our deposit base is part of the product structural hedge, where yields are depressed relative to current rates. The yield in the first half was 1.58%. our product structural hedge has an average duration of two and a half years, which means it takes a full five years to reprice. And we reinvest maturing balances at the prevailing five-year swap rate. As we have shown in the chart, before further reinvestment is taken into account, more than 90% of income is already written for 2024. And product hedges already written will deliver income of 2.9 billion in both 2025 and 2026. The actual income from the structural hedge in coming years will reflect any changes in notional balances, as well as differences between the redemption and the reinvestment yield. The product notional reduced by £10 billion during the first half, which reflects our 12-month look back at average eligible balances. We continue to expect around £170 billion by the end of this year, based on a static balance sheet. Overall, we expect the product structural hedge to deliver higher income in 2024 than 2023, and for this to deliver a more significant income benefit in 2025 and 2026. turning now to costs. We remain on track for other operating expenses to be broadly stable compared to 2023, excluding the increase in bank levies of around £100 million and the costs associated with the potential retail share offering of £24 million. Other operating expenses of £1.9 billion for the second quarter were slightly lower than the first as a result of the Bank of England levy. severance, branch and property exit costs increased in the first half as we accelerated our work on simplification. The second quarter includes costs relating to our announced exit from Poland. I'd like to remind you that our investment spend and cost savings are not evenly spread across the year and you should not make run rate assumptions based on a single quarter. Turning now to impairments. Our diversified prime loan book continues to perform well. We are reporting a net impairment release of 45 million for the second quarter, taking the first half charge to 48 million, equivalent to three basis points of loans. In retail banking, a charge of 12 basis points reflects broadly stable stage three inflows, partially offset by a further post-model adjustment release. Commercial and institutional reported a release of 28 basis points driven by post-model adjustment releases, as well as a reduction in stage three impairments. Our balance sheet provision for expected credit loss still includes £302 million of PMAs for economic uncertainty. We have also reviewed and updated our economic scenarios, which drove a £17 million release. We have included the economic forecasts and weightings in our appendices. Stage 3 charges have remained low in the first half, and as our economic scenarios are relatively stable, with little sign of deterioration, we now expect a loan impairment rate below 15 basis points for the full year. And turning now to capital. We ended the second quarter with a common equity tier 1 ratio of 13.6%, up 10 basis points. Capital generation was especially strong given our impairment release and active RWA management. We generated 63 basis points of capital from earnings and 41 basis points from lower RWAs. RWAs decreased by 5.5 billion to 180.8 billion. Active capital management accounted for 3.9 billion pounds of this reduction. This activity is in line with plan and with a number of actions successfully competed in the second quarter. And while it is an important capital management tool, it should not be considered the run rate. We currently expect around 200 billion of RWAs by the end of 2025, but the journey will not be linear. You need to bear three things in mind. First, the continued discipline growth, including the Metro Bank and St Andrews Bank transactions. Secondly, further RWA management. And finally, ongoing registry headwinds. We are awaiting the PRA publication of the Basel 3.1 rules. We are also liaising with the regulator on CRD4 model changes, where we expect some further inflation in the second half and through 2025, though timing and quantum remains uncertain. Overall, we believe around £200 billion by the end of 2025 is an appropriate basis for planning. we will continue to operate with a CET1 ratio in the range of 13 to 14%. And finally, turning to guidance. For the full year, we now expect income excluding notable items to be around 14 billion. Other operating costs to be broadly stable with 2023, excluding additional bank levies of around 100 million pounds and the retail offer costs of 24 million. and our loan impairment rate to be below 15 basis points. Together, this will deliver an expected return on tangible equity of greater than 14%. And with that, I'll hand back to the operator for questions.