NatWest Group plc (NWG) Earnings Call Transcript & Summary

Good morning, everybody. Thank you for joining us. I'd like to ask you 3 quick questions before we move on to NatWest. You can see them on your screen, and please do respond, and we'll collate them and come back to them later in the day. The first one, sadly, we are asking this question again on Brexit. So there are options A through D. The first one, there will be a deal, I'm not worried; there will be -- there will probably be a deal; thirdly, there will be a deal, but it's so limited that a bad outcome is likely anyway; or deal -- or 4 -- or D, even, we're heading for no deal. So that's the Brexit question. The second one on domestic U.K. bank profitability. A, ROE targets will be met; the second option, ROE targets -- ROE and returns already can get to a good level, but only after restructuring; and the third option, interest rates make it too hard to get to a decent ROE. And then the final question on capital distribution. Firstly, the Bank of England will lift the ban, normal distributions can restart with full year results. Secondly, Bank of England will lift the ban, but distributions will last small. Thirdly, banks can't afford distributions, they need the money for bad debt and restructuring. And then finally, the dividend ban will be extended. So those are the following questions. Do please respond. There's also a box in the bottom of your screen, if you'd like to ask session -- questions in this session, which we will certainly come on to. So please feel free to ask questions in the box at the bottom of the screen. So with that out of the way, I'm very pleased to welcome Alison Rose, Chief Executive of NatWest Group. Good morning, Alison. Thank you very much for joining us.

Good morning. Nice to see you there.

Perhaps we can make a start on strategy. You set out your vision for the bank back in February, including a substantial refocusing of NatWest markets and broader efficiency improvements. Coronavirus doesn't seem to have impacted your ability to execute on those. In fact, you've accelerated some of your plans. So what are your priorities for the business as we stand today?

Thank you. Well, yes, I mean, when we announced in February, we set out a number of priorities supporting our customers at every stage of their life being simple to deal with, so reengineering and continuing to simplify, focusing on innovation and partnerships and, obviously, sharpening our customer and capital efficiency. I think the areas that I'm focused on today is really continuing to execute that strategy. But obviously, we've had the COVID pandemic sort of happened just a few weeks after I announce that strategy. So my key areas of focus. First is operational resilience. We've got very strong customer franchises, and those have been very important as we responded to the period of disruption and making sure that our business can continue to support effectively and efficiently and leverage that operational resilience during this period has been key. Our investment program and the investments that we've made in technology is not just supporting the 50,000 people I have working from home to continue to support the business, but also to allow us to accelerate our digital services to meet customer needs, so increasingly supporting them through digital channels. Secondly, it's been supporting our customers. Obviously, the strong customer base, but also making sure that we can support them through this period, participating in the government lending schemes as well as putting in support such as mortgage repayment holidays and capital repayment holidays. We've extended mortgage holidays to about 20% of our customers in the initial onslaught of the COVID pandemic. And for our commercial customers, at the end of June, we've seen GBP 8.3 billion drawn down under the government schemes. And I've been very clear, we've been supporting our existing customers during this period. So that's how we've been participating in those schemes. Thirdly, a key focus and priority is making sure we continue to have a balanced and consistent approach to risk. I'm very comfortable with the level of risk and diversification I have on our books. Our U.K. personal banking represents just over half of our total loans and advances. And within our personal bank, only 7% of our book is unsecured. Wholesale lending is well diversified across large corporates, small and midsized businesses. And we monitor a number of those sectors very closely, particularly the ones that we think will be impacted from the COVID situation. Our fourth focus is on continuing that execution, as you mentioned, around simplification and cost out. As you recall, when I announced my strategy in February, refocusing NatWest markets was a key strategic initiative, and we continue to make progress on that. We set a target to reduce risk-weighted assets in NatWest markets to GBP 32 billion in 2020. To date, we've reduced RWAs by GBP 2.8 billion, and we're making good progress on that 2020 target. And we now expect to achieve the majority of the restructuring to around GBP 20 billion by the end of next year. And on costs, although I've had to change the shape of them a little bit in terms of timing, we're still on track to deliver the GBP 250 million that I set out as a target for this year. And then finally, as an area of priority, our robust capital position, despite that significant increase in impairments in half 1, where we took a prudent and measured approach, we have very strong CET1 at 17.2, and our liquidity portfolio of GBP 243 million, which is a coverage ratio of 166%. So we continue to believe the shape and mix of the business is good and appropriate. Our target of a CET1 of 13% to 14% over the medium to long term, which gives me headroom around GBP 6 billion GBP to 8 billion. So that allows me to continue my focus on making sure we can return capital to shareholders, manage the uncertain outlook and consider other options as we move forward.

On NatWest markets, the goal is to consume less capital within the group, as you just mentioned. And then from a profitability perspective, to be breakeven. So how do you see NatWest markets' role within the broader group?

Yes. I mean the restructuring has really been centered around making it more strategically aligned to our core corporate and institutional customers and making it at a much simpler bank, less complex and, obviously, less volatile. So it's a simpler product suite, serves on focusing to support our core customers across financing, risk management and an operating model that's better integrated. So it's really bringing that group to be much more closely aligned strategically where we have very strong positions to deliver. We will continue to do that and invest in that and reduce volatility. Obviously, the model was unsustainable in its current form and consuming too much capital of the group, so bringing it down to around 10%, which is that GBP 20 billion, which I've accelerated. So I think you think of it as much more closely aligned to the group, supporting that core customer base in products that are going to be less volatile, but also core to our corporate franchise.

And then the operating outlook has changed very substantially in the 7 or so months since you announced your strategy, particularly the interest rate environment as well as the growth outlook. Is the ROTE target that you set out back in February, is that still achievable in this operating environment, given what you see today?

Well, what I would say is the plan I announced in February was really designed for a lower-for-longer interest rate. We structured a case with the mix of business we had to assume at that point, one rate cut and then lower for longer for the whole period. So as you quite rightly say, the environment and the rate environment has become much tougher with a 65 basis point cut in April. So clearly, these are substantially lower rates and a much more uncertain economic outlook. So it makes those targets more difficult to achieve. However, I think there are a number of offsets against those revenue headwinds that we have within the mix and shape of our business and opportunities as that evolves. So for example, we have capacity to grow in mortgages. And you've seen the strong performance we had, both in terms of stock and share in Q4 and Q1, and then, obviously, as we're coming out of COVID, what's happening in that market. We're repositioning our work offering. I made some announcements over the last few weeks, where we see an opportunity to grow in that business, leveraging the strength of our [ Keith's ] franchise. And we also see an opportunity to grow based on our recent reentry into the merchant-acquiring market by NatWest Tyl, where we've seen good take-up of Tyl with high customer advocacy. And we'll continue to roll that out, and currently hitting 5 million transactions in June. So I think there are some offsets there. We remain very disciplined on costs, and we continue to simplify the bank and improve the customer journey. And some of the evidence that you've seen in how we've responded to COVID and how we've leveraged our technology and our assets to scale up digital-only propositions, for example, the bounce bank loan scheme, we were able to scale that up very quickly using our digital and automation and robotics tools to deliver a fully end-to-end journey. So we will continue to simplify and focus on that and continue to remove the manual processes. On the digital side, in our retail bank, we now have over 7.2 million active mobile users, and whilst 3/4 of our current account customers in the U.K. are on there and also on commercial banking there regularly using digital, so an acceleration in some of those trends. So I think, clearly, the economic outlook has become tougher, but there are opportunities on both revenue and cost. We continue to focus on taking out costs in the business, 3% to 4% of our annual ongoing cost base every year, and then the refocus of NatWest markets and more disciplined on capital. So I think in summary, yes, a much tougher outlook, but the strength of our business, combined with our ability to grow whilst being disciplined on cost and capital, will drive and support our ability to drive higher returns over time.

And on the cost side of things, you mentioned the changes in customer behavior, the growth of digital. And just in terms of ways of working, which I guess is the other potential cost lever. You've announced the acceleration of some of the property closures that you had planned. Are there any other more substantial changes down the line in terms of ways of working that you sort of -- have sort of come to light over the last few months?

Yes. I mean, look, I think if you'd ask me in February, whether I could shift 50,000 colleagues to working from home in a fully agile workforce, then that would have been a challenging question. But what we've demonstrated is an ability to do that. And I think the whole working from home environment, we've seen our productivity remain very strong. Our continuity of service to customers are very good. And so engagement and support during this period has been very strong. And I think the way colleagues are working together, and it's busted a few of the mix and you must be physically present. So I think you're seeing an evolution in the ways of working. The fact that I brought forward a property closure gives you a sense of some of the evolution that is happening. And the increased use of our digital tools for our customers. So look, I think what you're seeing is an acceleration of those underlying trends. We're already moving to a more flexible workforce. That's accelerated in terms of the opportunity it offers for colleagues, which has implications for footprint and how we will work in the future. But also customer behavior is shifting and accelerating, and that won't bounce back to how it was before. So look, I think we're readying further simplification strategies based on what we're learning and what we're seeing and what we're continuing to evolve, and we're continuing to develop on our technology and IT to do this. So I think it's an evolution, and we'll certainly sort of learn and evolve from this. So I think it's about thinking what the new model will be going forward rather than reverting back to the old.

And are there further opportunities to improve capital allocation over and above what you're doing with NatWest markets?

Yes. I mean, look, as you say, we're applying a very disciplined approach to NatWest markets from a capital perspective. And we will continue to do that. I think if you look at what I did in the commercial bank in that business, we took a very disciplined approach to capital. And you've seen a reallocation and a recycling of that capital. And we worked pretty hard to exit those parts of the book in the portfolio that would flare under stress and absorb more capital. So we will continue to have that active recycling methodology in terms of capital as we move forward and continue to do that, both on a name by name basis, but also in terms of a portfolio allocation of where I allocate our capital. So it's about balancing that, but I think that discipline on capital allocation, there's definitely more that we can do, and we'll continue to apply sort of some of the trends you saw me apply in the commercial business across the whole group as we think about our capital. So I think there are more opportunities to do that.

And then in terms of thinking about capital distributions, the capital position is clearly very strong, and there's also a clear focus on distributing surplus capital to shareholders. How do you balance investing for sustainable profitability with capital distributions? And then following on from that, once the regulator gives the green light for distributions to restart, how do you think about the balance between ordinary dividends, specials and share buybacks?

Yes. I mean, as you say, we've entered this crisis in a position of strength in terms of our capital base and significant headroom above the regulatory capital requirements. And it is a case of making sure that we balance that position going forward. So our priorities in terms of as I've set the strategy for the group are designed really to deliver sustainable returns for shareholders over the long term. And we've invested a significant amount of money, GBP 8 billion, over the last 6 years, transforming the bank and continuing to invest around GBP 1 billion a year going forward to make sure that we can continue to evolve and drive a competitive business. And a good example of that is if you look at our mortgage markets and our mortgage business, we've been investing to digitize that. Our paperless mortgage is market leading. It's done incredibly well moving to really simplify our new save and retrieve functionality, is really positive for customers. Single sign-on. All of those sort of investments and innovation mean that we're doing very well in that product, which is value accretive, which will grow value for shareholders. So investing to make sure our business stays capital-generative, with headroom, with good, balanced risk is really how we think about our investment envelope of where we reinvest in the business. The key consideration when we think about distribution, and I've been very clear that it is my clear intention to restart dividends as soon as it is appropriate, is thinking about making sure the bank stays well capitalized and strong and secure, but also making sure we have real clarity over the scale of the impairment charges and the economic outlook, so that, that safe and secure remains very robust, that the investment is continuing to drive valuable returns for shareholders and then a steady and safe return. So in terms of the form that distribution will take, I'm very open to all options of returning capital. We've guided to a payout ratio of 40% over time, and that remains. But we'll look at all options to consider how we do that. In terms of other uses of capital, I've said that we would consider small acquisitions and opportunities only to the extent that they offer compelling shareholder value and strategic rationale. So I look to balance all of those considerations together to make sure that I can continue to support that sustainable return profile as we go forward.

Then moving on to income, perhaps, and we sort of touched on it right at the beginning. But the interest rate environment looks set to remain near 0 for multiple years from here. We were already starting to see an impact of that in the Q2 net interest margin. How do you see that evolving over the next couple of years from a margin perspective?

Yes. I mean, clearly, there are a number of impacts from the low rate environment. So -- and that's a challenge. Clearly, the other margin drivers are a little bit more difficult to predict, given that they're dependent on pricing and the competitive dynamic. But I think if you look at our business and if you look at the outlook, obviously, you have the interest rate cuts and the outlook for that, but we were building a business that would be in a lower for longer environment. As you know, our structural hedge is designed to reduce our sensitivity to moves in the short term. However, the ongoing reinvestment of this portfolio means the impact from lower rates continues for the next few years, but we give disclosure on that. On the competitive side, I think in mortgages, if we look at what's happening now, we improved margin in Q2 and in respective applications, largely driven by lower swap rates. So although the fund book margin is still below the back book, we see that gap closing towards the end of the year and good growth in mortgage and value-accretive business. On the commercial side, one of the short-term considerations in terms of what's happening there is we're writing a lot of volume in that business. But obviously, the rates on the margin are lower rates than our back book mainly predominantly because they’re benefitting from the nature of those loans and the government guarantee. So there's a number dynamics happening now, I think pricing on the mortgage looking forwards, it's against a back book of strong volume growth driven in part by pent-up demand, I think, from the pre-lockdown and the stimulus from lower stamp duty. On the commercial side, it's really about the government schemes at the moment and then future growth in that book, and what will happen there is really dependent on business confidence.