NatWest Group plc (NWG) Earnings Call Transcript & Summary

This session with NatWest. As in the previous sessions, as you may have just heard, we'll be taking questions from the audience later in the session. So please don't be shy in raising your hand when the time comes.

But I'd like to start by welcoming Katie Murray, NatWest CFO. It's a pleasure to have you back here again. How should I say this, it was probably quite a turbulent summer at NatWest.

Was a busy time, certainly, but it's great to see the announcement of our new Chairman, a process that you all know was very much in play anyway. So it's good to have that piece in. And Paul is a colleague I've worked with very closely for the last number of years and he was very involved in the setting of necessity. And the him coming in as interim was something that was very well understood in the organization and something we're very supportive of. I think what's important is he's -- while there is some sort of temporary nature at the moment in his role, there is -- the Board has been very, very clear that he is the CEO and he needs to make sure that he acts. And it's the same thing that needs to be [ triggered on ], he should crack on and do that. So very, very comfortable with them, and it's great to see him kind of stepping in the way he has over the last 6 weeks. Rick joined us in January, and then he becomes the Chairman in mid-April. So he'll be doing our AGM and things like that. But it was a busy year, a few weeks, certainly.

And in terms of that, the CEO search, whether that's all staying in confirmation for staying in role or a broader search, could you help us with the time line for that, given that you now know the timing of the chair?

I mean, the Chair, obviously, he joins the group in January. He'll certainly be giving it some thought, I'm sure at this stage and then ultimately becomes -- as I said, becomes the Chairman in mid-April. So it's a process that will be in the early stages of starting on that side. So it will take a little bit of time. These things always do. We've all watched many of that happen and I think what's really important is that Paul is very much, and hand on the tiller in that time and clearly, a very strong candidate as part of that as well.

Okay. And I guess you've sort of already addressed that Paul has a mandate to execute the strategy. So as far as we know today, no change in terms of near-term financials or strategic priorities?

I think Paul and I both very clear that we need to deliver on our commitments in 2023. We've also got targets out for 2025. We see them very much as kind of nonnegotiables. In terms of how we set them and the kind of macro within which they were set. So he's very focused on them. And as we move forward, I think he's also very focused on just the running of the core and making sure that we're the brilliant bank that we can be for our entire customer base. So very, very focused. I think it's important to remember that Paul was part of the setting of that strategy. He was part of the agreeing of the targets. He's been very senior in the organization for some time. So he'd been involved in the previous strategies as well.

Okay. And then over the summer, but I guess, a longer running discussion. There's been a lot of media, government regulatory focus on customer treatment, but also pricing. NatWest's been the focal point for some of that. Has that changed at all the way that you're running the business?

So look, I think, [ Chandra ] as you look at the whole pricing piece. And clearly, the FCA has issued both the mortgage charter and the savings charter, which is for all banks. It's not just for us, obviously, a customer duty then kind of came live at the end of July, and we kind of see that for us as something as a large incumbent bank. We don't have any of the history of back book, front book kind of lending kind of or pricing type issues. And so we're in a very good kind of solid place for that. And a lot of the things that those charters said are things that are very much on how we kind of run our business. I think what Paul and I are really focused on is making sure that we -- they implemented appropriately. We're teaching the customers fairly. And I think what's been really important is that the customers who have real access to understanding where they can go to get the right rates for them. And it's really that for them, piece is very important because people have different views as to what is the right thing for them as they move forward. So welcome the charters and see them as helpful to us, and we see customer duty overall is something that we're very comfortable dealing with and a positive for us as a bank.

Okay. And then coming back to your strategic targets, which you've reaffirmed. So I guess in the past, you talked about the 14% to 16% ROTE as a through-the-cycle level, it's floor, but not necessarily a cap for a given year. What sort of -- any economic expectations have just moved around so much in the last 2 years. Can you give us a sense of the range of sort of interest rate and GDP expectations that are captured within that 14% to 16%? And what is it about NatWest business mix that gives you the confidence in that range?

So we think there's a lot of different things within there. I think if we just kind of go with some of the economics first of all. So obviously, at the moment, our view is that we'll hit a maximum rate of 5.5%. We had thought that, that would happen in August. It may happen in September or the next kind of MPC meetings, but still remain kind of comfortable with that. And that will stay by high rates into relatively late in 2024, where you'll start to see them kind of gradually come down from there. That's an important aspect of it. I think also what's really important is the kind of unemployment levels as well that we have because that very much drives the demand for the lending but also really importantly, drives our impairment number. You know, Rohith, that we have traditionally had a very strong hand on costs. and that's unchanged even though the kind of inflation rate has remained a little bit stickier, I think than we would have expected to be. We probably would expect it to be slightly lower by this stage. But as you kind of work your way through those kind of different lines, you've got to think about how the interplay is across all of them. And I think what's really important as well on the royalty number is also to think of capital build. So at the moment, Basel 3.1 has been implemented in the U.K. on the 1st of January 2025. So that means that we need to make sure we've done the appropriate capital build during 2024. In our guidance has been that across post [indiscernible] lending growth in [indiscernible] that we see a kind of 5% to 10% increase in RWAs from where we started in the period. That's -- we've not given you any more precise numbers. I think once the FCA comes out of the -- sorry, the PRA come out of their consultation period, we might look to refine a little bit. And -- so clearly, within that 14%, 16%, you've also tested slightly different parameters if the rates were higher rates is lower. How would we be comfortable with that number, and we do feel that the 14% to 16% is a good through-the-cycle number to be thinking of us in terms of returns at that 13% to 14% level of CET1.

And I guess people would have historically thought about banks as being more cyclical than just that 14% to 16%. So is there something about the NatWest model that's different to the...

I think we have to move back a little bit in the kind of recent history that we're all obviously impacted by. We've heard an extended period where rates were basically 0. We don't see that as something that's coming back. So we do expect, even in the longer-term assumptions that we have as the weights are still elevated from the most recent history that we've lived in. So that's an important aspect for us. We've also done a significant amount of resizing of our cost base. We'll continue to look and manage that cost base very aggressively as we move forward from here and also the management of impairments, where again, we're seeing our RWA densities kind of improve. And I do think there's lots of different things. But the reality is today, given that we don't expect rates to go down anywhere near that kind of level as you would expect a bank with that kind of level of capital, we think to be returning to that kind of level of possibility. Clearly, we'll move around within there. I think, Rohith, when we're at the point that at the bottom end of that range rather than the top end in any 1 year, you'll be giving me a relatively hard time about that. So I do think the 14% to 16% does give us quite -- gives us sort of scope for maneuverability.

Okay. And just following on from the comment you just made on rates. I guess the key investor concern that we tend to get pushed back on is we're in a relatively mature end of the rate cycle in the U.K., doesn't that mean that margins and revenues go down from here? What would you -- is that a concern that you care?

Look, I think there's a few different things that go on within there. So I would agree whether it's 5.5% or slightly higher or even if it gets to that level, we're definitely -- it feels that we're at the end of that piece. I definitely would agree with that. I think what we've seen as well with the last kind of the pass-through of the last freight rise is the last pass-through was more at 70% to 80%, taking us to kind of cumulative 50%. I think there's debate since as when rates start to come down, what has got speed that you see of kind of the reversing of that pass-through, that's going to have a lot of kind of -- I think competition will be a big kind of input into that piece. I do -- when I look at kind of our income as we go forward and I talked about this a lot with the analyst community is that NIM is really important. We do see NIM a little bit as an output of any of the actions that we take. So yes, we may be at kind of peak NIM, but I don't necessarily believe given where our [ brick ] sitting today, we're necessarily at peak revenue. I think the thing that would move that or change that around is kind of what happens with the deposit mix, how much more we see move into interest rates -- sorry, into fixed term accounts. And then -- but we do know, as you look at [indiscernible], particularly because we've been so mechanistic with the hedge over a number of years, we can see that, that is a positive as we go into sort of '24 and again in 2025. So it's a balance of many different factors, I think, in terms of why we have that comfort.

We can maybe dig into some of that a little bit. I think the deposit piece is number one, very uncertain, but also quite a big swing factor. So -- and it's moving very fast at the moment. So what are you seeing in terms of deposit pricing volume mix? So what have you seen so far? Is the pace accelerating? It doesn't look like it is from the Bank of England data? And what do you expect from here?

Yes. I mean, look, I guess what we've seen is -- if I look at my kind of last 4 quarters of kind of quarterly calls. For the first 3, I kept talking about the NIBBs and NIBBs were 40% NIBBs, 60% IBBs kind of balance. And that doesn't seem to move, which felt a little bit unusual. Some -- the deposit levels fell, but the kind of proportion was very similar. Then what we saw this last quarter is actually we moved to sort of 37% NIBBs and 63% IBBs obviously. And that, I think, was quite instructive is as the pass-through was increasing, and I think there were more and more availability of higher rates, we could start to see people move. If you then pick the part of our business, you would particularly have seen that in the private bank where you've got the higher balances in terms of those moves that percentage was slightly lower in terms of moves at the retail bank. So we can see that people are moving. I think it's interesting that how slow that has been to kind of come through. So if I look at our fixed term today, at the end of Q2, it was at 11%. If I took that back to the beginning of sort of end 2022, it was about 6% and back to end of 2021, it would be 3%. So definitely a move. One of the questions I'm asked a lot is where do I think the number will land. And if I go pre-GFC, people quote a kind of 20% number. I think what's really important in that time as well is the banks are funded completely differently. We had far more kind of short-term funding, which we would have been placing on fixed to kind of offset some of the floating nature. And so that would reflect the kind of number that was there. So if you talk around 20%, 25% or even 30% number, I do think you got to think actually the shape of the bank's balance sheet, and shape of our customers balance sheet was quite different at that time. So we don't necessarily feel that we'll get as far as that. I would agree with you I have not seen any particular acceleration. But I do think the number will continue to grow a little bit further. I'm probably not going to be drawn on exactly where the percentage is, but somewhere sort of -- I think I do -- we do feel lower than where ultimately it was pre GFC, because actually, that's not for comparing. We're not kind of comparing like-for-like. You then go into what's happening in the competition. Look, it's very competitive. We watch with real interest when we see the likes of National Savings putting out there 6.2% 1 year, what kind of money flows there. We can see with customers that have Marcus accounts that money comes in and it flows back out again when there's different offers. So with that really cannibalizing our book a little bit more. When we had some recent activities with one of my peer banks, I kind of see, okay, what happened in that short-term offer that they've done on term access. And it's interesting as I go back over a number of months, what you can see if any one institution has a particular offer, you can see there will be some flow to them, but it's a little bit of noise in the system rather than something more fundamental. But what we do know then is actually if you need to raise pizza funding quickly, it's definitely possible to do that if you pay the right rate and you will get some flow. I'm not sure how sticky some of that flow is. And I think it's really important that we are always trying to balance both of the value from the income statement, but also the value in terms of our LCR.

And so you're seeing some hot money flowing around. In terms of overall volumes, there were some quite chunky outflows late last year, early this year, which rather was stabilizing in, in Q2. Is that -- do you think that's largely done now? Or do you think we see more for the system not necessary?

There was a few things as I go into late last year and early this year that it's important to, I think, to be mindful of, one, I think what we saw is the corporate treasurers became very active. And so they did a lot flowing around of their own funds. Now I would expect that flow, it will mature at different points, and we'll all be kind of mindful of that. And if I think of my desks that manage the kind of corporate treasury activity, we are definitely in a lot of conversation on there. But I do think the big movement kind of happens, and there is just some kind of recycling. . We also saw in our own world that January is always a big tax payment month. There's nothing unusual in that. Interesting it continues a bit more into February, March. Then I personally probably over expected. And what you know is that the revenue to more taxes this year than they have traditionally because of the kind of tax [ price ]. So that was certainly a little bit of an impact on us as well. And then we also -- as I said earlier, we manage that value across both income and liquidity. And actually, if we've got a customer, who's looking to get a better rate than they are a value to us, then we wouldn't necessarily match them on that rate and kind of happy to see them kind of go. But I do think in Q2, it was very important for us to show the stability and we did that. I think as a I look forward from here, I can probably see there's a little bit of a split between the kind of the retail and kind of private area where normally in the second half of the year, you expect to see kind of gentle growth as they prep for their tax payments. And what we can see the impact of the shrinkage of money supply is much more focused, I think, on the commercial side. But overall, I do think the big volatility is kind of behind us, and it's how we manage as people are maturing their rates. I think an interesting thing. If you look at swap rates today, they're down 4 to 5 basis points in this last month. So if you look at -- we are 1 and 2-year money was paying out about 5.55%, swap rate is now below that. So we have hedged at that amount. And I think we've probably seen some of the peak in some of those rates that are paid out, other than when something is doing something for a very specific purpose. So I do think how they continue to mature from here is going to be quite interesting.

Okay. And then I guess the other moving parts of the NIM in particular, you mentioned the hedge before. There's also, I guess, a trade-off between the hedge and liquidity book. And then -- on the opposite side, you still have something of a headwind on mortgage pricing. Can you help us put those 3 things together?

Yes, absolutely. So what we've said on NIM is around 3.15% for the full year. That would mean a drop from -- in the second half of the year from the first half to averaging around 3.10%. And it will move round about there. That's obviously with the assumption of the base rate rise coming in, in August, it's a little bit later. That will have a small impact in it. But I think if the component parts as we go through there. If I look at mortgages today, the value of our mortgage book is 101 basis points. We've seen that kind of fall 15 to 18 basis points a quarter for the last number of quarters as a lot of those sort of more valuable transactions that we would have done 2 to 3 years ago in the peak of COVID kind of roll off. What I talk about is that we seek to manage the book over time at around 80 basis points. Now that will go below there at certain points, depending where I am on our hedge that we've got in place or depending where swap curves have moved. You know that they move quicker than I can move in terms of mortgages. So we will see movement below and then occasionally, we'll see movement above. But I do think -- I was chatting with my Finance Director for mortgages yesterday just sort of saying do we still hold true to that kind of 80 basis points over time. And the feeling is that it's appropriate that there will be movements around about it. So you're still going to see a little bit of degradation from that in the second half of the year, I think, as it comes through, because the 101, we'll kind of see a little bit of a repeat. What I do think the way -- coming into Q1 that, that kind of starts to move itself out. I mean, the hedge we talked about it a little bit already, it becomes a real discussion on both volume in terms of how much of the hedge is there and what the shape of deposits and then kind of fixed term accounts, but also rates. And I think if you [indiscernible] back to sort of 5 years ago when what I'm replacing is maturing in 2024, what's coming off was yielding 80 basis points. At the moment, my average for this year will be going back on in [ 4.44% ] -- and then what's coming off of [ '25 ] was yielding about 50 basis points. So while I might see shrinkage in the hedge because I've got this yield pickup, you can kind of see those things kind of balance themselves out.

So you don't think we're at peak revenues necessarily?

Not necessarily. I know you guys are all assets tied with this revenue, but there's a bit more complexity in [indiscernible].

So what do you see in terms of near-term credit demand from households and corporates, feels pretty lackluster at the moment? But then also, probably more importantly, what is NatWest doing to build long-term revenue generation?

Yes. So I mean, look, and I think there's a kind of a path to that kind of revenue increasing, which is important as well. So if I look at the demand, we've had -- we increased our gross new lending -- our gross lending in the first half this year by GBP 6 billion over the previous half, GBP 17.1 billion in mortgages. I think we -- while we can certainly see in our kind of [indiscernible] applications that they are a bit lower than they were historically. And I guess if you think about the business we're writing now, it's almost -- it's kind of Q1. So it's definitely a bit tougher in terms of that piece on the mortgage side. But we're still comfortable that we're taking a little bit more than that of our market share. And in the market, we're comfortable with the rates that we're doing at. So that's kind of helpful in terms of that kind of gentle build. We can see within the commercial space, there's a bit more activity on things like RCF or invoice financing and asset financing is still kind of progressing well. But there is -- demand for credit is not as significant. So we need to continue to kind of work on that. We -- recently we've talked about it many times around kind of noninterest income. It's aligned that had a natural imbalance in our P&L. But I do think it is one that we just -- we're constantly kind of just showing a very small steady growth within that piece. And I think it was a huge focus on making sure that we continue with that penetration of those products deeper and deeper into the organization, whether that's through something like having FX more embedded or some of our payments activity more embedded to make sure that you are kind of continuing to improve that line. The line obviously is a lot about consumer activity. Inflation helps a little bit, because often your rates are a percentage of the actual number. If the actual number is going up, then your rates would have been improving as well. But I think there's a lot of focus on how do you manage that level of penetration and how do we make sure that we're working with our customers to meet their financial needs as well.

Okay. So then moving on to credit policy. So we had a rapid increase in rates, persistent high inflation. All of that makes it harder for both households and businesses. So have you seen any pockets of credit stress so far? And also, what action are you and your customers taking in order to reduce credit risk?

So I think in terms of the first question, in terms of pockets of stress. I mean the absolute simple answer to that is no. We've not -- we've seen some tiny movements where people maybe aren't paying off all of their credit card bill, but they're so small. I wouldn't put them into that kind of pocket of stress. What we do see is the book continues to perform incredibly well. We were 12 basis points of impairment for the first half of the year. I mean that's -- if I think of the guidance have been sharing with you all of 20 to 30 basis points for the year, it feels like things have to move quite significantly. To get to the bottom end of that level. And that even includes the strengthening of the PMA. So therefore, with the GBP 0.5 billion on the balance sheet, the balance sheet is strong to be able to kind of deal with that uncertainty. . So there's nothing we've kind of seen there. I do think we've been doing a lot of activity with customers to make sure that they are coming in to talk to us, particularly in the commercial space. So I kind of think about it is we've got this funnel and people kind of pop into heightened monitoring at the top of the funnel. And then what we want to do is to try to actually kind of flip them back out of the funnel. Funnel is probably not the best kitchen utility to use it must be said. But anyway, we've had about the same number of people kind of coming in as we saw pre-COVID. But what's interesting is actually they are in better shape or they leave they don't kind of work the way down the funnel, which is much more of where you get to the real risk of credit loss and where you get into the much more kind of serious part of the businesses. So there's a lot of activity. We've really worked hard to make sure the customers come in to talk to us and then we kind of can work with them. What we're seeing more on the retail side is we've increased the number of sort of natural health checks we do. We've done a huge amount of work to try to get people to kind of start saving. But I think what's really important there is that because people have these slightly higher balances and really importantly, that they're employed. And if I look at employments, we kind of think of the last year as the year of kind of real wage growth. But actually, if I look over the last kind of 3 to 5 years, you can actually see the wage growth that we've seen come in is outstripping the increase we're now seeing in mortgage repayments. So actually, they're kind of protected a little bit. Now clearly, we all know that people when they get a pay rise, they don't pop it a way to pay for their future mortgage increase. So there is an adjustment in behavior, but we can see people managing that behavior. I spent quite a lot of time looking at credit card data, what people spending there money on, see if there's any stresses in there, and there still is a very high level of discretionary spend and some of that funded through the wage growth or maybe in some cases, we're seeing that people are saving a little bit less as they're trying to kind of protect their kind of their quality of life. So definitely, when you go from 1.5% to like a 5.5% mortgage, there is a stick short moment without doubt. But actually, the wage support that we've had in that time and helps with that. So people are able to manage their positions a little bit more carefully.

Okay. You mentioned the 12 basis points first half charge in the 20 to 30 basis points guidance. So you need a doubling or quadrupling in the charge to get there. And you mentioned the PMA GBP 0.5 billion as well, what scenario would you have to see to get into that?

You can do the math yourself. I think we would have to see unemployment moving quite quickly, which, as you know, is not in our economic assumptions. But we'd actually have to see far more kind of the commercial, the commercial kind of companies having problems. You'll read the papers avidly as I do it, and what we can see is while there are 1 or 2 names in there, there's nothing like the kind of level we'd expect to see. So I think as I've said at the half year, we have to work quite hard to get to the bottom end of that range. I'm not -- we're not seeing things deteriorate particularly over the summer. So we'll talk more about it in a few weeks' time, but it certainly sitting at 12 basis points of the news flow that I can see coming through. It certainly doesn't feel it will be well into that rate by any stretch of the imagination.

Okay. And then -- so then moving to costs. You reaffirm the cost guidance for this year. You target 50% cost income or below 50% by 2025. You mentioned earlier that inflation has been higher for longer than you had anticipated. So how do you manage the bank to achieve that -- still achieve that cost income target?

So I mean, as we look at the cost side, I mean, there's three ways that you take out -- that you deal with costs, it's people, processes and technology. You know that we're making significant investments in our technology base. We talk about sort of GBP 3.5 billion over 3 years. Huge amount of that goes into technology, whether that's through some of the regulatory and repair work you have to do with the mandatory requirements or the actual pure investment in kind of growth initiatives. So you can see that kind of start to yield kind of benefits in terms of the automation. Similarly on processes, it's amazing how often when you change the technology, you have to put as much effort into making sure you change the processes that sit around about that. We actively manage our workforce whether that's making sure we're bringing in the right people in terms of data skills and things like that or whether we kind of -- you see us trying to manage to not having too many what we call managed service workers, which is kind of people being supplied by other organizations, bringing them in-house. So you might not see our FT number move, but the cost of those FTEs are better than you would -- when you have them kind of be supplied kind of elsewhere. So I think it is about how do you manage all of those pieces. And I think importantly, keep a really good eye on growth to make sure that those growth initiatives are things that are really delivering real kind of value. We talked about income already. I'm not the biggest fan of cost-income ratios. I think you can get to kind of issues kind of completing. At the moment, we're -- while our printed number is, I think it's at 49.4% in terms of the cost-income ratio. That's kind of helped by a technical matter around some tax recycling. So we're sitting just above 51% in reality today. So it kind of feels how do we move into next year and then to get towards that 50% cost to income ratio. And I think it will be a factor of both the cost and the income side to make sure that we hit that.

And then capital distribution, there's been a very clear commitment to that historically. You've announced about GBP 4 billion cumulative since just February this year. How should we think about that going forward in terms of your prioritization of distributions relative to the [indiscernible] ?

I mean, absolutely no change in the narrative that we've given you to date. We're very, very clear, 40% cost-to-income ratio or -- sorry, 40% give me a 40% dividend-payout ratio -- to make sure we maintain the capacity for the directed buyback. Obviously, we did it in May this year. That means it would move to May next year at the earliest. And then when there is other capacity to kind of utilize on market buybacks, we're 20% to the one that we announced in the end of July. So that's kind of progressing nicely. We're very clear as an executive that any kind of venture into the [ NA ] world would have to make huge sense from our shareholder, so both value and distributions. Kind of level to make sure that we're really giving the right value for that. So there's really been no movement at all in the capital distribution actives that we have. I think one of the changes that some people have had to get used to is we're sitting at 18%. We were distributing down to 13% to 14%. We're now in that 13% to 14%. We know that we generated in the first 2 quarters of the year, about 50 basis points of capital. So it's 100 so far this year, but I think we're in kind of manage in that 13% to 14% level, very happy to toggle up and down within it. And so we're not trying to keep ourselves at the high end or anything like that. But it is where we have done significant distribution this year already, but it's a bit different from where we were a couple of years as well -- ago, and I think it's important to people do remember that when they compare absolutes with absolutes.

We do have some time there. So if there's questions in the audience, to please raise your hand, and I'm very short sight to say, Katie, if you can see any one.

I've been blinded by the slide, so we're okay here. Rohith, there will be any.

Making this one over there somewhere. Here we go on left.

If you look across the U.S., the leaders of the U.S. banks are very robust in defending their banks and their shareholders, and you see a much more kind of competitive response to whether it's Basel III or regulations in general. That doesn't happen in the U.K. and shareholder returns for your bank have been [indiscernible], is there any chance of a change in your response to regulation, the U.K. government, your ability to make money and deliver returns to shareholders or is it sort of business as usual?

Yes. So as I kind of look at it, I would say we do definitely have a different style in terms of responding to regulation. I wouldn't -- and I would say it's less public in our views in terms of that piece. But certainly, if I look at the most recent Basel 3.1, we've been very strong in our concerns around a couple of the areas that the PRA are pursuing there, particularly around an SME lending and also infrastructure and kind of green lending. We do think they'll be back very bad for PLC. U.K., not just for us in person. So they will continue to be kind of developed. I mean look, what I really believe we've built here is our bank that will deliver 14% to 16% or 13% to 14% royalty. I think those that is an excellent return. I do accept in terms of the total shareholder return and where our valuation is placed at the moment that, that hasn't delivered the return on those shareholder numbers. I think there's a number of things in there. U.K. PLC macro is an important one. So the conversations that we have when rules are coming in to say, look, actually, your rules could bring down SME lending, it can make easier for a French bank to lend an infrastructure than it is for a U.K. bank. So -- and those conversations happen very much with treasury and with the PRA to make sure that they are in lockstep. I think traditionally, we haven't taking to the podium to have those conversations and it's not something we probably expect to be doing any time as soon as we work our way through them.

Another question?

Just 2 for me. You've talked about the reinvestment yields on the hedge book around the 4.4% mark, but I look at 2 and 5 slots there, they've been trading a lot higher than that. So why are you sticking 4.4%? Secondly, in terms of not choosing to roll over better the hedges. Is that just mix shift that's factoring there, given we're sort of a peak base rates is your expectation? I would have thought you'd want to have a higher structural hedge to shield from a sudden drop in rates.

Yes. Sure. So I guess, as I talked, the 4.44% as an average over the year. So we didn't start the year the 5.4% we're at just now. So it's to kind of look at that in the average number. It's a number we also shared with you at the end of July. We'll update in another number there. But if you take the average over the year, you'll get -- we'll be investing in what it says. So it's not -- there's nothing -- we're not cutting it or holding back in any way on that. So I guess if I then look at the shape of the hedge. So we've guided you to GBP 190 billion for the year. We do it quite mechanistically. It's important to remember how that hedge is formed. We hedge most of our current account balances. So as we've seen movements from the current accounts going into instant access or into fixed, you'd naturally see those kind of come down. GBP 190 billion assumes that we kind of stay at the same kind of levels both in terms of quantum and shape as we were at the end of June. I'm not a fan of being overhedged and it actually doesn't make it get any more money, because the way the hedge works is the money I've got at the Bank of England, but don't have the deposits. I'm not making any return from the Bank of England. So actually, hedging more or taking that actually means that we're making a bet on interest rates. We do believe that over time, that mechanistic approach has served us well that we've been able to capture all over the up as we've kind of continued to kind of increase. Okay, now as we come on, it will be slightly lower, but I'm happy to kind of make sure I'm locking in the down as we do, but overhedging that or making sure that we're trying not to turn, actually, I think we bring more risk into our statements. So it's not something we're interested in doing it at this stage. And I think it would be highly unlikely for us to take that position.

Can I just follow up on that, actually. So if the deposit moves from a current account to, say, a fixed term deposit or let's say, an internet deposit -- it's no longer hedged or less of its hedged?

Less of its hedged [indiscernible] yet.

But you still -- if it's also invested in your liquidity book, you still earn a yield on the liquidity book, which is higher than the current -- than you could reinvest on the on the hedge. Is that right? So I guess you would get a short term -- funding would go up and yield that you make when you reinvest that funding actually goes up when you move it out of the hedge?

In that short-term piece, but guess.

We don't get the duration?

But you don't get any duration benefit of it. So I think -- so from that movement, that's obviously more valuable. Again, I don't want to over-hedge because you don't -- and then the 2 year, obviously, I'm just -- I'm earning sorry, the 1-year or 2-year money, I'm kind of forward treating them. So I'm earning 20, 30 basis points on that piece. So you certainly wouldn't hedge those ones.

Okay. Anybody else in the room? Could I then come back to -- so the question on defending the bank, I guess, an issue that has been raised for NatWest RBS over the years is just the government involvement in the bank. I guess, came to the floor again over the summer. Is that a real concern in how you run the business? Or is that a perception issue?

I think. I can't remember, Rohith, when we last sat on this stage together. And I think it was actually probably when I first became the CFO, which was kind of 5 years ago now. And I've been able to see absolutely hand on heart in those 5 years. I've never experienced any kind of government interference. I deal with them on a monthly basis. The top of my agenda says, please do not give me any insider information in that piece. I do -- I accept that the events of July are still very present in people's mind. Nothing's changed in my day-to-day interactions with the U.K. GI in that time, and I would hope that if you're again in a year's time, that would say no different. I do think it was the event of a particularly febrile nature in a particular moment of time. So I mean there is no day-to-day involvement in the running of the bank. What Paul and I need to do is to make sure that we deliver the right equity story, so that we can enable their sell down. They've been very public around their desire to do the cell time. We need to get the valuation to the right place to enable them to do that. But I think delivering for the bank on the day to day is the best thing that we can do. It's really not -- it's not a day-to-day concern for us in terms of the political involvement, and it's not a reality of what we experienced and what I have experienced personally over the last 5 years.

Okay. then on capital return. You talked about prioritization of distributions. We also talked earlier about noninterest income growth. Would you consider M&A to boost that rebalance in interest?

No. We do consider it. It's something that we look at. We have our small M&A team that I spend a lot of time kind of working with and we've done some very small kind of acquisitions. I think for me, the benchmark is really high in terms of M&A. We've committed to delivering 14% to 16% return. So it needs to be something that can deliver that at the price that we would have to pay for it. We're -- the question we got earlier, we know we're trading at 5.5x book, even 4.6 so things that actually make an acquisition for earnings that are trading at 20x. That's a difficult math thing to do. And I think I would question whether that's the best use of our shareholder return. We do look at it. We're very interested in it. We'll continue to keep a very open mind. I do -- [indiscernible] have of our own P&L is very much around is that not so much the weakness in that line, but the weakness in the comparison of it to the net interest line, it's not as balanced as we'd like it to be. So we will continue to look. But for us, it's very important you get the right culture of acquisition, but also that it makes the right sense for the shareholder, whose money we have to invest.

Okay. Anyone else in the room?

Sorry, one more for me. Just on Ulster. It's a bit hard to pass what sits in discontinued operations Ulster direct costs, indirect costs. Just wondering if you can get some clarity and when we get a very clean number here, where I believe a lot of the direct costs will be running off in 2024? How about the indirect costs associated with running the Ulster Bank?

So the way I look at it, and I would agree with you, I think discontinuing, discontinuing. It's not the IASB project kind of moment in terms of disclosure for the market in terms of how you actually get behind that. I guess what we have said there's minimal income coming in now, clearly, than what you have coming through, we've got GBP 330 million of costs this year. We'd expect a material step down in that number next year as we see the direct cost really comes to an end. We're also -- for the end time we get to particularly after kind of Q1 next year, most of the transactions will have kind of fed their way through. So the RWAs from credit are kind of off the books as well. So I mean, I would kind of thought how we got to next year that the numbers become so small. We just kind of don't talk about them any longer in terms of that piece. So we're there, we'll disclose them with you, but really this is the kind of last big year. I think the RSG has done a superb job in kind of making sure they've been able to move both the assets and the liabilities of the balance sheet. And if you sit in the Irish company today, you know exactly the date that you're leaving. So that is also really important in terms of making sure that those costs are heading off, clearly, there'll be a small little team, but that's a small team as we kind of wind up and kind of get into kind of license, how that kind of conversations. But I do think that this year for the last year of any meaningful costs in there, GBP 150 million, GBP 130 million, they're not so meaningful in the GBP 7.6 billion balance sheet and GBP 7.6 billion income line.

That does bring us to time. Thank you very much.

Lovely. Thanks very much. Thanks for your time, everyone.