NatWest Group plc (NWG) Earnings Call Transcript & Summary

Hello, and welcome to the NatWest Group H1 Results 2025 Fixed Income Update. Today's presentation will be hosted by CFO, Katie Murray; and Treasurer, Donald Quaid. After the presentation, we will open up for questions. Katie, please go ahead.

Good afternoon, everyone, and thank you for joining our half year 2025 fixed income results presentation. I'm joined today by Donald Quaid, our Treasurer; and Paul Pybus, our Head of Debt IR. I'll take you through the headlines for the year before moving on to the financials for the second quarter. Donald will take you through capital, liquidity and funding, and then we'll open up for questions. Starting with the headlines on Slide 3. Customer activity has helped to deliver a strong first half. Customer lending grew 3.2% to GBP 384 billion in H1. Customer deposits were up 1% to GBP 436 billion, and assets under management and administration grew 5.9% to GBP 52 billion. Income grew 13.7% to GBP 8 billion year-on-year while costs reduced 1.4% to GBP 3.9 billion. This resulted in operating profit of GBP 3.6 billion and attributable profit of GBP 2.5 billion. Our return on tangible equity was 18.1%. This morning, we announced an interim dividend of 9.5p and a new share buyback of GBP 750 million. Our balance sheet remains strong with a CET1 ratio of 13.6%, and we reached an important milestone in May where the government is selling its remaining stake in NatWest Group. So we are now privately owned for the first time in 17 years. With a significant restructuring of the bank and government ownership behind us, we are now attracting new investors and driving growth. Turning to our strategic priorities on Slide 4. We continue to grow our customer base, attracting over 100,000 new customers across the bank as a result of organic growth during the first half. In addition, the Sainsbury's Bank transaction completed in May, adding around 1 million new customers with about GBP 2.4 billion of savings and GBP 2.2 billion of unsecured lending. In commercial and institutional, we are building on our strength in social housing and it delivered GBP 6.8 billion of our lending towards our GBP 7.5 billion 2026 target. We've over-delivered on our GBP 100 million target for climate and sustainable funding and financing and have now reached GBP 110 billion. We are announcing a new target today to deliver GBP 200 billion of climate and transition finance by 2030. We continue to work on bank-wide simplification to enhance customer and colleague experience and increase productivity. We are accelerating the use of data and AI across the bank through collaboration with others. For example, we have just announced a strategic collaboration with AWS and Accenture to modernize our data capabilities including the creation of a platform that uses AI to give us a single view of customer data across the bank. This will enable greater personalization, faster onboarding, better protection against fraud and stronger customer engagement. Finally, as we actively manage our balance sheet, we have generated 101 basis points of capital in the first half. We have taken action to reduce risk-weighted assets by GBP 2.9 billion through a range of measures, including 3 significant risk transfers. Turning now to our second quarter performance using the first quarter as a comparator. Income, excluding all notable items, was up 1.5% at GBP 4 billion. Operating expenses were 3% higher at GBP 2 billion, and the impairment charge was GBP 193 million or 19 basis points of loans. Taking this together, we have delivered operating profit before tax of GBP 1.8 billion. Profit attributable to ordinary shareholders was GBP 1.2 billion and return on tangible equity was 17.7%. Turning now to income. Overall income, excluding notable items, grew 1.5% to GBP 4 billion. Excluding the impact of one additional day in the quarter, income across our 3 businesses increased 1.1% or GBP 43 million. Net interest income grew 1.6% to GBP 3.1 billion. This was driven by volume growth across lending and deposits, including portfolios added from Sainsbury's. It was also supported by margin expansion as tailwinds from the product structural hedge more than offset the impact of the base rate cut in May and lending growth. We continue to assume 2 further base rate cuts this year with rates reaching 3.75 by the year-end. Noninterest income across the 3 businesses was down 0.8% compared with a strong first quarter and up 2% compared to the prior year. Given the strength of the first half total income, we now expect full year total income, excluding notable items, to be greater than GBP 16 billion and return on tangible equity to be greater than 16.5%. Moving now to lending. We continue to be disciplined in our approach to deploying capital where returns are attractive. Gross loans to customers across our 3 businesses increased GBP 8.4 billion to GBP 384 billion. Taking retail banking together with private banking, mortgage balances grew by GBP 1.3 billion, with growth improving through the quarter following the stamp duty deadline at the end of March. Our stock share remained stable at 12.6%. Unsecured balances increased by GBP 2.7 million, mainly reflecting the addition of the credit card and personal loan portfolios from Sainsbury's Bank. In commercial and institutional, gross customer loans, excluding government schemes, increased by GBP 4.6 billion. Within this, loans to corporates and institutions grew by GBP 2.1 billion, mainly driven by project finance, sustainable financing and funds lending. Loans in our commercial mid-market business grew by GBP 2.1 billion, reflecting increased lending across social housing and residential, commercial real estate. I'll now turn to deposits. These were up GBP 2.4 billion across our 3 businesses to GBP 436 billion, continuing the quarterly growth trend. Retail Banking increased deposit balances by GBP 0.9 billion to GBP 197 billion. The addition of GBP 2.4 billion of deposits acquired from Sainsbury's Bank was partially offset by a reduction in current accounts. Private banking balances increased by GBP 0.1 billion and the increase in commercial and institutional of GBP 1.4 billion was mainly from larger customers in corporate and institutions. Deposit mix was broadly stable as the proportion of noninterest-bearing balances remained at 31% and term accounts increased slightly from 16% to 17%. Turning now to costs. Fees increased 1.6% to GBP 2 billion in the second quarter. Our annual wage awards and higher national insurance contributions both took effect in early April. We also incurred GBP 27 million of our guided onetime integration cost during the quarter, bringing the total to GBP 34 million for the first half. We remain on track for the other operating expenses to be around GBP 8 billion for the full year, plus around GBP 100 million of onetime integration costs. This means expenses will be higher in the second half driven by further business transformation, the remaining onetime integration costs and the bank levy. Our focus remains driving cost savings to create capacity for further investment to accelerate our bank-wide simplification. I'd like to turn now to impairments. Our diversified prime loan book continues to perform well, and we're reporting a net impairment charge of GBP 193 million for the second quarter, equivalent to 19 basis points of loans on an annualized basis. This includes an GBP 81 million onetime charge on acquisition of balances from Sainsbury's Bank equivalent to 8 basis points. Excluding this, the charge was GBP 112 million or 11 basis points. We retained post-model adjustments for economic uncertainty of GBP 234 million. We have reviewed and updated our macroeconomic assumptions with minor changes that drove GBP 10 million of additional expected credit loss. Overall, we have no significant concerns about the credit portfolio at this point. And given the current performance of the book, we continue to expect a lower impairment rate below 20 basis points for the full year. Turning now to guidance for 2025. We now expect income excluding notable items, to be greater than GBP 16 billion. And based on the strength of income, we anticipate return on tangible equity to be greater than 16.5%. Our cost impairment and RWA guidance remains unchanged. We expect other operating expenses to be around GBP 8.1 billion, including around GBP 100 million of onetime integration costs. The loan impairment rate to be below 20 basis points and RWAs to be between GBP 190 billion and GBP 195 billion. Where the figure lands within this range still depends on CRD IV model outcomes. We also continue to target returns greater than 15% in 2027. And with that, I'll hand over to Donal.

Thank you, Katie. Good afternoon, and thank you for joining today's call. I will start by sharing some highlights for the half year before moving into more detail on the balance sheet, covering capital, liquidity and funding. I will then update you on the progress against our funding plans for the year and plans for the second half of the year. Starting with an overview of the key metrics on Slide 13. We ended the quarter with a strong capital, MREL and leverage position, comfortably above regulatory minimum with a CET1 ratio of 13.6%, a total capital ratio of 19.7%, a total MREL ratio of 32.4% and a leverage ratio of 5%. Our average liquidity coverage ratio was 150%, giving us a comfortable surplus over our minimum requirements. Our loan-to-deposit ratio was 86% and our average net stable funding ratio was 136%. The group's funding is very well diversified with a strong retail, private and corporate deposit franchise with around GBP 437 billion of customer deposits. We have made solid progress against our 2025 funding plan with GBP 5 billion equivalent of benchmark issuance from the holding company across senior MREL AT1 and Tier 2 capital securities, and GBP 4.2 billion equivalent from the operating company, NatWest Markets. Thank you for your continued support for our transactions. June marked another positive step in our credit ratings journey as Fitch upgraded all rated entities while affirming a stable outlook. Turning to our capital and leverage positions on Slide 14. Our CET1 ratio of 13.6% is within our guided target range of 13% to 14%, and we're currently operating with 310 basis points of headroom above the maximum distributable amount of 10.5%, equivalent to GBP 5.9 billion of nominal CET1. Our U.K. leverage ratio was 5%, leaving around 115 basis points of headroom above the Bank of England minimum requirements. The slide also shows the impact of the other systemically important institution buffer applied to NatWest Holdings that results in a group risk add-on for NatWest Group of 1.2% for CET1 and 40 basis points for leverage. Although not part of minimum ratio requirements or combined buffer requirements for NatWest Group, it does form part of our minimum supervisory requirements, resulting in a buffer of 190 basis points or GBP 3.6 billion of nominal CET1 capital and 75 basis points for leverage. Moving to capital generation on Slide 15. We ended the second quarter with a common equity Tier 1 ratio of 13.6%, down 20 basis points on the first. We generated 53 basis points of capital before distributions. Strong earnings added 69 basis points, offset by 15 basis points from Sainsbury's and 1 basis point from RWA increases and other CET1 movements. We increased our ordinary dividend payout ratio from around 40% to around 50% earlier this year. And this morning, we announced an interim ordinary dividend of 9.5p per share together with a share buyback program for GBP 750 million. Together, these accruals consumed 72 basis points of capital. Risk-weighted assets increased by GBP 3.1 billion to GBP 190.1 billion. This comprises GBP 4.6 billion of business movements which broadly reflects our lending growth, including Sainsbury's Bank, and GBP 1.4 billion from CRD IV model inflation. These movements were partially offset by a GBP 1.7 billion reduction as a result of RWA management and a GBP 1.2 billion reduction in other RWA movements, including FX. We continue to expect between GBP million and GBP 195 billion of risk-weighted assets at the year-end. Where the figure lands within this range still depends on CRD IV model outcomes. Our target CET1 ratio remains unchanged in the 13% to 14% range. Turning to our total capital position on Slide 16. We currently have an AT1 ratio of 3.1% with GBP 6 billion of securities outstanding. Earlier this month, we announced the call of the August USD 1.15 billion AT1 notes, which reduced CET1 by approximately 5 basis points. The impact arises due to changes in FX rates since the date of issuance of the notes. Our Tier 2 ratio is 3% with GBP 5.7 billion of securities outstanding. We are currently running with excess headroom in AT1 and Tier 2 compared to our minimum requirements, having taken advantage of positive market dynamics in 2024 and 2025 to prefund both AT1 and Tier 2 calls. However, over time, we expect to return to more normalized levels of AT1 and Tier 2 capital relative to our minimum requirements. Turning to our total MREL position on Slide 17. Our total MREL is very healthy at 32.4%, significantly higher than our risk-weighted asset requirements, leaving us well positioned for any further growth in risk-weighted assets by the end of the year. Having built out the maturity curve of our MREL stack, we have an annual refinance requirement of GBP 3 billion to GBP 5 billion over the next few years. Turning to liquidity on Slide 18. Our liquidity position remains very strong. At the end of the quarter, the LCR ratio was 150% on a 12-month rolling average and 147% on a spot basis reflecting around GBP 52 billion of surplus primary liquidity above minimum requirements. Our total liquidity portfolio was GBP 217 billion, comprising primary liquidity of GBP 161 billion and secondary liquidity of GBP 56 billion. Primary liquidity decreased slightly in the first half, driven by an increase in lending, including balances acquired from Sainsbury's Bank, partially offset by issuances during the year. Secondary liquidity reduced due to the normal amortization of collateral prepositioned at the Bank of England. Looking at our primary liquidity, cash balances of GBP 86.6 billion placed with Central Banks represents around 54% of total primary liquidity, with Level 1 high-quality government and SSA bonds of GBP 61.5 billion, making up a further 38%. We continue to transition the portfolio from cash holdings into securities, which provides a tailwind to income. The percentage of primary liquidity held in Central Bank balances has reduced from 87% at full year 2022 to 54% at H1 this year, inclusive of net repo positions. Looking at the composition of the securities portfolio, 73% are held to collect and sell on fair value through other comprehensive income and 27% are held to collect and held on the balance sheet at amortized cost. The remaining primary liquidity is a smaller percentage of Level 1 high-quality covered bonds and Level 2 securities. Turning to Slide 19 and our funding composition. Although customer deposits account for over 80% of the group's funding, we also have access to stable and diverse sources of wholesale funding across a range of products, maturities and currencies. Of the GBP 91 billion of wholesale funding outstanding, the large majority is MREL and capital issuance from NatWest Group and senior unsecured issuance from NatWest Markets. As part of the mix, we have GBP 12 billion currently drawn under the Bank of England's TFSME scheme with GBP 3.8 billion repayable in October this year and the remainder repayable from 2027. On Slide 20, you can see that we've been very active in the first half in wholesale funding markets, issuing from both the group holding company and our NatWest Markets operating entity. From NatWest Group, we have issued GBP 3.3 billion equivalent in senior MREL against our guidance of GBP 4 billion to GBP 5 billion for the year. In addition to issuing MREL, we've also issued GBP 750 million of AT1 and GBP 0.9 billion equivalent of Tier 2 capital during the year, while for NatWest Markets Plc, we issued around GBP 4.2 billion equivalent against our GBP 4 billion to GBP 5 billion guidance for 2025. We continue to take opportunities to diversify our currency mix, issuing in our core currencies of euros and dollars together with Australian dollars and Swiss francs. The progress we have made in the first half leaves us well placed against our capital requirements for 2025. In the second half, I expect to be active in senior issuance from the holding company and in senior unsecured from NatWest Markets. I will also start to consider 2026 funding requirements later in the year. And finally, turning to credit ratings on Slide 21. It was pleasing to see progress in our credit ratings during the first half. In June, Fitch upgraded the rating of NatWest Group PLC to A+ from A and upgraded all rated operating companies, including the issuing entities, NatWest Markets Plc, NatWest Markets NV and RBSI Limited to AA- with a stable outlook. With that, we can open up for questions.

[Operator Instructions] Our first question is a presubmitted question. You have a guided up to GBP 1 billion AT1, you have issued GBP 700 million. Are you expected to issue another small transaction before the end of the year?

Donald, would you like to take that?

Yes, sure, Katie, I'll take that one. So yes, guiding to GBP 1 billion, we've actually issued GBP 750 million earlier on in the year. I suppose if I look ahead, our current AT1 ratio is 3.1%. We do have an upcoming 6-month back call later on in December. If we were to call that security that would bring our ratio back down to a more optimized 2.1%, so the way we think about it is evolution of risk weights into year-end and into next year. So I think putting all that together, there is potential for a cleanup AT1 transaction later on this year or early next year subject to the trajectory of risk weights.

And our second question is one of your peers was asked yesterday about the gap in ratings between S&P and other credit rating agencies. Is this a concern for you? And what do you do -- what do you plan to do to close the gap?

Donal?

Katie, I'll take that one as well. Yes, so as you pointed, S&P are now the only rating agencies that do not have an A rating for NatWest Group. We've got Fitch at A+. We've got Moody's at A3 and S&P at BBB+. I'd obviously like to see S&P join the other 2 agencies with an A rating, which I personally think is more than deserved given the balance sheet strength of the organization and the consistent strong financial performance of the group, both on the relative and on an absolute basis versus European peers. However, I think when you look at S&P ratings methodology for U.K. Bank holdcos, it's overly punitive versus others. That's reflected in the minus one notch applied for structural subordination. I think NatWest and peers are also penalized by S&P's use on the U.K. economy, which keeps the BICRA score lower than other European countries. Again, if that improved, our rating would likely go up one notch for stronger capital. So we'll continue to deliver on our strategy and continue to deliver strong results and emphasize the operating strength and discussions we have with all the agencies, particularly S&P.

Our next question comes from Daniel David of Autonomous.

Hey, Dan?

I need to press right button on my phone. And you can hear me?