NatWest Group plc (NWG) Earnings Call Transcript & Summary

Thank you. Thank you very much for your time, everyone. I'm joined here by Katie Murray, CFO of NatWest Group. A pleasure to have you here, Katie.

Lovely to be here. Thank you very much.

Now, the stock has done very well over the last few years relative to the U.K. market, relative to European banks as well, trading at 7.5x PE, 1.3x book for almost a 19% return on tangible equity on our numbers. So a very strong operating performance. Clearly, the fiscal backdrop adds an element of uncertainty there. But if we start there, the news flow around the budget has been volatile, to say the least. Can you give a sense of the economic environment that some of the corporates and individuals are faced with and your view on that?

Yes. No, absolutely. And it's one of those things. There's a lot of noise at the moment about the budget, and I'm sure all of us feel it's gone on for a long time as well. But there's also, I think, the reality of what we see on the ground. The way that we kind of look at economics kind of internally, I guess, our kind of in-house sort of commentary is one of sort of cautious optimism. When we look at kind of what's happening in the economics, base rates have behaved more or less as we expected them to. Unemployment has gone up a little bit. It's gone up to kind of 5%. But the reality is 5% versus 4.7%, 4.8%, it's not a particular movement. It's still at incredibly low kind of levels of activity. We still see wage growth continue to be high. And what that kind of converts into for the -- certainly for the retail depositors that they've got high level of deposits, there's high kind of saving rates going on. We continue to see strong kind of activity in that sector. And I know we'll get into mortgages and things later, but that market has performed incredibly well this year. And so therefore, you can see this kind of a level of confidence in the consumer that sometimes is at odds with some of the narrative we read externally. And I spend a lot of time out with different corporate customers as well and see what's kind of happening in their business. And while they've worked really hard to do things like digest the NIC changes that were earlier in the year and the budget is definitely causing some what's kind of happening, I also see them growing and investing in their businesses. And that kind of bears out in some of our numbers that we've been posting as well. And there's often a kind of worry of what's happening over here rather than what's happening in my business. And in my business, I can kind of see the path. So I guess when we look at all of the various indices, which are in reality all a bit more positive, the print this morning on inflation was a little bit higher than we were expecting, but still down from where it had been. I think our kind of view of sort of cautious optimism is the right balance to have. And we'll obviously continue to review our economics, particularly as we get into the year-end. But at this stage, we've actually seen great stability in them throughout the year, which I think has been really beneficial despite the huge amount of noise that's been going on kind of in the background as well.

And if we focus in on your business here, you've upgraded guidance several times this year, targets of greater than 18% RoTE. What has surprised most against your expectations? And as I look into my forecast into the outer years, I see a high teens RoTE as being a strong level, possibly 20% upwards. Is that level a sustainable level? What do you think the arguments that go against that?

Yes. So let me talk a little bit about this year, first of all, and then we can talk a little bit about the later years as well. So I guess as we kind of look at the performance, it really has been very strong. And it's been great to upgrade guidance but we don't generally like to do it every quarter, though I'm very conscious that we have. And that's really been a result of a number of different things. The first one has actually importantly been the broad-based growth that we've seen across whether it's been our kind of the assets, the liabilities in terms of deposits and also the AUM that we've seen good growth in all of those areas across the year. We've also seen the structural hedge. It's been reinvested at a level. I think at the beginning of the year, we were talking about reinvesting rates of sort of 3.5% to 3.6%. And actually, we've been closer to 3.8%. So that's kind of been kind of quite positive. But also importantly, I think the customer activity, you've seen the strength of that coming through in terms of our noninterest income, really strong performance, particularly in places like FX, where we've been able to take real advantage of the volatility that's been in the market and really work with our customers and also on our capital markets piece as well as, of course, in noninterest income, you need to have that level of kind of customer activity, and it's been quite strong. So all of those things together is kind of why we've upgraded up to around 16.3% for income for this year and a greater than 18% RoTE. If we look to next year, you know in February, I'm going to talk more about our 2026 and 2028 guidance, and we'll talk more about them then as well. But if I look at the kind of trends that we're seeing of that balance sheet growth coming through the strength of the structural hedge, the ongoing focus that we have on cost management. I think that's really -- it's really important. There are obviously some registered headwinds that we'll get into in terms of RWAs, I'm sure. But overall, that kind of gives us the confidence around our greater than 15%, which is our existing guidance, and we'll look at where we kind of land and where we guide you to when we get to February in terms of what those outer years might look like.

Great. And if we dig a little deeper then, if we start on NII, the strength that we've seen in NII across...

I'm still struggling to remove my [ necklace ], which is clearly causing problems. [indiscernible] no idea how to remove it. Give me a second, sorry. You can talk and I will open.

In terms of NII, the growth in NII has been particularly strong in the context of the European banks and the level we've seen there. The hedge is expected to be a tailwind across multiple years including next year being another GBP 1 billion or so greater of incremental NII from the hedge. What are some of the other moving parts we should be thinking about for that NII story as we look out?

The hedge has done exactly what we wanted it to do. And it's really important to remember that we have the strength of the hedge because of the strength of the deposit franchise that we operate, which we've seen kind of continue to grow, but with really good stability in terms of the mix of that. So -- and I think sometimes people talk about ex hedge and ex this, but it's there for a really good reason, and I'm delighted with how well it has performed and how well it's continuing to run. So I think that's important, but it's not the most important aspect of the numbers. What I think is really important as we go through is actually the growth that we continue to see in the balance sheet. If you look at something like lending, we've had a greater than a 4% compound growth for the last 7 years that is a huge testament to our business that's just continuing to capture growth in an environment where actually growth is relatively low. So our ability to be out there and making sure that we're capturing that on both sides of the balance sheet is really important. And then coupling that with the AUM growth we kind of talked about, which has been sort of 15% this year. I mean, really kind of quite startling kind of numbers. So that's important. The hedge will continue to deliver the value that we have. Noninterest income, we've talked a little bit about already, but the kind of the delivery on that is important. Rate cuts have been -- rates in general have obviously been a big feature of all of the banking results. We've got the rate cut coming through. We think that we've got 2 more to go in terms of so we get to kind of a terminal level of sort of 3.5%. I think sometimes in models, it's important to remember that the cuts that we've had and that takes about GBP 300 million of income off next year. So it's important not to forget that number as we all get excited about how it kind of going forward. But definitely, growth is the big feature along with the hedge and also that kind of that negative on the rate cut, and then they'll be supplemented by the noninterest income moving forward.

Yes. That's helpful. And if we double-click into the lending side of the balance sheet in terms of the growth that you've spoken about, 4% growth over the last few years, there's clearly been a strong level. If I look at the retail business, your market shares and deposits sit around 16%. On the asset side, mortgages, maybe unsecured credit, it's maybe undershooting that level. How are you thinking about growth in this market in terms of market share gains? What are your market share ambitions for these areas?

Yes. No, absolutely. And I think we've -- as I look at something like mortgages, we're 12.6% market share for the whole group. In the time that I've been CFO, I think that's kind of come up sort of 3-ish percentage points. And sometimes when you think of that number, you forget how huge the mortgage market is in the U.K. I think it's like GBP 1.2 trillion, so actually a percentage movement is an important kind of movement in terms of the number. But I think what's really excited me about our market proposition in terms of mortgages in this last sort of year to 18 months is actually to see it kind of growing, which is important, but actually widening which has been really important. We talk a lot about the widening of the waterfront. So you've seen things like the family-backed mortgage come out this week. We launched another mortgage proposition around shared ownership coming out as well. We've also gone into a relationship with Landbay in terms of increasing our access to kind of private landlords, so increasing our kind of buy-to-let exposure there as well. And also, that's been combined with some regulatory changes, which have made mortgages a little bit more accessible for people. And when I look at that mortgage market this year, a year ago, we were talking about a mortgage market of, say, GBP 240 billion. This year, it's kind of GBP 285 billion. So again, it kind of goes back to that macro of actually that's a strong market, and it's strong because people are feeling that they are kind of comfortable to move. So that, I think, is important as we move. So we do continue to see growth within there. And we're obviously always very mindful of the RoTE that we're earning. So you have I think sometimes in some quarters seen us kind of pull back. But overall, if I look on a multi-quarter basis, that will continue to grow. In the unsecured space, look, it's been an absolutely fantastic, I think, journey on unsecured. If I look over the last kind of 5 years. We kind of reentered the market just before COVID and then it all went in the wrong direction as everybody paid down. And actually, since then, it's been an absolute metronome of growth. And with the Sainsbury's acquisition kind of coming through and coming in and really kind of boosting that, I think we're at about 11% market share. We do think there's still a bit more that we can grow there. So we've developed our proposition, done an important acquisition for us and also taken it to whole of markets while still making sure that we stay within that risk appetite framework. So I do think that you can expect to continue to see strong growth coming through on the retail side, on lending. And very comfortable with our deposit performance as well.

And on the mortgage side, the actions you've taken to maybe diversify the book looking at other sources of sort of mortgage flows, has that helped the margin? If I talk about the margin at the moment, it's sitting just below 70. During COVID time, that was maybe 200 plus. What do you think of the push and the pull on that margin number going forward?

Yes. No, look, there are -- there's definitely push and pulls. And as we talk about COVID, what's important to remember in kind of late 2020, early 2021, it was one of the kind of peak activity of people kind of doing lots of moving and selling and actually real kind of peak rates. You can see that they are now at the 5-year anniversary, so they'll be renewing their rates. And so therefore, from a margin perspective, we do see a bit of compression coming into the book on that as that kind of reprice is still comfortable with the around 70 basis points, but it is something that's a bit of compression. And definitely, the expansion of that product offering is twofold. One is about bringing more of the bank to our customers to make sure that we can really service all of their needs. But it is also, of course, about diversifying the margin that we're earning and it's helpful in that. If I look at the kind of vanilla sort of mortgage product today, we're definitely writing below 70. And we've said that for the last number of quarters. And so that obviously brings a little bit of pressure in there. Comfortable about the returns, but it is important that we kind of supplement with what we're seeing in the broadening, but also importantly on retention. Retention is really important in terms of making sure that you take those mortgages and they stay with you for a number of years. So we work really hard to make it as effortless as possible in terms of the renewal of that mortgage piece, and we're happy with the kind of retention rates we've got in the kind of high 70%. And again, they are also helpful on margin. So it is a blend of making sure you're pulling all of the levers to make sure we're kind of staying at that around 70 basis points for the book.

Looking at the other side of the balance sheet, the liabilities and the deposits, it's clearly been a competitive market over the last few months. We had the ISA season volatility and pricing seems quite tight at the moment as well. What are your thoughts on deposit growth going forward and deposit pricing in terms of what you're seeing now and into the future?

Yes. So when we look at the deposit growth, we feel pretty confident on it. The retail consumer -- and I'll talk retail and then kind of commercial. The retail consumer has got a saving rate of about 10% plus, even so that got to about 12% earlier in the year. So we know that with wage growth and things that will naturally have a bit of a flow through. It has been a very competitive market. The ISA season was very competitive with some of the debates of what the budget may or may not do or the changes that might be coming through at that time. There's obviously some of those debates again. And I'd say at the moment, when I look at competition, the real competition is in that kind of fixed term, whether it's fixed term ISA or just fixed term accounts. And actually, you see there that actually many of us are kind of pricing slightly below with a slight negative margin. I'm comfortable with that because I look at it in the whole kind of total of my funding stack, and it works very well. And the reason we do that is we know how valuable these deposits are. And what you don't want to be doing when you get to the terminal rate is then fighting for deposits at that stage because you'll pay a lot more to get them back than you will to retain them. So kind of very logical behavior within there. But overall, we do see it growing. We were pleased to see the growth in current accounts. And over time, while I don't expect it to be material, that is something, as you know, that can influence on the hedge. It's not something we're making a big noise about at this point, but that growth in the current account is important. And then the retention again of your fixed term accounts is very important. And there, I think we do very well, retaining about 85% of our fixed term accounts. There's always an element of hot money that will move, but we're very happy with that kind of retention level that we see. It also shows that the retail consumer has got good spending power. So if they were to choose to start spending more, they can do that without impacting the kind of quality of the book. And actually what we would see being the kind of largest bank for U.K. business, you would see that those balances move from retail, you can see them then move into the commercial side. Again, commercial, I think we do see growth coming through within there. It kind of -- it's not as easy to track [indiscernible]. So obviously corporates do lots of different things. But again, comfortable in terms of how that book is continuing to evolve as well. So we do feel comfortable that there will be continuing to be growth on the balance sheet and the kind of the 3.5% kind of terminal rate, that's obviously valuable growth for banks.

And as the largest corporate bank with 25% market share on deposits, almost 20% on lending, we've seen 6% growth in the lending book in the corporate side year-to-date, which considering the U.K. backdrop of being gloomy on the consumer side and on the business side is quite impressive. What's underpinning this level of growth?

We run a model that's very focused on the nations and regions of the country. So when I kind of travel around the country to work with -- to meet different customers and work with different kind of regions, that model and that depth that we have within local areas is just really, really important. And it's also something that's quite hard to replicate because it's often relationships have built up over 10, 15, 20 years with the bank when we've taken businesses on their own growth journey or we've taken them through transfer of businesses from kind of parent to child and things like that. So I think the value of that model, so you have people who are really specialized in that area or we have sector specialists who can then kind of go across region is one that's really important. There is competition. We can see people look at our stats, 20% market share and above 25% in deposits. That's a very attractive area. So we do feel that competition and we observe it. And so it's important that we continue to evolve with those customers. And I think one of the things you've also seen us doing, which has kind of helped drive things like noninterest income over this last year is making sure that we're bringing more of the bank to more of our customers. And so really increase that kind of FX penetration that we have or making sure we're meeting some of their capital needs as well. So I think that those sort of things have really helped. We're making big investments in some of the IT systems that those corporates reduce, and that means that you're very integrated into their businesses as well. And as that system continues to improve, what we can see, it helps not only the efficiency of the relationship managers, but also helps on the income line as they continue to do more business with us. So it's an area that we're naturally very proud of and one that we're very protective of. So making sure that we really continue to evolve and develop it with our customer base.

If I follow up on that, a lot of the U.K. banks are targeting this corporate space. We had Barclays on earlier talking about one of the areas that they may be undershooting, where they could grow is the corporate space. It's traditionally been deposit heavy as opposed to lending heavy for a lot of these banks. Are you seeing that come across into margins? How are you thinking about this competition?

Yes. So it's interesting on margins and those of you who are familiar with my NIM walk would know there's not a lot of noise on front book, back book margin in the corporate space. It's pretty kind of stable on the kind of lending side. We do observe the competition. We are kind of aware of it. And it's important that we don't minimize any of that, and we certainly don't. And so we kind of just keep kind of moving forward in that real kind of depth and deep experiences that we have with our customer base. But it is good to see the relative stability on that lending side on the margin piece. Obviously, the deposit margin, it varies. It's a very -- the C&I business is very broad, so that those margins will also vary as well from when you're negotiating with the treasurer at one of the biggest banks to when you're a much more retail like kind of experience that when you're down at the kind of business banking kind of side of things, but also kind of really making sure that we get the right product in the hands of those customers to make sure that they are also able to manage their funding appropriately. So -- but we do see it as a real strength. It's something we are justifiably proud of, but we'll continue to defend.

If I look at the third of your key businesses, the private wealth -- private banking, wealth management business, the business has traditionally been a very strong private bank, maybe less so on the wealth management side, but AUM has been picking up.

15%, I'd give that good pickup, yes.

15% and GBP 56 billion AUM. So it's of a decent size now. Considering the market is quite fragmented, we've seen some of the FCA's proposals come through to try and narrow this advice gap or the gap we see in the U.K. wealth market. How do you think that fits into your strategy for this business?

Look, I mean the private banking, wealth management, I mean, you're absolutely right. It's something where we were, I think, traditionally see more as a private bank than as a wealth manager. We spent quite a lot of time talking to all of you about this business this year. And as we kind of -- as I kind of look at it, we've got targets out to 2027 of kind of a cost-income ratio that's in the kind of mid-60s and above 20% RoTE. So it's kind of -- it's smaller in the group in terms of the absolute size, but it's definitely very mighty in its performance. And I guess what gives us confidence as to where we go from here? I think of it as 3 kind of things. There is around how do we penetrate our very strong customer base more. So they also see us as a wealth management. And look, in many of your houses, GBP 56 billion in terms of assets under management is a small number compared to what you manage, but actually, it is meaningful and it's growing because of the -- as we continue to improve that penetration into our customer segment. So that piece is important. The other real benefit we have as well being the large corporate commercial bank that we are, we have access to people who should be Coutts customers, who are either having liquidity events within their own -- because they're selling their business or within their own kind of private environment. So actually, how well do we do the referrals from one of the bank to the other. And that's just a feeder line that we can continue to improve and one that I think if you look historically, it happened, but not the way that it should and that what Emma is doing is being really systematic to actually say, how do we make sure that we're talking to the right customer base. And that's a very rich vein to kind of for us to continue to look at. And then on the other side, which is why this business is so lovely in the group, they're also the provider of the wealth management services into the retail bank. And that's where I think some of the real changes of wealth advice will come through. So we've got a good wealth management business. We've done -- we've got a product called RBS Invest, NatWest Invest, which has grown quietly and steadily in the background over the last number of years. But actually, with the advent of more advice coming through, then you can actually see how that will really continue to help develop the services that the Coutts business can provide to the rest of the group. So we are excited about that. I know that all of the regulations are not quite where they need to be yet in terms of being published and out and making the availability of that advice easy to provide. But we are very pleased with the direction of travel and we do see it as something that's an opportunity for us as we continue to grow that business and kind of make sure that we are hitting that greater than 20% RoTE for that PB and WM segment.

And in line with this opportunity, do you think there is an inorganic strategy that maybe fits into the wealth business and your strategy there?

Yes. I mean inorganic is something we've obviously talked about -- we talk about a lot. And when we look into the wealth business, it's something that we've always said is a high bar. And the reason for that high bar is as much to do with actually, can you find a business that strategically makes sense with what we have in terms of this very strong private bank and the wealth business. Can we culturally integrate it as we bring it in? And then does it make real kind of differentiation for our customers. But really importantly, there's also a price kind of angle to it as well. So given that there is a kind of pricing differential between these 2 businesses, there has to be something that you're very comfortable on integration ability and very comfortable on strategic sense. So we continue to look at things from time to time as they become available, and we will continue to do that. But I would say there is a high bar. What I would say in terms of the strategy we have around those 2027 targets and our kind of ongoing delivery, they're not dependent upon an acquisition for that business, but we do believe that there is good growth that we can continue to deliver. And when we think of that business and the CAL, which is the kind of total customer assets and liabilities, we talk about assets under management being greater than 50% of that. We've made lovely progress in that space over the last couple of quarters, and we're sitting at kind of 49% at the moment, and we'd expect to see that continue to grow. So we will look at things, but it is a high bar. And strategically, we're really comfortable with our delivery if that was not to come through.

And still on the topic of inorganic growth, you've done several portfolio acquisitions in the past, whether it's Sainsbury's, whether it's Metro Bank portfolios as well. Is this an area that you'd be looking at as well to maybe beef up the asset side compared to the deposit market shares that you have?

Yes. We do definitely look at, and in retail, that's where we've been most active. If you look at the strength and depth of our commercial business, it's harder to see what we could take externally to bring in to kind of continue to grow that. We roll off cards, but we've obviously seen our activity more in the retail space. But the Sainsbury's acquisition was a fantastic acquisition for us. It really accelerated our unsecured business, also brought in some good level of deposits, and some nice kind of personal lending. We've done the integration of that business into our business. So everything has now been transferred. They're on our systems. And actually, if you think it was a transaction that closed in May, the fact that we can say as a bank that actually they're now all in our systems and we're servicing those customers from our own systems and it's only November. I think that's a real -- it's a really, really strong point. So we're not sitting there for many years with multiple systems and customers kind of going through. And then also now the fact that they are our customers, that also gives you different and greater opportunity to continue to develop them. So I think it was a great transaction for us. It was a good transaction for our customers. But also it really showed our ability to leverage the systems that we have, that we could add something of that size on, add a couple of percent of market share on instantly overnight. And actually, there was no dip in the service quality. We didn't have to do things in our system. So really important in terms of the ability to continue to leverage what we've got. Metro, again, we've done 2 transactions with them over the years. Again, very, very kind of good integration, good kind of customer outcomes as well. We'll continue to look at those kind of things. Other bits over time we've added in terms of capability. Rooster Money is probably one of our personal kind of favorites. We talk about it a lot, but it's been really important for us in terms of bringing that pocket money account. And I think one of the things that we didn't quite appreciate at the beginning is actually what it would also do for the connectivity you have with the parents of those children and that we can see if you're a Rooster Money account holder then actually you're far more engaged with us as a parent of those children, so actually they become more valuable customers as well. And that was the classic piece of what was actually a tiny acquisition in reality, but accelerated our build by 6 to 7 months and actually got a really good product that already had good awareness out to market. So we'll continue to look. But you're right, retail is somewhere we're probably more focused on.

And if I talk about capital now, which I think has been the key talking point for.

I talked about it quite a lot already this morning in the meeting.

Clearly, we have the Bank of England's capital review coming up. Expectations are building into this. Your capital ratio or should I say your capital target range at the moment is 13% to 14%. The gap to MDA is maybe one of the bigger gaps compared to the U.K. and other European banks as well. What are your expectations for this big sort of Bank of England FPC meeting? And therefore, where do you see your capital target going towards? Is it possible that we talk about a 12-point something capital ratio capital target for the group?

Yes. It's been -- the capital journey has been a really important one. We set our 13% to 14% target in 2019, so we're 6 years further on. In that time, we've completely reshaped NatWest markets. We've exited Ulster. We've also -- we're kind of coming to the end of our second very active kind of program of RWA management actions. And we've been very successful in the first couple of years of that, and it will continue to be something that goes along those. Sheel, I'm always quick to remind you, not necessarily the levels you get in the first couple of years as you go out. So you can see that we've been really trying to manage our capital position a lot over the last number of years. We started to talk about whether we might look at capital a little bit in July, our Q2 results. And then also since then, they've announced this review that's been published in early December, which we're all awaiting to see what might come out. And we note the kind of comments that Sarah Breeden has been making and that gives us some kind of view of positivity of that. So we'll see what they say in December. But when we look at it, you're absolutely right. We've got a gap of about 140 basis points from our kind of statutory regulatory minimum requirement. up to the bottom end of that range. We know that, that reg. requirement is going to fall further when Basel 3.1 comes in. So in theory, that gap would continue to grow. And when we look at the additional RWAs that we'll bring through CRD IV and also through Basel 3.1, we will see that we're holding more nominal capital for a business that's actually not increasing in risk. So it's something we're actively looking at. We'll talk in February around our 2026 and 2028 targets. And while I'm not committing to make a change, it's a conversation that we're doing. And it's a conversation we've had with many of you as our investors on both the debt and equity side, just to kind of take soundings as to what their kind of view is. So we look forward to December. We'll see what that comes through with. It's not going to make the decision any harder, but you know what might make it a little bit easier as well. So we'll wait to see how that comes through.

And I'll appreciate that we can wait until February for the update there. How would you think about capital distributions with a potential reduction of the capital target? You've just increased the dividend payout ratio to 50%. Is there any scope for that to change further? How are you thinking about distribution in its entirety?

So when we look at the capital, I think before we even get to distribution, it's almost a broader question of allocation. So where do we spend the significant capital that we do generate. I mean we've generated 202 basis points in the first 9 months of the year. That's a particularly good year, I think, but you have seen us kind of do kind of around that 200 kind of mark. So when you look at it, the first question that Paul and I ask ourselves is are we investing appropriately in the business? Because there is good growth. It's a growing business, but businesses grow because you continue to kind of invest in them and we're comfortable that we are, but that's our first allocation. We then look at the businesses and those of you who are involved in business plans will know that this is a busy time to kind of -- so the businesses talk about this is where they can grow. This is what they believe they need an additional capital. And we try to make sure that we don't constrain that and just say, actually, where is it? Given the business we write is capital generative, we want to make sure we're doing that. So we do that next. We then, obviously, last year, we raised the payout ratio up to 50%, around 50% payout ratio. You could imagine that given we look on a 2- or 3-year outlook, whenever we're making any capital decisions, we probably had some views of capital at the time we did that. So I wouldn't anticipate that, that number would go up. And in fact, I think a 50% payout ratio is a really strong payout ratio, but also gives an organization flexibility to do the other things that the capital might want to, whether it's more investment, more organic growth or even inorganic activity. Now I think we've demonstrated over the last number of years a really strong practice of returning excess capital back to shareholders. And that's obviously the next bit that you do. And I think that's something you wouldn't expect to see a difference in that. So this is obviously a point in time when we'll look to maybe change our capital ratios, and we'll deal with that as we go through. Being able to see the kind of the end of the increases coming through from the [ GFC ] again is very helpful. But I don't actually think it changes our distribution narrative or our allocation narrative fundamentally.

And part of the capital allocation has been towards investments. The cost base has been managed quite well through the recent years. How should we think about cost growth going forward? Where are the investments that the bank is making?

When we look at the cost growth, so this year, we'll be up about 2%. And we -- I'm really very, very focused on making sure that we give you a kind of annual target on costs. It's a number that we work really hard to hit more or less exactly in terms of that delivery. And that's really important, I think, internally, just to absolutely maintain that cost discipline that we have. And that cost discipline is something that's kind of very much part of the DNA of the organization and something we continue to kind of develop. And we'll talk more about numbers and targets in February. But you should assume that we wouldn't step away from that kind of cost type delivery as we move forward, really making sure that we're able to continue to drive the operating leverage of the business across all of our businesses. And it's great when we do these spotlights, so you can hear and talk about their kind of developments as they go forward. If I think of where we are investing in this year, we'll invest around GBP 1.1 billion in addition to actually what we spend on a day-to-day kind of basis, which is obviously developing the business as well. Technology is always the main part and focus of that. You've seen us talk about some of the collaborations we've done on things like AI, some of the work we're doing in terms of our data piece, but it's just a continuing evolution to make sure that the customer experience is as strong as it is because we know that, that's how we manage costs, but it's also how we know how we manage our revenue line. So it will be continued investment along those veins, making sure that we are investing in the new as well as continuing to update some of the older parts of the system, which is why today we have a good sort of technology that's not looking for a big kind of single moment of truth that has to move from one to the other because it's been a constant, consistent investment that we've done over a number of years.

And the way you look at costs and the way your businesses, the divisions look at costs, do you think about costs on an absolute basis? Or would you have a preference towards cost to income because cost to income for the bank is a clear sign of that declining given the growth on the income side as well.

No, it's really important so -- and it's something we have talked a lot about internally. And jaws is somewhere. And if you look at our jaws for this year on the guidance we've given you, it's incredibly strong. It's kind of high single-digit kind of jaws [indiscernible] so you kind of go right. The leverage is working, the income is going, the costs are kind of being dealt with importantly. I really like an absolute number, particularly in the year because the cost-to-income ratio is one that particularly when you have good income and helpful notable things that come in, I'm very mindful of all of a sudden your cost-to-income ratio looks great, but actually your cost line hasn't changed. So -- but I do think it's something that you need to look at together actually because it does show you a trajectory. I think in the year, you have to have an absolute number as well. And for me, we're very focused on a net number and kind of not interested in the gross takeout because generally, when you're talking about that, the net number is going up as well. So it's actually what is the absolute number that we're going to hit. I can hear the arguments on cost-to-income ratio and sort of maybe appreciate them more, but I'm always very mindful there's 2 lines in that piece of math, and I want to make sure they're both going in the right direction. So really very focused on both of them in balance.

That's clear. And if we take a step back, the U.K. market has seen a fair amount of consolidation. We've seen some of the challenger banks consolidate, including the building societies as well. How are you looking at the U.K. landscape? Where are the elements of competition coming from, whether it's the fintechs, the neos, the big tech, there are multiple avenues?

Even the U.S. banks as well. So I mean it's -- the U.K. is a very competitive market. The reason for that competition like anything is obviously, if you look at the returns that the banks to make in a kind of a steady-state environment, they are definitely there, and they've been very important, I think, particularly some of the neo banks and the fintechs, they've been very important for the incumbent banks and have actually caused all of us to really improve our customer service, improve our experience for customers. I think what it's also demonstrated over the last number of years that continue to grow and continue to make sure you've got the right customer offering, scale is also very important. And so when you look at competition, actually looking at where those scale players are, what's kind of coming is something that we pay a lot of attention to. I think also you also see, particularly in places like deposits, we see a bit more of an emergence of some of the nontraditional players. It's been less about pure banks and more about some kind of money market kind of experiences as well. So I think we're mindful of what's happening within there and also mindful of your margin is something. So we do see competition as both a positive, but something we also have to be very mindful of to make sure that we're continuing to evolve, which is why that investment that we continue to do in our business is very important.

And on the regulatory side, I know we've spoken a lot around capital, we've seen some moving parts in terms of redress and conduct. Are there any other areas that you think that the U.K. from sort of the top down, from the political motive is helping the banking sector? Are we seeing that direction of travel heading upwards positively?

We, as you know, are big believers in strong regulation. We think that we are well regulated. We certainly have some views there are pockets that we'd like to be a bit less regulated. We've been quite public on some of those views. But overall, we think we have a strong regulator, and we think that, that's important. We've seen some of the real benefits of the changes that have been made in things like mortgage regulation recently that's part of the reason why the market is bigger. We benefited from that improvement in there, and I suspect that will continue to grow. We've talked already about the advice changes that are coming. We view them as very positive as they go through. There's obviously continued work that is going on within the regulator world. We'll see more of that again in December. But we are comfortable and we feel the direction of travel, it feels good. We'd like to see a bit more, and we'll continue to see that as it kind of comes through.

And with the potential speculated bank tax that may come in next week, how does that balance against maybe the U.K.'s agenda taxing on one side versus maybe reform on the other?

Being someone who has to balance the budget as well every year, it's a difficult task. Mine is slightly less complicated, I suspect, than the chancellor's in terms of how we do that. We'll see what happens next week, and we'll comment on that as and when it happens. I think what's really important for me for the budget is actually that it delivers clarity not just to banks, but actually to the wider economy because we know that as they get that clarity, we are kind of cautiously optimistic, and we do believe there's good growth to continue to come and we will benefit from that. So we'll probably save any more deep conversations comments on the budget until then. We are feeling quite positive around the capital regulation, which we've talked about already. And then I do think that there are areas that we are overregulated and we do carry more capital than we need to, which is why we've been talking about our own kind of capital numbers as well. And as they continue to develop, they will ultimately be good for the banking sector.

Got it. Thank you. I'll open up for any questions.

If the reinvestment yields on your structural hedge was to fall significantly below, I think your current assumption is 3.5%. Let's call it 3% or 2.5%. Do you think on the -- there would be an offsetting factor on mortgage spreads, which are still not that high by historical standards? So could it be -- would it significantly reduce visibility on the NII if such a scenario was to occur? Or would you expect an offsetting factor on the mortgage side?

Yes. I think it's a really important question. And if we look kind of historically, a few years ago when I'd be in your office talking about the hedge, they'd be falling all the way down to when we were -- if you look at our roll-off rate at the moment, it's 0 in terms of what's kind of coming off and what's giving and we kind of continue to go there. And we know -- I talked earlier about the kind of the 5-year mortgages that are rolling off just now, they're at much kind of higher rates. So you do kind of see this sort of like the DNA kind of helix. So as they kind of move, you do kind of see that happening. I wouldn't be as brave as to say, yes, if we went to 2%, it would automatically offset completely in that kind of space. But we have traditionally over time seen that when the deposit margin is tighter, the asset margin is a bit broader. So I think you do see them in kind of working together in kind of tandem. But I think then that makes really important how well we manage the cost line, how well we take efficiency coming through from kind of new technology and AI and all of those things to make sure that if that income line is under challenge because of margins to make sure we're getting the right kind of growth, but we're managing it the whole way through the P&L. So we're ultimately continuing to deliver the right quality of sustainable RoTE that you'd expect us to be delivering.

Great. Any others? No. Otherwise, thank you.

Thank you very much. That's great. Thanks a lot.

Hopefully, we'll see you again next year.

Yes. We look forward to it. Thank you very much, indeed. Thanks for your time.