NatWest Group plc (NWG) Earnings Call Transcript & Summary

Good afternoon, and welcome to NatWest Group's H1 2026 Results Fixed Income Presentation. Today's presentation will be hosted by CFO, Katie Murray, and Group Treasurer, Donald Quad. After the presentation, we will take questions.

Good afternoon, everyone. Thank you for joining our H1 2026 Fixed Income Results presentation. I'm joined today by Donal Quaid, our Treasurer; and Paul Pybus, our Head of Debt IR. I will take you through the headlines for the half year and the detail for the quarter. Jon will take you through the balance sheet, capital liquidity, and then I'll go through the forward look and targets, and then we'll open up for questions. So turning to the headlines. Our results today show how we have created a bank with increasing momentum through our focus on sustainable growth and returns by delivering growth across all businesses, improving operating leverage and managing our capital and risk well. We have created the most efficient large U.K. bank with the lowest cost of risk, delivering the strongest levels of capital generation and highest returns. Our performance makes clear. We have the capability and capacity to grow at scale. The momentum we're seeing in customer growth, efficiency and returns gives us confidence for the future. We have created a business capable of delivering strong, compounding sustainable returns through the cycle. In February, we set at how we plan to deliver our 2028 targets by pursuing disciplined growth, leveraging simplification and actively managing our capital and risk. Our aim is to grow customer assets and liabilities at an annual rate of more than to reduce our cost income ratio to below 45% and to generate over 200 basis points of capital before distributions with a return on tangible equity of more than 18%. Our strategy is delivering excellent results as we make good progress against these ambitions. So let me give you the financial headlines. We have deliberately built a scale business that benefits from structural U.K. growth drivers to deliver strong returns on a sustainable basis. Our return on tangible equity was industry-leading at 19.7%. Our acquisition of Evrim Partners has now completed and boosts our exposure to the fast-growing U.K. wealth market. Customer assets and liabilities grew 13.4%, including Evan Partners. We continue to drive operating leverage. Income growth of 8.9% is significantly ahead of 4.5% cost growth. And our cost income ratio reduced 2.8 percentage points to 46% getting close to our 2028 target. We also generated high levels of capital at 137 basis points, and our balance sheet remained strong with a CET1 ratio of 13.2% after the acquisition of Evelyn Partners. Given the strength of our performance and our confidence in the outlook, we are upgrading our 2026 returns guidance to more than 19%. I'll now take you through the performance of the second quarter. My comments for the second quarter use the first quarter as a comparator. Our strong performance in the first quarter continued in the second with broad-based growth, income momentum and improved operating leverage. Income excluding notable items, increased 5.4% to GBP 4.4 billion and total operating costs grew 1.8% to GBP 2.1 billion driving a percentage point improvement in the cost/income ratio to 45.5%. The impairment charge was GBP 140 million, equivalent to 13 basis points of loans. This resulted in 12.4% growth in operating profit to GBP 2.3 billion. Profit attributable to ordinary shareholders was GBP 1.6 billion, and we delivered a return on tangible equity of 21%. Turning now to income. Income, excluding notable items, was up 5.4% at GBP 4.4 billion. Income across our businesses continued to grow, supported by an increase in call, margin expansion and higher noninterest income. Noninterest income grew 15% or GBP 124 million. Given the strength of our performance and the inclusion of Evrim partners, we now expect full year income, excluding notable items of around GBP 17.9 billion. Turning now to customer assets and liabilities, or Cal. We are pleased with our continued track record of growth. Cal increased by $86.8 billion in the quarter or 9.6% to JPY 986.9 billion. This comprises $9.7 billion of broad-based customer lending growth, $2.8 billion of customer deposit growth and a GBP 73.9 billion increase in assets under management and administration, including Evolin Partners. I'll touch on each of these elements in turn. We are reporting another quarter of strong broad-based loan growth across the group with gross loans to customers up by GBP 9.7 billion. Retail Banking and Private Banking and Wealth Management balances grew $4 billion or 1.7%. This comprises GBP 3.9 billion in mortgages and EUR 0.1 billion in unsecured lending. Our mortgage stock share increased to 12.7%, with record applications in March. Commercial and institutional lending increased by GBP 5.7 billion or 3.6%. Within this, growth is strongest for our larger corporate and institutions where we see continued strong demand driven by structural trends, including digitization and decarbonization. Our mid-market customers are showing healthy demand driven by manufacturing and social housing. Turning now to deposits. Customer deposits grew by GBP 2.8 billion in the quarter, this was driven by commercial and institutional, where deposits increased by GBP 2.5 billion with broad-based growth across business banking, commercial wood market and our large corporates. Private Banking and Wealth Management deposits were up GBP 0.3 billion, mainly as a result of growth in savings balances. Retail banking deposits were stable with further migration to fixed and variable rate is as customers prioritize tax-efficient savings options. Turning now to assets under management. Assets under management and administration closed the quarter at GBP 130.6 billion. This includes the addition of GBP 71.7 billion from Evan Partners and a EUR 4 billion reduction following the sale of Cushing in May. Turning now to costs. We are pleased that once again, we have driven operating leverage as income growth outpaced cost growth. Other operating expenses were GBP 2 billion in the second quarter, taking the total to GBP 4.1 billion for the first half. Our cost-to-income ratio reduced by 2.8 percentage points to 46%. And we now expect other operating expenses to be around GBP 8.5 billion for the full year. Turning to impairments. Credit performance remained strong, and we benefit from a structurally low loan impairment rate and strong asset quality. The impairment charge for the quarter was GBP 140 million, equivalent to 13 basis points of loans. We saw no new signs of stress across our 3 businesses, and we continue to expect a loan impairment rate below 25 basis points for 2026. So our guidance is unchanged. We carry economic uncertainty post model adjustments of GBP 284 million, with total PMAs of GBP 316 million. And with that, I'll hand over to Donna.

Thank you, Casey. Good afternoon, and thank you for joining today's call. I'll start by sharing some highlights from the first half of the year before moving into more detail on the balance sheet, covering capital, liquidity and funding. I'll then update you on our progress on funding plans across the group. Starting with an overview of the key metrics on Slide 15. We ended the first half with strong capital, MREL and leverage positions comfortably above directory minimum with a CET1 ratio of 13.2%, a total MREL ratio of 30.6% and a leverage ratio of 4.7%. Our average liquidity coverage ratio was 140%, giving us a comfortable surplus over minimum requirements. Our average net stable funding ratio was 132%, and and primary liquidity was GBP 152 billion. The group's funding is very well diversified. Our loan-to-deposit ratio was 90%, and we have a strong retail, private and corporate deposit franchise with around EUR 448 billion of customer deposits across our 3 businesses. We've made good progress with our 2026 funding plan with GBP 2.7 billion equivalent of benchmark issuance from NatWest Group across holdco senior, AT1 and Tier 2 capital securities and GBP 3.7 billion equivalent from NatWest Markets. Thank you for your continued support of NatWest in both the primary and secondary markets. We saw another positive step in our credit ratings journey as Fitch upgraded a number of rated subsidiaries by 1 notch following an update to its bank ratings criteria. Moving to capital generation on Slide 16. Our business continues to be highly capital generative. We've ended the first half of the year with a common equity Tier 1 ratio of 14% before distributions in line with the year-end. Our earnings power is reflected in 197 basis points of CET1 capital generation, which was boosted by 31 basis points of capital generation from RWA management. Our ongoing investment spend consumed 19 basis points and organic lending growth consumed 61 basis points. This means all our investment in growth was funded with just 6 months of capital generation. And we are reporting a CET1 ratio of 13.2% after accruing 50% material profit for ordinary dividend payments. We expect to continue generating strong capital from earnings with active RWA management. And for 2026, we now anticipate capital generation before distributions and the impact of Eglin Partners of more than 240 basis points. This is before the impact of Basel 3.1 on the first of January 2027 where we continue to assume around EUR 10 billion of RA uplift. Turning now to our approach to capital allocation on Slide 17. We have a robust balance sheet and aim to operate with a CET1 ratio of around 13% giving us appropriate headroom above minimum requirements. Our strong capital generation enables us to invest in our business to grow and deepen customer relationships. We are both disciplined and dynamic in our deployment of capital and our diversification across 3 businesses gives us optionality through the cycle to optimize risk-adjusted returns. We also apply a high bar as we consider acquisitions to accelerate our strategy through additional scale or capabilities. Our strategy is delivering attractive and growing shareholder returns and we remain committed to a dividend payout ratio of around 50% and to returning surplus capital to shareholders via share buybacks. Turning to our total capital position on Slide 18. Our total capital ratio of 18.9% reflects the strength of our CET1 ratio and higher levels of AT1 and Tier 2 capital relative to our minimum requirements. We currently have an AT1 ratio of 2.5% with GBP 5.1 billion of securities outstanding, inclusive of the EUR 500 million we issued in May. This is above our minimum requirement of 2.1%, and I expect to move closer to this requirement during the course of next year after the implementation of Basel III. Our Tier 2 ratio is 3.1% with GBP 6.3 billion of securities outstanding, including the $750 million new issuance in the first half. Turning to our total MREL position on Slide 19. Our total MREL is very healthy at 30.6%, significantly higher than our risk-weighted asset requirements, leaving us well positioned for the growth and the upcoming impact of Basel III. Having built out the maturity curve of our MREL stack, issuance requirements will be driven primarily by refinancing needs. Turning to our total leverage position on Slide 20. Our spot U.K. leverage ratio is 4.7% with an average ratio of 4.8% compared to our 4.3% minimum requirements. I welcome the proposed reforms to the leverage framework that were announced as part of the financial stability report in July, which the PRA intend to consult on in the near future. As you can see from this slide, if the proposals are adopted, the minimum leverage ratio for Navis Group would reduce by approximately 40 basis points to 3.9% while this will ensure leverage remains a backstop measure going forward, it will not bring any day 1 benefit to the group given the risk way framework is our binding constraint. Turning to liquidity on Slide 21. Our liquidity position remains very strong. At the end of the quarter, the LCR was 140% on a 12-month rolling average, reflecting around EUR 44 billion of surplus primary liquidity above minimum requirements. Our total liquidity portfolio was GBP 224.6 billion, comprising primary liquidity of EUR 152 billion and secondary liquidity of GBP 72.6 billion. Primary liquidity decreased during the first half, driven by an increase in lending and the acquisition of Evelyn Partners, partially offset by new issuance. Second, liquidity decreased to the amortization of eligible collateral prepositioned at the Bank of England. Our central bank balances are held at both the Bank of England and the European Central Bank with 70% of balances held in sterling. Looking at the composition of the securities portfolio, 69% are held to collect and sell and fair value through other comprehensive income and 31% are held to collect and held on the balance sheet at amortized costs. The remaining primary liquidity is a smaller percentage of level 1 high-quality covered bonds and Level 2 securities. Turning to Slide 22 on 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 93 billion of wholesale funding outstanding, the large majority is senior holdco and regulatory capital issuance from NatWest Group and senior unsecured issuance from NatWest markets. Drawings under the Bank of England's TFSME scheme are part of our funding mix and our current drawings are $8.2 billion, with EUR 5.2 billion repayable in March 27 and EUR 3 billion in March 2031. On Slide 23, you can see that we've made progress against our issuance plans for 2026, including benchmark transactions from the group holding company, NatWest Markets and NatWest Bank. From NatWest Group, we've issued around GBP 1.6 billion equivalent in Holdco Senior against our guidance of approximately $3 billion for the year. In addition, we also issued EUR 0.5 billion of AT1 and around GBP 0.6 billion equivalent of Tier 2 capital during the year, including our longest maturity dollar Tier 2 capital transaction to date, a very well-supported 21 noncall 20. While for Navis Markets Plc, our benchmark trades totaled GBP 3.7 billion equivalent across euro and U.S. dollar markets. We also returned to the covered bond market for NatWest Bank in June with a 1 billion issuance, our first since 2024. As we come into H2, we continue to look for opportunities to further balance our funding mix to support our customers. Following the success of our covered bond issuance, we expect to return to the market with another transaction later in the year. Investor demand remains strong across a broad range of asset classes, including short-term markets, providing the flexibility to access funding where we see the best value. And as we approach the year-end, we will consider prefinancing opportunities across asset classes, taking into account balance sheet growth assumptions. And finally, turning to credit ratings on Slide 24. We are composed strong A rating across our senior ratings, and I was pleasing to see progress in our credit ratings during the first half as Fitch upgraded a number of rated subsidiaries by 1 notch following an update to its bank ratings criteria. With that, I'll hand back to Casey.

Thank you, Donal. Given our first half performance and the inclusion of Evelyn Partners, we are strengthening our 2026 guidance. We now expect income excluding notable items of around GBP 17.9 billion. Other operating expenses of around GBP 8.5 billion, capital generation before distributions and the impact of Evelyn partners, greater than 240 basis points and a return on tangible equity of more than 19%. Finally, we now expect to announce our next buyback with our full year results in February. And with that, I'll hand back to the operator for Q&A. Thank you.

[Operator Instructions] Our first question today is what is your take on the July FSR proposals? I see that the new slide on leverage, any other opportunities that you see that would impact capital targets or planning.

So would you want to take that?

Yes. Quite a generic question. So there's a lot to unpack. Let me cover a few elements. Overall, what we'd say is we welcome direction of travel to date, but we reiterate what we said in case and the call this morning, and I also said in my opening comments, there has been no change to our capital requirements to date. But if we look at some of the proposed reforms that were discussed as part of the FSO review, Firstly, on leverage. Again, in my opening remarks, I talked about the changes that we see from a NatWest Group perspective. If implemented as proposed, we see about a 40 basis points reduction in our leverage requirement, but that will not bring any day 1 benefit to the group given we are constrained by the risk weight framework and not leverage. However, I would say it is a positive move because it would move and insurers that leverage remains a backstop measure and that will not come and find any constraints in the foreseeable future. We've also had a lot of roofer usability. So the FPC signals an ambition to support the move towards a simpler framework centered on a single buffer that is releasable in stress. Again, very much welcome that anything that's increases the size of releasable buffers and stress and simplifies the framework is a positive. However, I think given that any changes there will be in conjunction with international authorities, I don't expect any changes in the near term that will probably evolve over a number of years and then we also had those change to the OSSI buffer where the PRA have clarified that it could release the OSSIbuffer in the event of a systemic stress under existing discretionary powers. Now again, this is not going to have any impact on the way we manage capital or our CET1 target for a number of reasons. Firstly, the OSS applied at the ring-fencing holding group level. and the related group risk add-on that is up at NatWest Group does not form part of MDA threshold. So therefore, in a stress, there will be no change to our MDA. There would obviously be a change to our minimum requirement. As you know, we give careful for to the calibration of our CET1 target with consideration to multiple factors, not just the consideration of MDA or buffers and stress. And we also look to balance the expectations of various stakeholders as well as consideration to our minimum Supervise requirements in both BAU and stress requirements and also probably the last point I would just call out is that the releasability of the OSI buffer would only be an event of a systemic stress. I would afford no benefit against the new deact, syncratic capital event, which is an integral part of our management planning and target setting. So I think there -- the key, I think, proposals that are outlined in the FSO. The other probably more meaningful element from a NatWest Group perspective is the work that still needs to be done on the overlapping elements of the domestic capital framework. That's one that we see the most potential upside, and that has been deferred to Q4, but we look forward to constructively engaging with the PRA on the case for reducing that overlaps within the framework.

Our next pre-submitted question is covered bonds were mentioned on the management call this morning. Can you just set out your thinking on the requirements and how it links to the deposit outlook?

Take this one again. Sure. So corporate bonds, we guided to $1 billion of cover bonds for the year. You saw we did execute our first cover bond number of years in June. . And as Katie outlined this morning, given the success of that transaction, we look to come back to that market at some stage in H2. I think the like is as we move to a more normalized liquidity position, we expect cover bonds to be more core part of our issuance requirements going forward.

Our next question is going to come from a via letter, if you'd like to unmute and ask your question.

Katie. Can you hear me? So thank you very much for organizing the call. And obviously, congratulations on the results. Look, just a question from me. I'm looking at your funding slide and you're halfway through your funding for 2026. And shall I just take that we're still expecting you in AT1, Tier 2 and a little bit of MREL is that if you can confirm your stock? And then you mentioned prefunding what -- if we could quantify that a little bit, maybe on which part of the capital structure. Any comment also on currencies would be highly appreciated.