NatWest Group plc (NWG) Earnings Call Transcript & Summary

So if you think about our Private Banking & Wealth Management business, as I said, the kind of organic growth to pre Evelyn has been really encouraging. New leadership team kind of 2, 2.5 years ago, we talked -- we did a kind of investor kind of spotlight and talked about the strategy. So we had momentum in the business anyway, which is great. You then acquire Evelyn Partners, and it's genuinely transformational for the Private Banking & Wealth Management business. I can talk a little bit about why, but it's transformation for that business in terms of its scale. It more than doubles AUM. It makes our Private Banking & Wealth Management business, almost 20% of the group. It adds 20% to fee income. But crucially, it gives us a range of capabilities that we just didn't have to deploy against different parts of our customer base. So from that perspective, it's very -- it's strategically to also transformational for the kind of private bank it also accelerates the group strategy in terms of diversifying the income mix, which is, as you know, has been a priority of mine since I've had this role. So it works on multiple levels. We completed the acquisition at the end of June. So in effect, we've been owners of the business for 2.5 months. Really pleased with the progress so far. The business that we kind of took hold of at the end of June, was performing as we expected it to, both operationally from a risk perspective. So that's good because that's always a test point. So our performance is good. We've moved very quickly. We have -- now have one integrated business that's been led by one person, Emma Crystal, our CEO. We have one integrated management team. We made some announcements last week that brought the different functions together. We've got 1 kind of financial planning capability that's now running across the whole business, which is great. We've already surfaced the D2C capability to some of our retail clients are starting to experiment with what's possible an encouraging thing we're seeing with favorable both ways, a big part of the revenue synergies or a substantial part of the revenue synergies were distribution of kind of even financial planning and investment advice to NatWest or Evelyn clients, we're also seeing referrals the other way, which is banking and lending product to Evelyn clients. So we have to be realistic with 10 weeks in. So we don't get too carried away. It would get too high. We don't get too low, but so far, so good. But I think what's crucial for me is the breadth of capabilities we now have across [indiscernible] and Evelyn from banking, lending, saving, financial planning, advice, investment management and a D2C platform. the whole wealth waterfront to be deployed against [indiscernible], which is our kind of high net worth private bank, Premier, which is our mass affluent customer base, greater than 1 million customers, and then the 19 million retail primarily NatWest customers. So to me, big opportunity to drive AUM investment growth, which is, by serving the capabilities up because the regulatory tailwinds are with us, the client demand is there. So really the owners is on us as a management team to execute against that opportunity.

Perfect. Switching talk to costs. Costs have been very well controlled. You're guiding for about GBP 8.5 billion of cost in '26 and a sub 45% cost income ratio by 2028. What are the biggest remaining opportunities to simplify the bank from here? And could you tell us about what role AI has in that? .

Yes. the cost performance of the bank, I think, has been incredibly strong for a number of years, preceded me. I think it was in the DNA around -- relentlessness around productivity and efficiency. I touched on it earlier, you look at the comparison to 2021, I think mid-60s cost/income ratio. You can see where we're tracking now just above 45% cost-to-income ratio. My main observation was, although we become, in many respects, a simple bank, the simple bank that I talk about these 3 franchises. The way in which the bank operated was still quite complex. And that's really what drove my, I guess, simplification strategy, which is, I could see opportunity around efficiency. And we've -- I can talk about some of those -- I should talk about some of those areas. But that's really what's guided the continued improvement in the target around cost-to-income ratio. So less than 45% by '28 but we've also been on record Katie and I saying that isn't a limit to our ambition. We think the scope. And when you look across the enterprise and you look across the franchises, some of this cost reduction is driven by what I'd just call fundamentally good kind of efficiency management. So it could be kind of workforce transformation and organizational design. It could be property footprint, for example, we've just moved data centers from Switzerland to the U.K., the big efficiency save, but it also delivers a better proposition. There's still work to do on digitization and automation. You don't necessarily -- I mean, AI can help accelerate that. But actually, you don't need some of the probabilistic kind of outcomes there. You just need deterministic activity. There's still a lot of, what I would call, complexity in banks and certainly in that West that supports continued driven of efficiency. The other big thing that's helping is we're just becoming a lot more efficient at delivering change. So we have -- where you have an investment envelope and you're deploying that investment to drive efficiencies, the quantum of change and therefore, benefit we can get from the same envelope is increasing considerably. Some of that to the second part of your question is helped by AI, but not exclusively. So generally on costs, it's in our DNA. It remains a focus, less than 45% isn't the limit of our ambition. We put that out there for '28. On the specific topic of AI, it's kind of pervasive across the -- as you would expect, across the whole organization. We kind of see it through the lens, not just of efficiency and productivity. We see it through the lens of customer and growth and experience I think it can be a big driver of deeper customer relationships. We're seeing that. It does build trust if you do it in the right way. And therefore, to me, it should be a platform for growth as well. The reason for mentioning that is we don't just see it as a lever for efficiency and productivity, it's kind of we also see it as a lever for efficiency and productivity. But we are seeing tangible benefits on both sides on the efficiency side, whether it's the engineering kind of coding side, which you're well trailed by many. But the benefits there are increasing, literally quarter-by-quarter. And actually, the engineering efficiency is outstripping some of the efficiency of the wider organization. So actually the bigger challenge now is how do get what we call kind of out of loop activity. So not the pure engineering and coding, how do you get the rest of the activities, whether that's cyber risk, operating model deployment to operate at the same pace as you can operate with kind of AI-driven engineering. So we're seeing. That customer contact is another big source of both customer experience improvements, but also efficiency improvements. The reality is in the retail bank, and to a certain extent, in the smaller end of the commercial bank, customers are very comfortable and much more satisfied on some of the kind of low-value tasks for that to be executed, contained, managed well, supported by the kind of whatever you call it, AGI or AI. So that's all operating. So a lot of tangible benefits. I personally have an optimist around it. I feel as if there's big opportunities both to grow the business and to make the business more efficient. I don't subscribe that all the benefits are going to fall on to banks kind of bottom line. I think the benefits are going to be shared between the banks, the customers, instead of, I think some will be put back into customers. And I also think whether the tech companies, whether it's in the labs themselves or whether it's the hyperscalers, we'll obviously take some of that, let's call it, AI dividend as it relates to banks and financial services. I don't think that's settled yet how that -- where those benefits settle because a lot of these activities are still scaling up. The more mature ones like engineering and customer contact, you can start to see, but there's a whole host of wider kind of use cases, which are, I guess, are yet to scale. And I think only then when you start to see how the AI dividend kind of plays through across the different parties in the value chain. And I think I've said that, maybe not, at this conference, but I think I said that 6, 9 months ago, and I believe that even more. I think everybody is still working that out, how is the economic model going to work. But net-net, there is no doubt there are significant benefits, both on the customer side and on the efficiency side.

Yes. I was going to take a step back then. The U.K. Government wants banks to support growth and investment. There's also continued uncertainty around bank taxation. How do you reconcile these 2 competing forces? And what does it mean for NatWest willingness to lend and invest?

Yes. So obviously, in the U.K., we've had a change of leadership, both Prime Minister and Chancellor. So the individuals have changed. What I would say the fiscal situation hasn't changed as a consequence of that. The fiscal situation was the same pre new administration. I think to be fair to the new administration, there are words around the role of financial services, the role of banks, the importance of the financial services industry and sector in the U.K. have been well received. I'd say the relationships with government are good, access is good. Obviously, we're leading into a budget in the last week of October, which is not far away. Inevitably, the speculation, it feels -- I'm sure it feels like to all of you, but it certainly feels to us too is that we've had speculation for the last 3 budgets. So in that sense, it isn't new. I'm crystal clear that the government understands how important growth is in order to be able to achieve some of its other policy objectives. So I feel very confident about that. But the fiscal position is tight. So they're going to have to make some choices, not just in this project, but also in future budgets. The argument that I make is I want to use the capital of the bank to support the wider growth agenda, the way banks can support the wider growth agenda is lending more to business, lending more to households, hopefully, into productive investment that helps drive. And to me, that's -- you've heard me say before, strong economies need strong banks and the capital -- the ability to use the capital of banks to support the growing economy, my view is the natural thing to advocate for, and that's very much the approach that we're taking. There is lots of evidence across many jurisdictions that bank taxes or policies of that -- can limit growth and investments. And there's lots of academic literature around that, and it can feed through into cost of borrowing, et cetera. Yes. So my clear view is we want to support the U.K. to grow. I want to use the bank's capital to help businesses and households to grow. I think that's the best use of capital, and that achieves the North Star, which is trying to rebaseline U.K. economic growth.

I might actually just take this as a moment to open the floor. If there's anyone that does want to ask a question to Paul. Here is your chance. Otherwise, we will continue our conversation. .

Yes. Good morning.

Good morning. Just wanted to kind of get your thoughts on given how macro plays out in the U.K. and in fiscal budget being kind of on smart Apart from that, what other risks.

So I guess the job of the bank CEO is to worry about risks all the time. So by sleep well, so that's -- you should know that. But cyber is a very obvious one. So I think cyber risk, especially given the acceleration of some of the frontier models and some of the potential risks of that threat. So cyber risk, definitely, we spend a lot of time and a lot of resources on understanding our cyber risk, managing our cyber risk. So that's one area. I guess, linked to the macro, we do worry about geopolitical risk and the kind of the [ tectonic ] plates there and what that might mean, not necessarily just in the very short term, but in the medium and long term. We're always restless around operational resilience, not just from cyber events, but ultimately, a bank is based on trust and a bank needs to operate seamlessly every day. So we spend a lot of time thinking about the risks to our operational resilience, whether it's how our apps run kind of our portals for our corporate customers. We spend time on different aspects of credit risk. NatWest for the last decade has been a relatively kind of low credit risk bank. The great thing about the businesses we've been able to grow without having to fundamentally change our credit risk appetite. But that doesn't mean that we don't organize about new credit risks, whether it's build out of AI infrastructure, the kind of second order, third order effects. So I don't want to give you such a long list you think I spend all my life worrying. But they are the type of things, I would say, are very topical outside of the macro and the kind of economic and kind of current political changes. And we did a very -- I should say, we're doing in a very systematic way. We're very clear on what we believe are the key risks facing the institution both inherent and residual and making sure we're pretty agile with resources where we think we need to deploy more to mitigate some of those risks.

Got a question in the back of the room.

[indiscernible]

I speak of -- is it Phil? Consume a spotlight. I recognize your voice.

[indiscernible].

Yes. So it's -- we think about it both from the consumer side on the corporate side, I think the comments we touched on earlier around, if you look at U.K. balance sheets, the U.K. household balance sheets are in reasonably good shape at an aggregate level. We all know there's different states of the, I guess, the population and then certainly parts of the population that are more stressed. But generally, household budgets, household saving levels are high. Unsecured borrowing is 30% less in real terms than it was 20 years ago. Unemployment is still relatively low. And households have managed the transition to -- if you take mortgages as a proxy, households have managed the movement to higher mortgage rates pretty well. And we've now got 2/3 of our customers paying over 4%. And the reality is mortgage areas haven't moved at all. So the capacity is there. On the corporate side, some similar trends, but the reality is there's 20-year low on U.K. kind of corporate leverage. It doesn't mean -- I'm certainly not complacent about that because it does depend where the curve settles. But I do think there is a lot of debt servicing capacity. I think U.K. business has been very cautious since 2016 and Brexit and some of that's because of lack of confidence to invest. The pandemic drove a lot of businesses efficiency, still, as you know, to businesses have made themselves more resilient and their ability. If I look at the difference this year in terms of absorbing energy price shocks on the back of the Middle East versus 2022 and Ukraine and Russia are fundamentally different. So I think there's more resilience in the system. I don't think we should be I'm sure you're not. We shouldn't be as complacent enough to think it can't manifest in credit stress. But I think at a system level, household and [indiscernible] balance sheets are more resilient, certainly more resilient than they have been for some time. There will be pockets that is the inevitability those most exposed to the consumer. For example, those businesses that are not as well run. But that's my general thesis on the resilience in the kind of credit system.

Perfect. Capital. [indiscernible] discussion. So strong capital generation, 137 bps in H1, you're guiding for an excess of 240 bps this year before distributions. Interested in sustainability of cap generation at these levels, how enduring and your decisions around deploying that capital from here. Are they evolving at all?

Yes. I mean the capital generation of the business is incredibly strong. If you look at -- so we announced at the half year, we'll bring forward by 6 months, our ability to return to buybacks. I think you said 137 basis points of capital in the first half of the year. So that if you look at our ability to invest in the business, I think we grew our lending by GBP 17 billion during that period. We acquired Evelyn, and then we're getting back to buybacks at the end. So we've got a business, these 3 franchises that are growing, generating great returns, throwing off capital. So we're in a good place from that perspective. We expect that continue. We can see lending pipelines. We have a good sense of that. As we've -- the returns on growth are good at the moment because of our operating leverage. The returns on growth support the structurally higher sustainably higher returns profile, which by its very nature, generates capital. We haven't changed our philosophy around capital allocation. So capital that's needed for growth at the right returns, we'll -- an investment we'll deploy beyond the ordinary dividend, which we increased last year from 40% to 50%. Anything beyond that, that is surplus and not needed for growth, we'll return to shareholders as soon as possible. So from that perspective, generating a lot of capital, very mindful of how we deploy it, confident about the outlook that we'll continue to generate. And to me, that gives us a really nice balance. We can support a lot of good growth but we can also give a lot of distributions to shareholders. And that, to me, feels like the right balance. So no change in our philosophy from that perspective.

Perfect. We are exactly on time. Okay. So I wanted to thank everyone in the room. Especially wanted to thank you, Paul. Really appreciate it. Happy to bring the session to a close.

Thanks, Aman.