NatWest Group plc

Howard Davies - Chairman Ross McEwan - Chief Executive Officer Ewen Stevenson - Chief Financial Officer Alison Rose - Chief Executive Officer, Commercial & Private Banking Franics Carey - Director Chris Marks - Chief Executive Officer, NatWest Markets Simon McNamara - Chief Administrative Officer

Tom Rayne - Exane Rohith Chandra Rajan - Barclays Robert Noble - RBC Martin Leitgeb - Goldman Sachs Claire Kane - Credit Suisse Michael Helsby - Bank of America Merrill Lynch Joseph Dickerson - Jefferies Chris Cant - Autonomous

Good morning, welcome. Please I have the important task but the only task giving to the Chairman in this bank is to remind people to switch of their mobiles.

So if I could do that. Ross and Ewen will shortly talk you through the results for the first half and on those I will limit my own comments to the observation that they are in a word good.

The Board is pleased with the progress management are making to return this Bank to sustainable profitability. There are difficult decision ahead particularly on cost but the direction is clear and progress is promising.

Before the management team talk you through the details of results, I’ll just say a few words about the economic and political context in which they are set. The economy continues to grow albeit below trend, we think and we see direct evidence of caution on the parts of businesses about the future and we see some hesitancy in investment plans that is I think consistent with what we see in the surveys of business confidence.

The political context is uncertain, especially in relation to Brexit. Since our business is largely domestic, we are affected much less than many other banks.

But like others, we've prepared contingency plans to maintain our Western European business both corporate lending and our markets business. Our central option is to use our existing banking licenses in Amsterdam to provide continuity of service from NatWest Markets to our EU customers.

And we're in active discussions with the regulators in the Netherlands, De Nederlandsche Bank on the detail planning needed. Turning to our legacy issues, we began 2017 with four main problems to resolve and on three of them we have made very significant progress.

The 2008 rights issue litigation and the RMBS litigation with the Federal Housing Finance Agency have been settled. And last week, the competition Directorate of the European Commission announced that it is agreed in principle a revised scheme to satisfy the remaining state aid conditions imposed in 2009, the project formally known as Williams & Glyn.

The new scheme involving a capability fund for challenger banks, and incentivize transfers to them of some of our small business customers is practical and achievable. And like the FHFA settlement is required only a small additional provision in the second quarter.

Unfortunately, I have nothing to add on the last of our four issues involving the U.S. Department of Justice and our RMBs sales in the years to 2007.

We continue to hope to resolve that this year for tool possible. But overall, the Board believes that so far in 2017, we've made very material progress in resolving these legacy issues, which have hung over the bank for too long and it's pleasing that our focus today is therefore on the performance of the Core Bank.

And I’ll now handover to Ross McEwan, he will discuss our financial performance and the progress we're making in delivering a better bank for customers. Ross?

Thanks very much, Howard. Good morning and welcome to our first half results presentation.

As Howard has mentioned, the first half progress means that today we can spend a lot less time talking about the bank that we were and obviously more time talking about the bank that we are fast becoming. I'll start with an overview of progress against our plan and then I’ll outline how we have continued at pace to build a simplest safer and even more customer focused bank.

As we said in our full year results presentation in February, we've grown income, we've reduced costs and improved returns for our shareholders. We see the first six months of this year's proof of the investment case for this bank.

Ewen will provide the detailed financials behind this shortly. In the first half, we delivered an attributable profit of £939 million with an adjusted return on tangible equity of 11.5%, a strong performance despite the uncertain economic outlook.

We remain on track to hit all of our financial targets and continue to target a bottom line profit next year subject to final approval of the alternative remedies package for Williams & Glyn that have talked about and achieving a resolution of the Department of Justice investigation into our legacy RMBS activity. We don't have any further update on DoJ today, but we would like to resolve this matter in 20417 if possible.

We have continued to support the UK economy in the first six months of the year, as we grew leading in the markets that we lack and within our risk appetite. For example, our average LTV on the Group's mortgage lending is still 58% and this being at this level for last four years.

The strategy is supporting sustainable income growth in our Core Bank. We've taken out a further £494 million of costs out of the business in the first half and are on track to hit our full year target of £750 million.

We're doing this for cost efficiencies as well as the ongoing digital transformation of our business, and we are working our capital harder and lower return businesses and focusing capital in our target markets. In short, we're doing what we said we would, we’re growing income, we’re reducing costs and generating improved returns for our shareholders.

We also made good progress in the first six months against our strategic priorities. On customer experience, we are very pleased to report that the Commercial Banking franchise remains a clear market leader in terms of customer advocacy.

Our NatWest Personal score is stable at plus 13% and our Private Banking division has improved across all metrics with a great 12 point increase in net promoter score for the year-on-year. I can’t say that we still have significant amounts of work to do to improve our customer experience across some of our other businesses and our brands.

However there are signs that in our target market segments, the changes we’re making are starting to pay off. We've grown our net lending in PBB and CPB by 4.1% on an annualized basis, and that’s a hit of our full year target of 3%.

This growth is within our risk appetite concentrated in our target markets and is generating positive returns for shareholders. We've already achieved close to two thirds of cost target for this year.

Our common equity Tier 1 capital ratio stands at 14.8% that's ahead of 13% target and up 140 basis points on full year 2016. We’ve achieved this through a combination of obviously making bottom line profit that helps running down now our non-core division, which we remain on track to close at the end of this year and a focus on working our capital more intensely.

We continue to target improved colleague engagement, since last year scores have improved to nearly all areas, most pleasing is seeing the significant increase in pride in the business and our brands. And this is at the same time has continued heavy restructuring of our businesses, which does of course to fit of their colleagues.

Our longer term targets remained consistent and support the strong investment case for this bank. By 2020, we expect to be delivering a return on total equality of more than 12 plus percent on an unadjusted basis, on a cost to income ratio of sub 50% and a robust capital position of 13% common equity Tier 1.

Our customer and colleague engagement targets are stretching, but are also key to us delivering sustainable financial returns. Our balance sheet reflects the diversified lending profile of the bank with a good mix of exposure across personal, corporate and markets, and we have de-risked the balance sheet with the risk elements and lending representing 2.8% of growth customer alliance that's down from 9.4% at the end of full year 2013.

Our strategy strength is ongoing in those markets where we see an opportunity for sustainable risk adjusted returns. And mortgages for instance a flow shift for the first half was 12% supporting growth and have stock share of 9.1% that's up from 8.8% at the full year in last year.

In the challenging UK rate environment, we continued to see margin pressure in this business. However this was more than offset by a strong customer volumes and a focus on saving customers more efficiently and reducing our costs.

Our strategy in Commercial Banking is centered on focusing our capital we have returned of the greatest and we've continued to accept lower return exposures. Finally, our markets businesses continue to support customers through a period of uncertain market conditions.

We’ve achieve balance sheet growth while improving our risk metrics. In our retail SME and corporate lending, the probability of default rates have fallen since full year 2016.

Recent market attention is focusing on the rapid growth and unsecured lending with consumer credit growing by 10% in the last year outstripping wide growth. Regulators are rightly asking for more details from banks around how we can ensure customers can pay down they did.

Personal unsecured lending represents only 4% of our balance sheet and this is down 1% over the last 12 months in UK PBB. We feel our approach to putting the customer’s interest first has ensured that our lending growth is responsible, sustainable and is generating positive long term returns for our shareholders.

A digital channel usage continue to grow in the first half with the third of our digitally active customers now using both mobile and online platforms to interact with us. Five million customers now regularly use our award winning mobile app and in June, an average of 58 customer per second logged into the mobile app and they send close to 10 million payments in the month.

That's a 13% increase on December 2016 volumes. As customers use these channels more, we will support them by continuing to develop our mobile and online capabilities.

Currently, we meet about 71% of our personal customer service interest digitally, we're targeting to get this close to 90% by 2020. Our mobile Get Cash functionality allows customers to withdraw cash from a cash machine without the need of a debit card no other UK bank offers this service and our customers tell us they like it with volumes up over four times the level since in December 2016.

Customers now use the Get Cash service over 200,000 times a month. Innovative solutions like this have continued to make our mobile app net promoter scores have positive 50 and market leader.

Customers are changing the why they bank with us and technology is becoming even more important. And personal and business banking, a virtual checkbox, AI assist, answers a range of the most common questions from their customers, but is online and through the mobile app.

We expect this technology to help with around 1.3 million customer queries a month by the end of this year. In Commercial and Private Banking, our bank loan platform is independently right at this market leading with digital customer experience.

Currently 90% of our active customer base uses the platform with 400,000 payments processed daily. We continue to roll out a new and improved bank loan platform to further enhance customer experience.

That with markets continues to focus on customers, the business has lead major capital raising transactions in the UK, Europe and the U.S. for both corporate customers and financial institutions.

NatWest Market continues to simplify process is that it has ways in improving the customer experience. Our Agile Markets platform for example provides customers with financial markets detail, analysis and post-stride functionality.

Both Ewen and I have indicated previously the driving positive JAWs will also delivering innovations, which save customers is crucial to achieving our financial and customer goals. UK PPB’s performance in the first half provides a good example of this with operating JAWs of 12%.

One example of how we are achieving this is our mortgage sales process, customers can now upload all of their required documentation for the mortgage application digitally without needing to visit a branch. Our customers then complete and sign the mortgage offer in a single digital appointment.

Improvements such as this have reduced the average time talking to obtain a firm mortgage offer by half to renting does. With further process improvements plan, we will go further in reducing this time frame.

We've also improved the mortgage renewal process, while in the past, the mortgage renewal would have required an appointment of the branch or a phone call. Raw bank and NatWest customers can now renew online in a matter of minutes.

This is proving very popular with over third of all renewals this year being completed online. We've recently rode out a new process of gathering and responding to the feedback from our customers across most of our PBB franchise, it's called close look feedback.

Within 24 hours of an interaction taking place, customers can now provide specific actionable feedback directed to teams that served our customers, allowing them to listen, learn and act on what our customers are telling us. With complaints volumes down 12% in the first six months of the year, we continue to see the benefits of listening to our customers and fixing the process issues that having.

Each of these interactions shows how innovation is driving customer volumes and reducing costs, which is delivering income growth and positive shareholder returns. As we focus on becoming more efficient and responsive to the customers, we must also become simpler.

We've removed 23 products in our Commercial business. Across the bank, we've closed 81 subsidiary companies.

We’ve eliminated close to three thousand disk spices and we retired 700 systems and applications. We've achieved all of this in the six months or delivering bottom line profitability.

That drive to become a simpler bank continues. We’re currently working to simplify the key channels through which customers interact with us looking at how we can streamline products and service delivery.

For example, when a customer requires replacement debit card, our colleagues have to navigate three quite different systems to get a new card to the customer. In future, we will use our integrated system make it easier to save our customers at a lower cost point.

With the majority of our legacy issues behind us, we now have a clearer investment case for this bank. We're leading UK retail and commission bank for the very focused markets division.

We have strong brands, leading market positions and improving customer service. We're growing in attractive markets and within our risk appetite.

We've built a good track record on reducing costs and risk and at the same, we’re improving returns and refocusing capital in our Core Bank. I’ll now hand over Ewen, who will go into further detail around the investment case for this Bank.

Thank you.

Thanks Ross, and good morning, all. I’m encouraged by these results, second quarter in a row of bottom line profits, attributable profit of £680 million on the quarter, statutory return on equity in Q2 of 8% and we're on track to meet our 2017 and 2020 financial targets.

In the Core Bank, good continued momentum relative to H1 2016, I think we delivered strong operating performance improvement. Income was up almost 9% if you strip out, NatWest Markets income growth was up 4% across PBB and CPP.

Costs were down more than 4%, JAWs of 13% and our cost income ratio reduced from 62% to 54%. Adjusted return on equity was up three percentage points to 14.1% and adjusted operating profits were up 29%.

On our legacy cleanup, we're getting there as Ross says since the start of the year, we've resolved the 2008 rights issue litigation. We've resolved FHFA.

We are well progressed with the solution for Williams & Glyn. We’re comfortably on track to wind up our bad bank capital resolution by the end of the year.

And we’re back to being investment grade rated by all three credit rating agencies, which has helped drive much lot of funding spreads for us this year. And on Core capital, we achieved a very strong core capital build in the first half.

Our Core capital ratio is up 140 points to 14.8% and our fully diluted TNAV was up 4p to 298p. That's further on depend by today's disclosure on IFRS 9 with the day one impact for us expected to be modestly Core Tier 1 capital.

But as we look at over the next six to 12, months, I think we’ve recognized that it is a more uncertain macro environment. And given that more subdued outlook, we believe that we’re being appropriately cautious in our approach to risk appetite.

In Personal Banking, we’re deliberately prioritizing secured mortgage lending. Mortgages increased from 49% – from 47% of portfolio up to 49% in the first six months.

And we’re consciously trading off some NIM in order to continue to build market share and mortgages. In Commercial Banking, we’re being cautious on segments like commercial real estate and we’re also reprising or exiting lower retain in corporate relationships.

On income, the Core Bank grew adjusted income by almost 9% in H1 across PBB and CPB, we had combined income growth of 3.8%. NatWest Markets had a much stronger H1, adjusted income was up 44%.

We’re happy not only with the income growth we’re achieving but also that the business models that we are producing is also producing for us a much more predictable set of income flows. In the Core Bank in H1, almost 80% of our adjusted income was for PBB and CPB, which has very low quarter-on-quarter income volatility.

Overtime, we believe that this business mix should drive a much lower cost of capital being attached to our cash flows. On volumes, customer loans across PBB and CPB grew by 4.1% in H1 and customer deposits were up by 4.9%.

NIM was down 11% basis points in the quarter, it was weaker than trend, but we still maintain net interest income through a combination of volume growth and an extra day’s interest this quarter. In particular, the majority of the income decline in Q2 was driven by a conscious build up and liquidity both managing for expected context cost principally FHFA and accelerating MREL and other wholesale funding into H1.

But as you can see in our UK PBB NIM this quarter, conditions in the UK mortgage market have become more competitive. Our front book margin NIM is around 40 basis points lower than the back book, so we do expect further NIM compression over the remainder of 2017.

We committed to reduce operating costs by £750 this year. We're on track to do that almost £500 million out in H1.

I would observe through the cost reduction is not linear, so we're comfortable with the £750 million pound guidance at this point. We also say to expect going forward that more of the cost savings should begin to come out of the Core Bank.

In H1 around £150 million or about 30% of the cost savings came out of the Core Bank. And I think as we travel into the second half, we said that we expect for the full year around half of the cost savings and that would imply for you an acceleration in cost savings coming out of this Core Bank into the second half.

As a result of what we've achieved, the adjusted Core income ratio across our three businesses in H1 fell from 61% in H1 2016 to 54.3% this half. One of our other targets was to reduce – was to make the capital in the Core Bank work more productively.

We committed to reduce growth RWAs in the Core Bank by £20 billion by the end of 2018. We've reduced them by just under £9 billion pounds in the first half, so we're comfortably on track at this point to meet that Q4 2018 target.

In total, RWAs were down by £13 billion in H1 to £215 billion including a reduction of more than £6 billion pounds in Q2. On the back of the H1, RWA reduction together with the attributable profits we've made, our core Tier 1 ratio improved by 140 basis points in H1 including 70 basis points in Q2.

With our core Tier 1 ratio at 14.8% at the end of the quarter, we're obviously comfortably in excess of our 13% target. Turning to the individual franchises, UK personal and business banking continues to perform very well.

Adjusted operating profits were up 19% on H1 2016 and the adjusted return on equity was 32%. For Ulster Bank, the repositioning of allocated capital remains a clear focus for us.

Over the last year in euro terms, we've reduced both the risk elements on lending and the track of mortgage portfolios by 23% and on the back of that overall RWAs declined by 18%. Commercial Banking continues to position itself a higher returns.

We've taken some very decisive action to start shifting capital away from low ROE customer relationships through either reprising or exiting them. In H1, we’ve reduced gross RWAs in Commercial Banking by £4.2 billion and the adjusted return on equity improved to 10.1%.

On Private Banking, Ross and I’ve consistently said that we expect this business to earn materially higher returns than we’ve been achieving in recent years. So we’re pleased to see that turnaround now beginning to come through.

Adjusted operating profits were up 32% on H1 2016, and the adjusted return on equity improved from 7.6% to 9.3%. RBS International had another steady six months, while adjusted operating profits were down 6% on H1 2016.

This largely reflected increased regulatory costs in relation to us setting up RBS International as an honoring French bank. Overall on credit quality and payments remained very low in Q2, an annualized 12 basis points in the Core Bank and just 8 basis points for the bank overall.

But we do recognize that the outlook for credit has become more uncertain and that’s despite as we heard from the Bank of England yesterday, I could census macro view of low growth and low unemployment. So we’re seeking to be continuing to be cautious on the portfolio we’re were making in lending.

Turning to NatWest Markets, it had a much better first half than first half 2016 and that’s even if you adjust out the benefits of favorable currency movements. Adjusted income was up 44%, reflecting a much stronger performance by both the rates and the financing franchises and this performance was delivered with a £3.5 billion reduction in RWAs.

With the NatWest Markets suggested income at £918 million in H1, I’d be very cautious in extrapolating this for the full year with by August and December typically quite a month for us. Away from the Core franchises, Ross touched on the progress we’ve made on Williams & Glyn earlier, financially it had a good H1.

It’s based quarter for some time in Q2. Adjusted operating profits were up 19% on H1 2016.

That principally reflected lower operating costs and continuing benign payments. From a reporting perspective, we expect to stop reporting Williams & Glyn as a separate segment later this year, but we’ll give you plenty of disclosure ahead of that to allow you to do your pro forma.

On IFRS 9, we provided you in our interim report some analysis on day one impact. To be clear on what this is, it’s our estimate on the day when impact as of 1st of July, it can and is likely to change by the time we get to 1st January, 2018.

What you can see in today’s announcement is really two impacts, firstly an uplift in pretax provisions of around £0.5 billion, that’s about 13% on top of our existing balance sheet provisions and a £1 billion positive adjustment from certain lines that will be reclassified as mark-to-market as a result of our IFRS 9. As a result at this point, we expect the day-one impact to be modestly accreted for us in quarterly one times.

Turning to a few legacy issues, firstly on capital resolution, you all have seen a few months ago confirmation that Alawwal Bank is in discussions with the Saudi merger partner. Those discussions remained ongoing.

Away from Saudi Arabia for the residual RWAs in capital resolution, we said we’ve reduced these to between £15 billion to £20 billion of RWAs by the end of the year. At end H1, we’ve actually made better progress than we had planned.

RWAs are already down to £19 billion. So we now expect to be in the lower end of that £15 billion to £20 billion range by the end of the year.

On disposal losses and capital resolution, we’ve taken £103 million only in H1, £25 million made of impairment write-backs. We do expect H2 losses to be substantially higher but in line with the previous guidance we’ve given you.

You’ll see an increase in H1 in our prudential valuation adjustment in Core Tier 1. That’s largely due to about a £400 million of expected future losses within the markets book and capital resolution, I mean those losses have effectively being front end loaded into our Core Tier 1 ratio in H1.

We still expect to wind up capital resolution by the end of the year and as such Q3 is likely to be the last quarter of separate reporting. Again, we will provide you with disclosure on due course on the impact of on NatWest Markets and Commercial Banking as a result of assuming capital resolution legacy asset pools.

In H1, we had £396 million of conduct costs. This includes two previously announced settlement provisions.

Firstly, the £151 million or $196 million of additional RMBS provisions that we took for the reason, FHFA settlement and the additional £25 million we took in relation to settling the 2008 rights issue litigation. So in conclusion, I view these as an encouraging set of results for the Core Bank income is up, costs are down.

We’re achieving that with less capital. Adjusted operating profits on the Core bank are up 29% on H1 2016.

Adjusted return on equity is up from 10.9% to 14.1%. For our legacy issues, we are genuinely getting there now material progress on litigation Williams & Glyn and capital resolution.

And for the bank overall, an attributable profit of £680 million in Q2, £930 million in H1. We’re on track to deliver all of our 2017 and 2020 financial targets.

Thanks and with that, I will hand over to Howard to host some Q&A.

Yeah. Thanks Ewen.

Thanks Ross. Well, over to you.

Thank you very much. It’s Tom Rayner from Exane.

I’d like to ask the first two margin questions please. Firstly, if 8 basis points of the margin decline in the second quarter was down to a sort of temporary buildup of liquidity, should we not expect some of that to reverse out as you deploy that liquidity?

And my second question is looking at the sort of guidance sort of the 4 basis points, 5 basis points of margin pressure per quarter going forward. Can you say how much of that reflects mixed sort of anticipated changes in mix, a lot of them just pure competitive pressure in each product line please?

Thank you.

Yeah. So on the build off of liquidity, I think we’re going to continue to maintain relatively high LCR ratio for the remainder of the year.

So I don’t think you’re going to see any significant benefit from a reversal of that during the next couple of quarters. On the – if you just aggregate, we think there’s about 4 to 5 basis points of ongoing NIM pressure that we can see and just aggregating that about two basis points you should assume just comes in this right environment for my continue role off of the structural hedge.

And about 2 to 3 basis points is driven primarily by competitive pressures that we see in the mortgage market which really reflects two things, firstly, front book pricing continue to be materially below back book pricing about a 40 basis point differential. And secondly, this ongoing mix change that we’re doing of prioritizing effectively lower return – lower returning mortgages in return for trading off NIM and other parts of portfolio.

But what you get in return I think is a commitment from us that we’re going to continue to draw and build market share and mortgages as you saw in Q2, a lot of the NIM pressure was offset by volume growth. And that was also the benefit of an extra day’s interest in Q2 as well.

Thanks.

Next to you left. Thanks.

Hi, morning, everybody. It’s Raul [ph] from JPMorgan.

Can I have two as well, maybe the first one on the TFS perhaps for you and, Ewen, could you help us understand what the impact of the TFS is in terms of the NII line? I think as far as I understand, your draw down of 14 billion is the highest amongst the U.K.

banks, I think even Lloyds is 9 billion. As that comes in, does that start to drop your cost of funds faster than where it otherwise would have been and clearly you’re obviously running quite strong in terms of loan growth.

Shall we think about the TFS having a net positive impact on your NII? The second one is on just a loan growth numbers as well obviously you’re running ahead of your 3% target, maybe for Ross, what do you think about the second of the year, you're going to start to payback a little bit?

Okay, look on the TSF, I don't think there’s any real material benefit in terms of our funding costs. I mean if you look at where deposit price is funding now post the Q4 for reprising we did, I think it doesn't have any material.

Actually I would argue it just sort of net negative for us, because ultimately what it's done is enable others to be more competitive in the mortgage market. So while it's provided some funding benefit for us.

I think we've seen the benefit to others resulting in a more competitive mortgage market this year. I would point out that yes, we have drawn down more than most, but equally we didn't take advantage of other funding schemes of our overall funding benefit out of these schemes is much lower than some.

I think you're going to see good strong competition in the mortgage market, which will overtime bring the margin down. We're going to be think about how we plan that.

I know there have been other banks saying that going to be out there competing very, very heavily. I think this is much – as much about distribution is anything else.

I mean you can put an offer into the marketplace, but if you don't, the distribution to bank is somewhat useless. We will be cautionary about it.

You saw us more our pricing as you trying to push the pricing up in the second – earlier part of the second quarter. It's since come down again, so we've been trying to actually be all market as opposed to be one pulling it down.

But I think we will – I must to continue to grow faster than the market but they grow fast in the market, we are slower than probably has been in the past and you see that we are already coming through this year. You're seeing a much more, stronger balanced towards mortgages.

Ellison in the commercial space has got some message that she is still wanted to take off the books that's why we've said I need 3% growth across PBB and CBB. I think you’ll see that book sort of grow, but not at anyway near the pace that we're seeing in personal business bank and that's for a very good reason that we've got some issues that we want to take off.

Yes, sorry Ross, on unsecured particularly, once you do know what the capital treatment if any would be prospectively, would you reconsider the approach you’ve adopted for the unsecured?

Yean, unsecured, I go back to we've got lots of scares in this organization around unsecured lending, so we've got to put our position in context with that that we do want to do unsecured lending, we've done quite strongly in the personal lending space where we've been on market growth. And you know I think we'll continue there.

It's only been the credit card pace that we've been a little bit concerned about, and it's from the customer behavioral paces about how we treat customers, this is the pace that has always worried me. At least in time of the moving see some options there.

We're not really to go back into that market. I think you’re going to be careful when you go, and it's been 10% growth in that market last year, I think pretty high.

So we’re cautioning and we're just dealing with our customers, because we know them we got all the data.

Can we move it along next one? Yeah.

Thanks.

Thanks, good morning. It’s Rohith Chandra Rajan from Barclays.

I’ve got three please if that’s okay. One is just following up on the mortgage pricing question.

So some of your peers are sort of suggesting that assets here first starts to – well as go close to the TFS close that might lead some improvement in mortgage pricing, wondered whether that was a view that you concurred with whether you think it's more about large banks with big distribution capability still liking the returns available in the mortgage markets? And then secondly just on again on the net interest income that sort of margin versus volume particularly in relations to liquidity, is it right to assume the drag on the margin in liquidity is offset by higher average interest earnings assets so it doesn't actually have any net interest income impact?

And then the third question is just a point of clarification, central items revenue picked up £350 million in the quarter of which about £200 million was IFRS volatility, just wondering if you could through me lights about what the other £150 or so million was? Thank you.

Just on mortgage pricing, I’ll start there and you can go into the others, Ewen. We’ve always maintain that once the big banks get fully capitalized to gain and get stability that they would be competition coming back into this marketplace and that's what you're saying.

So you're seeing ourselves wanting to grow in the mortgage market we would be in splits, quite weak, but you know that's been a five year strategy build for us. You’re certainly seeing Lloyds with a the very strong position, Barclays, HSBC signaling, so you're seeing the bigger banks actually wanting to be in that market, because we see it is a good proposition for customers.

So I think you are going to see margin contraction continuing. But it's got to be done profitably and the day we see it not being done profitably, we won't be the – it's just got to be done profitably.

And remembering that the uptick for us will come and risk weightings at the end of 2019 and into 2020. We already pricing is though that there.

We also price knowing that you know payments is at a very low level today you've got to normalize that before actually said this is a sensible thing to be done. So we had been building distribution where price taker, not a price maker.

And in that marketplace, we'll continue to be strong in the distribution front and deliver growth service. I’ve talked about some of the initiatives that we’re doing that will make it so much easier for customers to do business for this, that's quite important to customers, it's not just around price.

But think there's going to be continue contraction in this marketplace. We are focusing on it and not focusing so much on the unsecured that means our NIM contractual would look larger than others, but then again we're using less capital to do so, which gives us a reasonably good return.

Yeah, on the net interest income, so if you backed out the extra day interest in Q2, the net interest income would have been down about £20 million rather than being up. I mean I do think if you go into Q3 and Q4 if you look at that NIM compression that I talked about, I think we will be offset that with volume growth what we saw in Q3 which for us was alluding to when we pushed pricing up a flow share drop for about 13% in Q1 to about 11% in Q2.

So we've now pushed pricing down a bit and I think as a result flow shares would pick up and mortgages. I would remind you when we talked about that £20 billion of gross out of the way reduction, we talked about losing £250 million to £300 million of income, so at some point that will progressively start to roll through the numbers as well.

But overall, I think you know as we've done consistently in recent quarters despite NIM compression, we've continued to sort of build net interest income through volume growth.

It also means we do have to keep the focus on our cost reduction program. We've given you the numbers there.

It doesn't make up all of it, it does help you in maintaining the JAWs on the business, so there's a very strong focus continuing in this business on cost reduction. We got to get ourselves back into shape.

Yeah, on the question on central items, there's one of two things, but nothing significant and I think we sort of continue to guide to the fact that that should be zero overtime.

You move it along. Right, thanks.

Good morning. It’s Robert Noble with RBC.

I’m just looking your net promoter scores, why divergence is between brands and businesses and so just looking RBS is doing very well – sorry NatWest is doing very well and Royal Bank of Scotland not so well, business not doing so well, commercial doing very well, I’m just wondering what you doing is making customers happy in NatWest and Commercial Banking, where you doing make them sad in the other ones.

So we have the happy bit from Allison. Allison, the mike is just behind you.

So, on the happy bits, in commercial we're very focused on –focusing on meeting our customer needs. So we've had a whole program of investing and training in all bankers in their capability and targeting them really on needs to meet their customers.

So we're deepening our understanding of our customers in delivering better service. Lots of simplification and innovation going in.

So we've redesigned a whole lending delivery, which is starting to roll out. So better service, quicker decisions, fast yes, fast no, money in their account very quickly, but that means very sustainable lending and increasing our content and knowledge to our customers.

So it's simply that so doing a better job with those customers deep in their needs. We'll set to lead content which we're delivering to all commercial clients with local representation across the markets and that missing it entering.

So simplification, better quality bankers, better need, better products and better delivery.

Let just actually skip to Franics, he’s part of him is happy and part of him is sad.

So, I’ll answer the question a little bit more broadly, so I mean if you look at the very positive JAWs that you have, part of that is a result of huge change that's going on in terms of distribution. So we are taking out 250 branches this year and that's on the back of doing something similar the previous year and the year before that.

The same time, we’re building up our digital capability and that’s – change is not always easy for customers. And so in business banking in particular, we’re moving to a more direct model.

What you’re seeing is as the branch network comes down and people have to adjust more to a direct model, not everybody is enthusiastic about that. Now the good news is the direct capability that we have is very strong.

If you look at our mobile app, it’s the best rated in the Apple Store by retail customers. And it’s – there isn’t a separate rating for business but if you look at the research that we have, it is positive.

So we think that it’s – to answer the question is, it’s a period of adjustment but we think that it’s the right thing and we’re confident that it will improve.

And I think I just pick up couple of other points. These does get hit with a lot of brain drag, I mean because way you see NatWest you see the net promoted scores being at a higher level.

A 95% of business sits underneath the NatWest personal side which is running a positive, it’s actually quite high levels for us. On the business side that business was running a return on equity of something like 7% to 8% about three years ago which you would have seen unsatisfactory, I certainly did.

That business is now getting well over the return on the cost of capital which would place with we’ve change the model and we have to get customers used to it quite a different model and how it was operating. In the Commission business, we have the opportunity of have a one-on-one relationship through Relationship Manager and leases business sits one on thousands, so you can’t get to the more and miss of change going on that business with the way we having to respond to have customers are charging not all are enjoying it.

So there’s a lot of brain drag on the Royal Bank, even though we position it very strongly.

Yeah, we move it to – yeah, behind you. Thanks.

Yes, good morning. Martin Leitgeb from Goldman.

I have three questions please and the first is to follow-up obviously on the mortgage comments made earlier. And I’m just trying to, if my understanding here is right that essentially RBS is trying to do is to maintain the 12% roughly 12%, 13% flow share going forward and essentially pricing at a moment is still such that your front book returns allow you to maintain that for the time being.

And then the second point of the question is the earlier comment on the margin compression to continue in that space. Is that purely the timing effect of the mortgages is turning over the average duration which is two to two and a half years or is that because you also have expect front book pricing still to fall –continue to fall going forward?

The second question is on capital and it’s just to come back to the discussion of French Banking, if you could share what you think the Core Tier 1 levels might be between those two entities going forward post ring fencing next year? And deferred question just a touch on the strong performance of NatWest Markets.

I want to get the sense at least from the numbers, this seems to be running much better than initially told. Is that a fair assessment or a couple of items within that which might have driven the strong performance in the first half?

I’ll pick up some of those and you can pick up the ones. You choose not to answer.

First half, well it’s the way should be. First half off on mortgages, our objective is to grow faster than the growth in the market.

We haven’t seen their selves a 12%, 13% or any percentage growth just to be growing a little bit quicker than market and that’s because of distribution capacity that we have built over time and we just have to have big client base that we’ve never really concentrated on. So there’s no 12%, 13% the fact that we have been doing to 12% I think signifies.

So we’ve got distribution in that area, but we’re happy to be growing faster than the marketplace. And that is around distribution is not around processing.

As I said you look at the average pricing points we did try to make a move in the marketplace to margin didn’t work, we’re back to where we have which is following the market is it what it is. On the compression itself, it is – if you take competition in the market it’s going to be a front book that actually does get knocked around a bit more and that is certainly where we would see a bit of it.

We’ve lifted about 12% of the book being on back book particularly around this. So there’s not a lot that’s moving around the least probably is the 1% movement probably wouldn’t be there out the book so.

Pretty standard around there 11%, 12%, so it’s really around front book margin. On NatWest Markets, okay Chris, to make some comments about the business, but can I just take you back three years ago when we were probably sitting here and we made the determination that we were going to bring this from being one 150 billion of risk weighted assets down to 35 billion of risk weighted assets and being a very focused business on three things, that’s what we’re doing and that’s where I think the success comes.

When you focus a business, you get the results because of it rather than spreading ourselves across what 28 products that you start with two, three things we’re really good at, that’s where we’re getting some good results. And I’ll leave Chris to say and make some comments on that.

Thanks, Ross. And actually the story isn’t much similar to Alison explained.

I think the really powerful step for us is that we’ve now been doing it for two and a half years and we’ve got the consistency of what we are offering and we’ve got the proof of the execution. So we came out with obviously fairly big reshape of the business back in 2016.

What we’ve seen since that is actually some interesting market conditions and what we done the shape the business allows us to support customers through those of market conditions and it continually tests the business, but also builds goodwill and allows us to get closer and closer to our customers. So similar to Alison we’ve made the business much more efficient.

We improved all of our customer journey. We are continue to invest and transform the business so that our front and technology and the applications that they using are more and more effective and more and more relevant.

We move to migrating more customers onto E-channels so actually that enables us to be quicker to respond, enables us to put more flow through our systems and it reduces risk and that enables us to manage our risk better. The dynamic that we’ve seen in the business is really just based upon the kind of clarity as Ross said the clarity of the product set and getting closer much closer to our customers and understanding what they need in all these difficult market conditions and giving them true relevant advice.

There’s no sort of magic to it, it’s simply being better what we do and be very clear about what we do. So they come to us as one of their key banking partners rather than you have somewhere down the pack.

Thanks, Chris. Other the two, what we set out 150 billion to 35 billion over the last year.

Chris and the team were working through how do we get that 30 billion risk rated assets, so just the fine tuning of the business that they’re operating through. I just remind you too that this business we are expensing all of the investment into this business and will continue to do so over the next three years.

So you’re seeing cost reduction drop out of about 50 million a year into the big investment stop so that drops quite quickly into 2020. So remember that’s specific why we’re operating this business.

So don’t expect the cost reductions in this business to be linear. There will be drops to about 50 a year until we stop the investment and expensing it all.

Is there anything you need to correct, Ewen?

No, no, just a couple of points. Just on Williams & Glyn, when we reconsolidate that back and it has about a percent of mortgage of market share and about a percent of flow share.

A flow share we think is not particularly overlapping. For example we gave Williams & Glyn three brokers that we didn’t use a lot and we’ve basically applied broker distribution model to those brokers and they have done a very, very good job and they talking about a 1% flow share.

On the point on capital, it is a really good question Martin. I mean I think our intention is to come back in Q3 and talk about a bit more about reinventing and the impact of capital across the group but broadly remember that we’ve got two non-ring fence banks, NatWest Markets where the leverage reasons we may run a slightly higher capital ratio than the 13% growth ratio for RBS side, potentially a bit lower than the 13%, you then get into questions of how much double leverage you can have and a bunch of other questions.

It’s a good but not straightforward question and will be back in Q3.

Hi there it’s, sorry it’s Claire Kane from Credit Suisse. So I have three, but the first two are just really clarification points.

So only the NIM compression in the front book, back book, could you perhaps talk about then in respect to U.K. PBB NIM you had a very sharp quarter-on-quarter drop much more than you’re indicating for the group overall.

What is the front book NIM on that business and should we expect that 40 pips from compression to come based on stable rates today overall at the great level? So that’s the first question.

The second one is on the PVA adjustment you’ve made. So I think you said £500 million should we expect that to unwind as you book £700 million losses in the second half, so it’s more or less CET1 neutral?

And then third point just Williams & Glyn, as you fold that backing, could you give us some indication of what those restructuring costs will be? Thanks.

Simon, good one for you actually.

I think both of those.

So on the NIM question it’s obviously that where more than most parts of our business we're seeing compression because of the mortgage phenomena we talk about, so not quite, I mean the 40 basis points point front broken back, I think should fully applied to UK PBB. The PVA question it was actually £400 million, so you should expect we think that way about an incremental £700 million of capital resolution losses in the second half that £400 million that we've taken into the PVA adjustment is effectively front end loading £400 million of the £700 million.

And then on Williams & Glyn, I don’t think we're yet able to talk about sort of reintegration plan and we've got sort of final approval out of the European Commission, so there will be incremental costs of consolidating in and but what one thing I would say is if you think about it in MN&A in terms it sort of classic in market major overtime, but all the systems, all the products, all the processes the same as ours. So if you map the branch network across our branch network in the UK you’ll see very close proximity of many of the branches as well.

So they should be significant cost opportunity there in due course.

Yes, next to you. That’s it, fine.

Thank you, it’s Michael Helsby from Bank of America Merrill Lynch. Two questions actually, first one on costs you mentioned the cost of progress would be linear, but the first half cost number if it we kind of double it, and out the levy you're clearly running below your what you’re targeting for the year, so I was just wondering what are the bits pumping in the back off to offset the actually the actual cost savings that you still flagging for the second half?

And then obviously there's been a lot of questions on the margin, the front book, back book thank you very much for that, it does feel like that's more of a more than a second half phenomenon and so the pressure that you have seen in the margin in that area particularly elect stand beyond the second half. So I was just wondering if I could invite you to give some comments on that the outlook for the margin for next year as well?

Thank you.

No to both of those. First of all deal with the one on costs because we've got the Chairman here, I don't want him doubling up on us having to double what we've done in the first part of the year that will not happen.

We've done 494 out of 750 odd hold you on through the guidance of the 750 plus. In the front end remembering we had cap rates coming off, so big costs coming at a capital resolution, which by kept some of the front end, we won't get as much of that in the second half of the year low to be some reduction, but it's becoming more and more into the Core Bank that we have into whether we're talking the cost side.

So those one off the operations that we had we’re bringing down becoming less and less and it starting to swing the other way and that's why guidance just keep your guidance back on to the 750 of cost even though we do, I think a very good job on the front end.

Yeah there was also some one-off benefits and that £500 million reduction in the first half and reverse in the second half, so but we have been add those for three and half years so assume that we understand how to do the forecasting is the one we guide you no to double please don't.

Please and don’t tell much Chairman.

Yeah on the NIM for 2018 we're not going to forecast, but I mean look at some point interest rates will go back up and as you know we've got a deposit book that is geared probably more than most of the banks to arising in positive yield environment, so we look forward to that in due course.

Hi thank you. It’s Joseph Dickerson from Jefferies.

Quick question on the liquidity book, I mean it was £160 billion at the end of Q1 is now £178 billion, I guess did you really need that kind of incremental liquidity in light of the FHFA charge because that seems to be what you – what you’ve referenced. And then following on from the last bit of the answer to Mike's question, I haven't got to the page up, but could you disclose what your rate since your presumably the rate sensitivity to rising rates must have gone up I would have thought in the second quarter and on the on the same liquidity point if the if the TFS was going to be negative for you why did you draw down £14 billion of it.

And then the second area of questioning would be on the repurposing the Dutch banking license does that create any hurdles to streamlining the capital structure on RBS? Thanks.

Ewen I think…

160 to 170, yeah so the repurposing no shouldn't do, I didn't say that TFS was negative for us, I said it was a net negative, I mean it's broadly in line with our existing funding costs, where it's negative is, because is enabled more competition in the mortgage market. On the liquidity book FHFA is not the only come back cost we’re facing at some point.

And the rate sensitivity?

Rate sensitivity is in the back, yeah you’re right. What's the price for – it is in the appendix, but we have become more rate sensitive obviously because we reprise the deposit base down, we can't reprocess that further in negative rights and we are more rate sensitive on a rising rate environment, but the disclosures.

Hi it’s David Lock from Deutsche Bank. I’ve got two please.

First ones in on the DoJ and appreciate there's no updates this no one picking up the phone, it's going to be frustrating for you will be clearly you are taking at least some liquidity provision for it. I was wondering if we all sitting in the same place in five months’ time and six months’ time, do you feel you could be able to take at least a small provision before that conversation really starts in 2018 if it does end up being 2018 just want to get a sense of the flexibility around what you can do in this financial year.

And I've got a second one on margin?

So did an accounting question, we would need to be engaged in some form of discussion that allowed us to take a different view on the appropriate measures of additional provisions, we would hope to be able to be in discussion in to have that fact set by the end of the year, but we constantly revisit it, but at the moment we've got my investors to revisit their provision.

Is that one is a broader question really on how you approach in mortgage in particular, this strikes me that you've had a lot mortgage growth in recent years, you've been particularly focused on the first time by segment, which means that I would think that a large portion of your mortgage, but actually it's a lot of first time buyers and borrowers frankly have never seen a rate case.

And I just wondering how you think about that in terms of a risk both behaviorally in terms of when they come to it doing but also obviously if rates do go up, how those customers will actually behave.

First off we don't price them today when we do the assessment on the current right or wrong, so it’s going on to a 2.5% or 3% process of 6.75% or 7% on their ability to pay and we've maintained that right throughout at the cycle. On the percentage of first time buyers we did participate in the government scheme where the guarantee was put in place.

We have a sense that since that's come off, we had I think doing a little bit less, but we have stayed in that market, but have been quite clear about what we're looking for on first time buyers, unless you might like to make some comments just around that is the percentage of book and the approach we take to the income.

Yeah I mean actually we've been slightly underweight in terms of first time buyers over the last two or three years, we had more like about 18% of our book there. Over the last – over this part of the year what we've seen is by to let coming down a lot obviously as you will have seen on the market for first time buyers has increased somewhat and we're taking about our share of that, but the bulk of our mortgages in either re-mortgaging or in new purchase rather than first time buyers.

Hi good morning, it’s [indiscernible]. Two please, the first is on your 30 basis points from IFRS 9.

Can you just confirm please that you don’t expect any offsetting increase on that? And then the second is on London mortgages, so last year I think you grew the London mortgage book 15%, but this time you seem to drop the disclosures which I wondering if you tell us the number please?

I think our exposure to London mortgage about 18% of the total book.

Yeah. That’s true in terms of forward flows about.

Yeah it hasn’t changed dramatically it’s been around that 18% of their total book.

Which is less than the market average in terms of London, so we’re slightly disproportional we have a lower share in London, which you might expect from a bank that has predominantly been Scotland, North of England, Midland, so we are underway to in London and we continue to be underweight in terms of our forward flow.

Thanks.

On that offer is non-benefit and it shouldn’t have a quality way impact on us, I mean just in terms of the portfolio with £1 billion, mark-to-market gain and that there was another UK banks had a similar portfolio with the embedded derivative attached, but they restructured that while we go on to capital benefit. We always knew that we were going to get an IFRS 9 benefit and what have involved as crystallizing some fairly material losses in order to restructure those lines.

So we’ve just been waiting for IFRS 9 to okay.

Thank you. Can I say any more – yeah.

Two in front, thanks.

Good morning. It’s Chris Cant from Autonomous.

If I could just follow up a response to the earlier question in terms of the NatWest Markets investment being put through the P&L when I look back at your historical investment in intangible assets as being pretty limited on a net basis in the last few years you’ve written-off quite a lot of the old investment in GPM systems and obviously if you built up quite a large excess capital position. I’m just wondering whether there’s going to be a headwind about it all from renewed investment in intangible assets over the next few years should we be expecting a sort of a pickup in investment.

I think about your net promoter score as being quite static best slightly down quarter-over-quarter in terms of retail do you need to be investing in better systems in retail banking? Thanks.

It just on NatWest Markets so it see any change there so we were expensing today all of the investment that business loss to this year get £210 million I think Chris next year would have made about £200 million. The year after I think it drops down a wee bit all things about £160 million, from £150 million to £160 million and then there after we think the normal spend for that business is probably going to be more at £50 million to £60 million.

So you can see the drop off or more we see the expenses of your expensing the completely today, in three years’ time going to have a lot less, but we don’t see a buildup intangible was missed you got something on that?

No, I am just in terms of investment spend way we’ve been spending well sort of comeback quite strong at what was said, but we been spending over a £1 pounds a year in investment spend for several years now. And actually the cost of digital distribution is actually quite low in terms of those investments.

But I got back to what Les said earlier if you look at bank the MPS for us is in the 50’s it’s actually got the highest net promoter score of any of our channels grew about 20% in the first half, it’s the only retail channel that’s actually seeing growth now, online itself is even in decline. So you’re seeing effectively 20% compound growth going through the digital and 20% reduction going through in the branch network.

So there’s a very deliberate and substantial investment program going into digitally transforming the bank at one.

I suppose the implication that is that you’ve been expensing most of the investment as well rather than capitalizing it.

Yes. A larger portion of it has been and just sort of the numbers I gave you we’re talking about 700 systems and applications in the first six months of this year.

We are reworking the stack of technology for this bank and making sure it’s appropriate for this business going forward and make it simpler same point time. And we will continue to do that over the next year or two, three years.

Yeah. Making that back to the cost program one of the reasons we’re so confident in our continued delivery against the £6.4 billion all in cost program of 2020 years.

Yeah the more that we get into the cost program the more that we can see really quite significant opportunity in process reengineering and automation.

We don’t have any questions. So are there any others before we wind up.

Thank you to need to say anything else in conclusion.

No process that we’re pleased with the results we know we’ve got a lot of work still to do in this bank, it’s good first six months. We have started up three of the major legacy issues, yes we’re still going to get a final approval of the Williams & Glyn, that is it’s a big issue for the this bank.

We do look forward to tiding up the DoJ as a last very big one, but it’s more now that we can focus on the go forward bank as opposed to the bank that we once were. So thank you very much for joining us.

Thanks for coming.

See you next time. Bye.