NatWest Group plc

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00:11 Good morning, and thank you for joining us today. As usual, I'll start with a brief update before handing over to Katie to take you through the Q3 results, we’ll then take your questions.

So, starting with the headlines. We're reporting operating profits of one point one billion pounds, up from four hundred million for the same quarter last year.

This includes an impairment release of two forty two million, as underlying credit metrics improved and defaults remained low, resulting in an attributable profit of six seventy four million. 00:45 We continue to make a good progress on our targets.

Net lending was up three point one percent on an annualized basis, driven primarily by growth in mortgage lending. Costs were down four point three percent for the first nine months, compared to the same period in twenty twenty.

And we're reporting a CET1 ratio of eighteen point seven percent. 01:08 As you know, this capital strength has enabled us to increase our annual dividend distribution to a minimum of one billion pounds for twenty twenty one, twenty two and twenty three.

It has also allowed us to make an initial on-market buyback of up to seven fifty million this year, of which four zero two million has been executed to date. 01:31 Taking into accounts, the one point one billion directed buyback in March, this brings total distributions for twenty twenty one to around two point none billion pounds of which we have already booked two point six billion.

01:45 As you'd expect, our focus is very much on executing our strategic priorities in order to drive shareholder returns and deliver on our twenty twenty three targets. These priorities are all about generating income growth, reducing operating costs, investing to make our business customer friendly and efficiency digitization, and allocating our capital wisely in order to maximize returns.

02:12 I won't dwell on this slide, but I would like to underline our commitment to play a leading role in relation to climate change. We have already exceeded our initial targets of delivering twenty billion pounds of climate and sustainable funding and financing.

So, we have recently announced a new target to deliver a further one hundred billion by the end of twenty twenty five. 02:35 Turning to slide five, I'd like to talk in more detail about how we are supporting our customers to drive growth.

Net lending across our retail and commercial businesses is up three point one percent on an annualized basis to three hundred and five billion pounds, seven billion pounds up since the year end, excluding government lending schemes. This growth has been driven by mortgage lending, whilst commercial demand continues to be relatively muted as the economy reopens.

03:05 I've spoken in the past that we see an opportunity to grow our share of mortgage and unsecured lending. And during the year, we have launched a range of initiatives to achieve this.

We're making good progress in buy-to-let mortgages, where application volumes in the third quarter more than doubled compared to the second. As a result of simplifying our policy and aligning our lending criteria more closely to the market, whilst maintaining firm pricing discipline.

03:33 We're also seeing good momentum in unsecured lending. The issuance in the credit cards has almost doubled year on year, and we have bought new products to the market.

Around a third of this growth has been in the last four months following the launch of the new purchase and balance transfer card in June. 03:52 Spending on credit cards is up twenty percent on last September to pre-Covid levels and whilst credit card balances remain slightly down, this trend is gradually reversing.

As you would expect, we are growing unsecured lending in a thoughtful and disciplined manner. We have made our new purchase in balance transfer card available only for existing customers, just as we did with the government lending schemes, and our mobile app helps customers both to track and set limits on their card spending.

04:25 Turning to commercial banking, demand remains relatively muted from smaller businesses, but we are seeing more activity in our corporate and specialized businesses. Revolving credit facility utilization remains broadly stable at nineteen percent, compared to a peak of forty percent in April last year.

04:45 Looking at government lending and particular bounce back loans, since the first anniversary of the scheme when repayment started, about seven percent of these loans have been repaid in full. And around ninety percent of customers due to start repayments are repaying on or ahead of schedule.

05:04 In NatWest Markets, our currency and capital markets businesses are performing in line with expectations, whilst we continue to reshape our rates business to better serve corporate and institutional clients. 05:17 And finally, we are benefiting from having brought all our wealth management businesses together in private banking in order to make better use of our asset management expertise right across the group.

Year to date, we have delivered strong growth of around eleven percent in assets under management and administration. This includes growth of one billion pounds in the third quarter, bringing assets under management and administration to thirty five point seven billion.

05:46 Just over half hour growth in the first nine months was net new inflows of which about thirty percent was via our digital platforms. Whilst all these trends are positive, we continue to monitor customer behavior closely in the light of recent supply chain challenges and inflationary cost pressures.

06:08 At the same time as expanding our products and services to meet customer needs, we continue to accelerate our digital transformation as you'll see on slide six. About seven million of our retail current account customers now use digital means only to interact with us, allowing them to access our services at any time of the day from any place they want.

06:32 We are using data and analytics to deepen customer engagement in retail banking through increasingly personalized messaging. Tailored messages have grown from seventy two million in the first nine months last year to three eighteen million in the first nine months this year, and they have resulted in a significant improvement in customer engagement.

06:54 Meanwhile, branch transactions remain below pre-COVID levels, whilst mobile payments and video banking have grown year on year. We’ve also been investing in technology led payment solutions for commercial banking customers through our merchant acquiring platform Tyl and online payment service Payit.

Tyl has processed over one point five billion worth of transactions since inception of which around five hundred million took place during the third quarter. 07:24 I want to turn now to capital management on slide seven.

Let me start with our multi-year withdrawal from Ulster Bank. We continue to work through our agreements to accelerate our withdrawal.

We've now reclassified three point seven billion euros of commercial loans. 07:40 The vast majority of those we are selling to Allied Irish Banks as assets held for sale.

And we're working with Permanent TSB on the sale of seven point six billion euros of performing retail and small business loans along with the transfer of essentially colleagues. If completed, we expect these two transactions to be capital accretive.

We're also reviewing options for other elements of the portfolio, and we'll continue to keep you updated on our progress. 08:11 Actively managing our capital in commercial banking has contributed to seven hundred million reduction in RWAs during the quarter.

We expect the impact of this capital management in Commercial Banking, together with disposal costs in NatWest markets to amount to one hundred and fifty million in twenty twenty one, down from our estimate of three hundred million of which seventy million has been realized to date. 08:38 As you know, our focus on capital allocation is about maximizing returns to shareholders.

This is a capital generative business and our CET1 ratio at eighteen point seven percent is well above our target ratio of thirteen percent to fourteen percent. 08:55 As I said earlier, this has enabled as to commit to an annual distribution of at least a billion pounds for twenty twenty one, twenty two and twenty three.

We expect to complete our initial on-market share buyback program of up to seven fifty million in the first quarter of twenty twenty two and have already executed on four hundred and two million. 09:19 Taking into account the directed buyback of one point one billion last March, this brings total distributions for twenty twenty one to around two point nine billion pounds.

09:29 With that, I'll hand over to Katie to take you through our financial performance in more detail.

09:35 Thanks you, Alison, and good morning, everyone. I will start with the group income statement.

We reported total income of two point eight billion pounds for the third quarter, up four point three percent from the second quarter. Within this, net interest income was down two percent at two billion, and non-interest income was up twenty one percent to eight twenty million pounds.

10:00 This increase reflects a number of notable items, including a seventy nine million pound share of gains from our collaboration with the business growth fund. And gains of forty five million on the liquid asset bond sales in the quarter.

10:14 Excluding all notable items, income was in line with the second quarter. Operating expenses increased fourteen percent to one point nine billion pounds, driven by litigation and conduct costs.

This means we are reporting an operating profit before impairments of eight thirty two million pounds, down thirteen percent on the second quarter. 10:36 The net impairment release of two forty two million pounds represents twenty six basis points of gross customer loans and compares to a release of six zero five million or sixty six basis points in the second quarter.

This reflects improvements in underlying credit metrics and a low level of defaults. 10:56 Taking all of this together, we reported operating profit before tax of one point one billion pounds.

Attributable profits to ordinary shareholders were six seventy four million pounds equivalent to a return on tangible equity of eight point five percent. I'll move on now to net interest income on slide ten.

11:17 Banking net interest income for the third quarter was six million pounds higher than the second, excluding the one off tax adjustment in the second quarter. This increase reflects continued mortgage growth, a return to net growth in unsecured balances and one extra day in the quarter.

11:35 It was partly offset by the reclassification of eighty one from equity to subordinated debt for the period before redemption in August. This accounted for a fourteen million decrease.

11:48 Turning to bank net interest margin, excluding the liquid asset buffer. This produced by three basis points to two thirty four basis points after adjusting for the one-off tax adjustment in the second quarter.

This reduction was driven by eighty one classification and a full quarter of debt costs following new issuance in Q2. 12:10 Business trends were broadly stable in the quarter, which you can see in our yield and cost data slide, eleven.

On the asset or lending side, gross yield for the group fell by three basis points to one hundred and seventy eight, reflecting further growth in lower yielding liquid assets. 12:29 There was moderate pressure on the retail banking loan yields due to lower mortgage rates, while commercial banking yields were broadly stable, excluding the one off-tax adjustment.

12:39 On the liability or deposit side, grid funding costs at thirty four basis points were impacted by the AT1 reclassification. There was a small reduction in both retail and commercial deposit costs due to mix.

There are two key factors to consider in relation to net interest margin in twenty twenty two, excluding the liquid asset buffer. 13:01 First, the yield curve and second, price and mix.

I will talk more about these factors on Slide twelve. Mortgage margins are returning to pre-Covid levels, average application margins in the third quarter reduced by thirty seven basis points to one hundred and fifteen basis points, and then continued to reduce towards the end of the quarter to around one hundred and five basis points, reflecting the higher swap rates.

This is broadly in line with January twenty twenty. 13:35 Front book margins on mortgages that completed in the third quarter decreased from one hundred and sixty five to one hundred and forty three basis points below the back book.

Lower margin roll offs resulted in the back book margin improving by one basis point to one hundred and sixty four. 13:53 The increase in swap rates in Q3 was followed by a further sharp rise in October and like other lenders, we have taken action to increase customer rates across a selection of our products.

Of course, the other side of the equation is the benefit we derive from higher spot rates to our structural hedge. 14:12 We have said that the majority of the two fifty million pounds year on year decline in our hedge income was in the first half and hedge impact in the third quarter relative to second quarter was negligible.

We also expect the hedge impact on net interest margin to be broadly neutral in Q4 and in twenty twenty two. 14:32 Turning to our interest rate sensitivity, which we updated at the first half.

We revised our economic assumptions at the half year and they will not be updated until the year end in line with our usual practice, but we welcome the improved consensus rate outlook. 14:48 At the half year, the yield curve suggested that UK base rates would remain at ten basis points until Q4 twenty two.

Before rising to twenty five basis points, and a further height to fifty basis points was expected in Q4 twenty three. You will see the majority of our sensitivity comes from our managed margin or the unhedged balance sheet.

15:10 This shows a benefit of four fourteen million pounds or an upward shift in the yield curve from ten basis points to thirty five basis points. This reduces in year two and three, reflecting higher pass through assumptions as base rates increases.

The overall benefit from a hundred basis point increase would be one point three billion pounds in year one, which shows you the sensitivity is not linear. 15:38 Moving on now to look at volumes on slide thirteen.

Gross banking loans decreased by two point nine billion pounds or zero point eight percent in the quarter to three fifty eight billion. This includes growth of two point seven billion in our UK and RBSI retail and commercial businesses, excluding government schemes, which was more than offset by the reclassification of Ulster Bank loans that we have agreed to sell to Allied Irish Banks as assets held for sale.

16:09 UK mortgage growth of two point five billion or one point four percent reflects continued robust demand following the first deadline for stamp duty relief at the end of June. UK unsecured balances grew by three hundred million.

The first increase since the fourth quarter in twenty nineteen. 16:27 We were pleased to see growth in personal loans of two hundred million or two percent and continued growth of credit card balances up a further three percent in the quarter.

In Commercial Banking, gross customer loans fell by one point three billion pounds, reflecting continued repayments on government schemes and targeted sector reductions, mainly across real estate and retail. And this was partially offset by growth in specialized business.

16:58 Average interest earning banking assets, excluding the liquid asset buffer increased by one billion pounds to three hundred and thirty one billion. 17:06 I'd like to now turn to non-interest income on slide fourteen.

Non-interest income, excluding notable items was in line with the second quarter at six sixty seven million. Within this, income from trading and other activities decreased by seven percent to one hundred and thirty seven million.

17:27 Our currencies and capital markets business in NatWest Markets performed in line with expectations, but there was continued weakness in fixed income, as a result of subdued customer activity, and ongoing reshaping of the business. We are taking action to address this performance and expect an improvement into twenty twenty two.

17:49 Fees and commissions in the retail and commercial businesses grew by twenty million pounds to five zero four million. This was driven by higher payments due to increased corporate activity, as well as card and blending fees as consumer activity increased.

18:05 I will move on now to look at costs on slide fifteen. Other expenses, excluding operating lease depreciation and the direct cost base of Ulster were one point five billion for the third quarter.

That's down thirteen million pounds on the third quarter last year, and reflects ongoing cost reduction, partly offset by higher investment spend as expected. This takes our year to date cost savings to four point three percent and we continue to expect to deliver savings of around four percent for the full year.

18:42 Strategic costs in Q3 were seventy seven million pounds bringing the total for the first nine months to four hundred and nine million. 18:50 Turning now to impairments on slide sixteen.

We're reporting a third quarter net impairment release of two forty two million pounds or twenty six basis points of gross customer loans. This brings the overall release for the first nine months to nine forty nine million pounds.

19:11 The Q3 release was driven by improved underlying risk metrics in our performing book and a continued low level of defaults. We still expect a net release for the full year, and the outcome will be affected by three key variables.

First, and foremost is the economic performance versus the weighted economic outlook we use in our scenarios. As you know, we update these each half.

So, the consensus economic outlook as we approach the end of the year will be critical. 19:38 Second, credit performance.

While we see a low level of defaults, no tall trees at the moment, we will monitor credit conditions carefully as COVID support continues to roll off. And third, our post model adjustments.

Our ECL provision at the end of Q3 was four point five billion pounds, down from four point nine billion at Q2. This includes one point one billion of post model adjustments, of which seven twenty nine million relates to economic uncertainty.

20:10 This is down by one hundred and five million in the quarter, reflecting a fifty four million pound reclassification of the PMA held against the Ulster portfolio, we have agreed to sell to Allied Irish Bank, and at the end of the payment holiday support for a number of our customers. 20:28 If the economic and credit conditions continue to trend in line with the third quarter.

There could be some further unwind of this PMA later this year and into twenty twenty two. We are comfortable with our ECL coverage of one point one nine percent.

20:44 Turning now to look at capital and risk weighted assets on slide seventeen. We ended the quarter with a common equity Tier one ratio of eighteen point seven percent on a transitional basis under IFRS nine, up fifty basis points over the second quarter.

This increase reflects a twenty eight basis point increase from attributable profit, net of changes to IFRS nine transitional relief. And a thirty seven basis point benefit due to lower RWAs.

This was partially by the updated dividend accrual and linked pension contribution, which together reduced the ratio by twenty six basis points. 21:25 Our IFRS nine transitional relief reduced by thirteen basis points in the quarter to sixty basis points.

This reflects the release of stage one and stage two expected credit loss, which should previously have been added back to our capital position. 21:40 RWAs fell by three point two billion pounds in the quarter, to one hundred and sixty billion pounds.

This was driven by lower market risk, which decreased by two point nine million pounds, reflecting the two point four billion impact of our updated model following the transition from LIBOR to SONIA. 22:01 There was a small decrease in RWAs of one hundred million from positive pro-cyclicality, which reflects a positive six hundred million in commercial banking offset by a negative in retail banking.

22:13 As we look to the year end, in NatWest markets, we no longer expect to achieve majority of the remaining RWA reduction towards the medium term target of twenty billion pounds this year. However, we now expect group RWAs to be below our previously guided range of one hundred and eighty five billion to one hundred ninety five billion on one January, twenty twenty two.

You will find more details of the various regulatory impact in our appendix. 22:40 Turning to my final side, which shows the strength of our balance sheet.

Our CET1 ratio of eighteen point seven percent is now between four seventy and five seventy basis points above our thirteen percent to fourteen percent target range, and is more than double our maximum distributable amount. 23:02 We continue to expect to operate within a range of thirteen percent to fourteen percent CET1 by full year twenty three.

And you will find more details of the CET1 ratio drivers in our appendix. 23:14 Our UK leverage ratio of five point nine percent is down from six point two percent in the prior quarter and two sixty five basis points above the Bank of England minimum requirements.

23:28 The reduction was driven by the redemption of one of our most expensive U.S. dollar AT1s, following successful issuance during the first half for which we recognized a gain of one hundred and fifty million pounds through reserves in the quarter.

23:43 We have also maintained strong liquidity levels with a high quality liquid asset pool and a stable diverse funding base. Our liquidity coverage ratio increased in the quarter to one hundred and sixty six percent, due to ongoing deposit inflows and headroom above our minimum requirement is now seventy nine billion pounds.

24:06 So, to conclude, we have delivered a strong operating performance in the third quarter, and we are pleased to see the growth in unsecured balances and fee income. We're also making good progress on cost reduction and capital optimization.

24:21 And with that, I'll hand back to Alison.

24:26 Thank you, Katie. So, to sum up before we open up for questions.

We're reporting operating profit of one point one billion pounds, which includes an impairment release of two forty two million as a result of low levels of default. Though we are mindful of the current operating environment, and are monitoring customer activity closely.

We're continuing to make progress in the execution of our strategy and delivery of our three year targets. 24:54 Lending is up three point one percent on an annualized basis.

We're on track to reduce costs by around four percent per annum, and we continue to work towards the CET1 ratio of thirteen percent to fourteen percent with the aim of delivering return on equity of nine percent to ten percent by twenty twenty three. 25:12 We're pleased that our capital strength enables us to continue investing in our digital transformation and to consider other options for creating shareholder value at the same time as committing to total distributions of around two point nine billion for twenty twenty one.

25:29 Thank you very much, and we're happy to take your questions.

25:56 Good morning. Thank you very much for taking the questions.

I've got two questions, please. One on rate sensitivity, and then just one on mortgages and mortgage margins.

So, firstly, on rate sensitivity, on the four fifty million for twenty five basis points, is there any color that you could add around what deposit beat assumptions are behind that number? And then secondly on mortgage margins, so the application margins were one hundred and five basis points in September versus the back book of one point six four, I think kind of historically, the level of around one hundred bps received in twenty nineteen is quite low.

And a few peers like nationwide at the time made comments that similar levels didn't meet their hurdles. So, my questions on mortgage margins are firstly, how do you get comfort that your internal ROE metrics that drive the business really reflect economic reality?

And then secondly, how do you get comfort that mortgage margins and volumes are being balanced in the most optimal way considering price elasticity for example? Thank you.

27:20 Thank you. Katie, do you want to pick up the question on the rate pass through in mortgages?

27:26 Yeah. Sure.

Absolutely. Thanks very much.

So, morning Omar, good to hear you. So, let me try to give you a little bit of color on this one.

So, our economic assumptions, they're based off H1, they are not updated in Q3 in line with our usual process. So, just to remind you, at H1, the yield curve suggested that base rates would remain at ten basis points until Q4 twenty twenty two before rising to fifteen basis points and [rising] [ph] by fifteen basis points to twenty five with a further hike to fifty basis points was expected in Q4 twenty three.

Clearly consensus rate expectations have increased significantly since then. 28:05 So, on the managed margin slide, as you look at it in terms of the Q3, the four forty million for a twenty five basis point shift in the base rate, is in there that's around ninety percent of that number is a sterling based.

This sensitivity is built bottom up incorporating different pass through assumptions for products across all franchises. 28:28 The actual pass through rates will be reviewed and adjusted subject to prevailing market conditions and upcoming capital charges, etcetera, including expectations of the pace and the number of rate increases that we might see.

28:42 Omar, you’ll be a bit disappointed to hear that I'm not going to get into the finer details of the past through rates today, but this is a built-up on the bottom, a number that we're giving you. You can see from the interest rate sensitivity disclosure that the managed margin benefit decreases in year two and three.

This reflects the higher pass-through assumptions that come as we get those higher base rates. 29:05 You can also see from our disclosure the hundred basis points shift in the sterling GDP yield curve would be one point three billion income benefit.

So, the sensitivity incorporates higher pass through rate and is not as simple as a multiplication of the twenty five basis point level. But clearly from this, you can see that any rate rise is very positive for us.

29:27 And then if I go to the mortgage margin question, so you're right again on that slide twelve, September one zero five, the back book at one hundred and sixty four. What I would say is that we continue to meet hurdle with clearly what's happened in that level, and then with the rate increases that you saw coming through from swaps into October, and then we’ve accompanied those with some rate rises as well from our own side.

29:51 So that [indiscernible] comfortable, we're still okay on the internal ROE. We do, do a lot of analysis internally to make sure that we are clear on the elasticity of pricing and then we're comfortable in terms of how we do all the extra charging over of course into this business.

30:05 So, very comfortable it makes sense. And I think it's important also to look at the whole book, and I think that's why I was really trying to demonstrate to you on slide twelve, it’s actually the movement we've seen in pricing.

Obviously, one helps compensate for the other. Overall, we're very comfortable and on this book and that’s seen in the very strong ROE that you see for the retail business as a whole.

30:27 Thank you.

30:28 Thanks Omar.

30:30 Thank you.

30:39 Good morning, Alison. Good morning, Katie.

30:41 Good morning.

30:42 I just have a couple of questions and that’s kind of related, if I think about the, kind of revenue and cost and isolation they do make sense, but when I look at the jaws coming through of the next few years given the cost reductions, they are one of the most ambitious in Europe and I guess given the cost of the inflation we're seeing across the market right now, how confident are you that you can see revenue growth while cutting costs four percent per annum? And then just specifically on, I feel that NatWest Markets is a real kind of [indiscernible] at that point, when you look at the kind of annualized quarterly number, it's kind of annualizing around four hundred million and the guidance I think you talked about being eight hundred to billion in the medium term, how much of that is actual growth expected in kind of rates improvement, currency improvement, capital market improvement?

And how much is just mechanically if you've got any a negative funding track still running in the business from building on core and that just kind of rolling off with just move that kind of four hundred million, up towards eight hundred million? Just interested to know how much do we need to kind of make an assumption on growth and how much is mechanical, that would be very helpful?

31:53 And then just a final question on NatWest Markets. The kind of twenty five billion or the kind of, the day in cutting the risk weighted assets.

I think that was the do with the particular position that you have on your balance and you like to keep on. When that rolls off next year what will be the revenue loss that you would see when that little bit of balance sheet comes off?

Thank you.

32:14 Thank you. Well, let me start and see if I can help you with some of that.

So, on costs, you can see we've got very good trajectory on our cost. As Casey, and I both said, it won't be linear, but we're very confident about the four percent and we see opportunities to continue to reduce costs within the business as we continue to invest in digitization and technology and our customer journeys.

And we also see continued revenue opportunities across different parts of our business. 32:45 You can see the strong performance in mortgages.

You can see our unsecured growth is very strong and coming back. You know, we've doubled the number of new credit card issues as we've launched new products, and you can see the strong growth in our AUMA in our private bank with a billion of assets under management an almost eleven percent year to date growth.

33:11 So, we see continuing growth trajectory from the strength of our franchises and with our continued investment in technology and digitization, which is where eighty percent of our investment is going opportunities across there. So, I think probably that's all I'll say there.

On NatWest Market specifically and just to, sort of talk through that and give you some help on that. 33:37 I mean, let's put, looking at the Q3 performance, I think the capital markets and currency businesses, which are serving our core client base are performing well and remain in line with our expectations.

Obviously, a disappointing performance in our rates businesses we continue to reshape that, but what we expect is that as we continue to grow in our capital markets and currency business and you can see this strong performance in ESG, that will continue to perform very well on the back of our franchise. 34:15 We'll have the benefit from improved funding costs, which will come through, and I think we'll see a stabilization of fixed income revenues into twenty twenty two from the improved trading, the lower funding costs and the completion of the refocus, which is largely on the rates business.

34:31 So, in the medium term, we're comfortable that this business is zero point eight to one billion revenue business, and we would expect that to stay the same and as that restructuring continues. So, I think that's where we remain.

On your specific point on the RWAs, you know the reshaping of the business is going well. We are running a strong syndicated loan pipeline as a result of strong activity across our corporate business and our specialized business and so that's giving us a little bit more RWA, but we'll continue to restructure that business in the right way on the RWA.

So, again trajectory we’re comfortable.

35:16 Thank you very much. Can I ask one quick follow-up?

35:19 Of course.

35:20 I guess, I understand isolation how the cost can come down, and you know NatWest has done a great job over the years of doing that, but the issue has always been the revenues have followed. I guess where I struggle a little bit is, if you're cutting capital and costs in a wholesale business without any kind of mechanical benefit, what really is going to be driving the growth when you are kind of cutting cost and capital, which is a big part of the story on NatWest markets?

35:47 So, on the, you are talking about growth in NatWest Market specifically, is your question?

35:55 Yeah.

35:56 Yeah. So, on NatWest Markets again, you know, if I remind you where we started with NatWest Markets too much of the capital was deployed into our rates business, and therefore, and not focused around, you know our key strategic priorities.

Where that capital is focused and you can see that through the strong performance in the capital markets business and also currency and FX, that business is growing very well. 36:24 So, the capital is being deployed to the areas that are growing and we're shrinking it in our rates business, which was outside.

So, overall, we're very comfortable that the size of the capital deployed to our markets business will be delivered. We'll deliver the sort of zero point eight to one billion revenue business.

And we're also investing in the underlying business as well. So, more digitization, more technology, which drives more efficiency in terms of our productivity and also our revenue growth.

So, I think we're very happy with that balance between investment and where the capital is deployed for growth.

37:03 Very helpful. Thank you very much.

37:04 Thank you.

37:13 Hi, Alvaro.

37:15 Hi Katie, Alison. I think a question one for each and they are both follow ups.

First on the managed margin rate sensitivity, I know you'd want to be drawn into the exact deposit [indiscernible], but the way I'm thinking about it and the question is I'm thinking – is it I’m thinking about it correctly? If I take your product hedge hundred and forty six billion disclosed in the first half, and deducted from your deposits, from your total deposits you get to three twenty billion or so remaining sort of unhedged deposits, which is basically twenty five basis points and [fifty seven percent] [ph] gets you to four hundred million, which sounds very, very familiar, very similar to the figure you've got in, in that slide in Page twelve.

Am I missing that some of those deposits might be tracking base rate or is it roughly the very sort of, is it not that simple? 38:23 That's a first question.

And the other follow-up is on the cost and inflation. Alison I heard your reply, but maybe you can give a bit more color as to why you're so confident around the four percent in subsequent years because presumably when you laid out the plan, sort of inflation, you wouldn’t have expected this kind of inflation?

Is it more about the fact that you're reducing the headcount that you’re not, the inflation pressures are less intense given the reduction of the headcount? Is it the fact that you, as a good manager you were building a buffer, you've got sort of efficiency plans to offset it or you didn't have Ireland in there, just a bit more color that can help us gain confidence or reassure us on that target?

Thank you.

39:16 Thanks. So, I’ll look on the cost and then Katie can pick up the managed margin.

As you can see, in our quarterly results this quarter, the continuing strong trajectory on [indiscernible] that's very much focused on largely our customer journeys as we create benefits from the investment that we're making in our customer journeys, and as we simplify those and more use of automation and digitization and the subsequent impacts on that. 39:47 I think as, you know we will afford, obviously, we're mindful of the inflationary situation that we may be looking at, but as I look at our customer journeys, as I look at the return on the investment that we're making, we still think there is efficiency that can be delivered across the business from that and if I look at the benefits that we get from our customer journeys that reduced throughput and the use of automation that does help us.

40:18 I'm not going to comment as I never do on FTE and headcount going forward, but clearly, that is an element of how we'll drive costs out going forward through that benefit of the investment that we're making. Katie, managed version?

40:33 Yeah. Alvaro, look, it's not a bad proxy.

I'd say it’s probably not quite as simple as that as you would expect. You need to consider the asset and the liability side.

So, if I think a little bit in terms of one deposits, almost all of our retail and corporate deposits are managed rates. We do not have an automatic price change due to the external reference rate change.

So, if you look at retail, one hundred eighty six billion at Q3, about around forty percent of that is current accounts, sixty percent is [savings accounts] [ph] with an average cost of five basis points, and no explicit link to that external [indiscernible]. 41:06 As said in that assumption we've given you is, we've obviously gone through product by product and saying, we'd move this, we’d move that.

The exact moves will depend a little bit on the environment in that moment. And then you see the same sort of dynamic in the commercial group where there is minimal balance that’s linked to that external reference rate.

41:23 So, you have a bit of flexibility. But then considering what will happen on the asset side, in terms of the lending.

So, retail bank, ninety percent fixed book. So, you have the impact because of the SVR immediately and that's less than ten percent of the book.

In commercial bank, there is a bit more linking to reference rates. So, you'd see that come through much more quickly.

But you can say, your proxy is not a bad one, inevitably as you can imagine the devil on this one is in the detail.

41:52 That's great. Thank you very much.

41:54 Thanks Alvaro.

42:07 Good morning, I'm going to slug a dead horse I’m afraid as we come for the late sensitivity. I guess what intrigued me when you look at your sensitivity and you compare it to peers is the peers has a much bigger multiplier affecting it in the [indiscernible]?

To you in your sensitivity it's almost relatively static as about time period. Now, one other thing you do provide which you pay down, which is quite helpful and is the split between the structural hedge and the managed margin and what's quite [indiscernible] the decline in the managed margin over time, whereas when you gave this guidance for the full year in the twenty twenty sensitivity, you didn't see that same decline.

So, I'd love a bit more color on what's driving the decline in the managed margins in year one, year two, year three is clearly the pass through and the churn that you will be on the time deposit book? And you’re also not assuming static balances, you are assuming dynamic balances within your sensitivity, so just a bit more color there on the sensitivity and assets.

43:20 My other one on NatWest Markets as well, you still reiterated the zero point eight to one billion revenue guidance, I think, can you just confirm that the breakeven guidance of that business is still in force as well in the medium term?

43:37 So, I plunge myself in there. Thanks morning, morning, Andrew.

It's interesting. I smiled when you said it's relatively static.

And I guess the headline level of the four fifty, four nine two and five zero two, it's relatively static. Though, I smile sometimes with the pain you give me when I move my fifty million on one line.

So, I'm delighted to get the feedback that that is seen as static movement. 44:02 The details – the devil's absolutely in the managed margin.

This is a disclosure we gave you in H1. What we talked about in H1 and you got to remember where your base sensitivity was?

It was ten basis points going through, and this is a twenty five basis point increase on that. And then in the outer year, it was in a further, it was a fifteen [indiscernible] and then a further twenty five basis points.

So, you get the change in that movement. So, what you can see from there is, clearly the beta, the pass through is lower in the order years and higher in the later years.

You know, obviously the structural hedge continues to strengthen. 44:36 If you cast your mind back to year end, when we had this slide here, what we were all talking about, actually it was going into negative territory.

So, therefore, you had a market curve that was assuming a negative journey, and so therefore the increase in the later years was in relation to coming out of negative. 44:55 So, therefore, the pass through assumption was probably lower, if you could assume in that case.

So that's why you see this kind of convert. So, it's rather going – we're now going to a rising rate whereas there we were actually going into a falling rate.

And you remember that we also floored some of them zero because they would be flooring happening at that point. 45:12 So, you've got to look at the disclosure and think what was in their assumptions at that time and how does the shape change?

So that's what's kind of driving you there. And probably won’t comment on how others have done their sensitivity.

We've done ours bottom-up product by product to try to give you the kind of the best, if this was to happen now, this is what would happen in terms of the movement going forward on that.

45:37 And on your NatWest Markets questions, yes, we remain comfortable with the medium term guidance we've given you on that and we're pleased with the refocusing and the restructuring of that business, and obviously, we're making good progress in October. NatWest Markets paid a further two fifty million dividend bringing the total year to date to a billion, but our guidance remains the same in terms of our confidence on the medium-term outlets.

46:05 Sorry, Andrew, I didn't answer your question on [indiscernible] balances, they are static. So, we kind of leave them flat from this point, there’s obviously movements in balances with movements as well, sorry, I missed off.

46:18 Thank you.

46:18 Thanks, Andrew.

46:30 Hey, good morning both. I’ve got a couple of questions on the hedge, I’m afraid.

First question is, could you just clarify what you’ve done on the scale of the hedge in the third quarter and what the remaining capacity is to build the hedge any further from here? Maybe we'll deal with that one first before I come with the second on the hedge, if that’s okay?

46:53 Katie?

46:54 Sure. Absolutely.

That's one for me. So, if I look at the hedge, we added on seven billion in the first quarter.

So, it's now one hundred and ninety seven billion and that we believe that we've got over the next twelve months, assuming balances do not grow, and I think that's important. It would be fifteen billion growth that we would do over the next twelve months.

I'm very conscious about the same things I said in Q1 and then I added on seven billion in the next quarter [Technical Difficulty] balances grew.

47:23 Okay. That's clear.

Thanks for that. Second question is, I think I heard you correctly in your comments Katie where you said that the contribution from the hedge in twenty twenty two would be broadly neutral from twenty twenty one, is that correct?

Did I hear that right?

47:42 I think broadly neutral may even slip into slight positive, but I would think about it in that level. I think it really depends of what kind of happens on rates in the next were this movement kind of settles in terms of that, but yes, we'd expect this to be broadly neutral.

47:56 I mean, I suppose coming into twenty twenty one, the hedge revenue was higher than where it is ending. So that leaves scope maybe some incremental quarter on quarter growth in hedging income as we move through twenty twenty two, but I'm still slightly surprised that you're not more positive on the potential outlook for the hedge because if I go back five years, the five years swap rate in twenty seventeen was sixty five basis points on average, and we’re now at hundred.

So, all those hedged you had pre-pandemic are presumably, certainly the five year part of it rolling onto to high yields through twenty twenty two, but maybe more importantly than that, you've loaded on a huge amount of net new hedge over the course of the last twelve to eighteen months, and a lot of it was done, I think at the sort of one year part of the curve to be [indiscernible]. And early this year, that the one year part of the curve was next to nothing.

And those will be rolling out on to the five year part of the curve, which is now around about a percentage point. I’m just slightly surprised that the comments on the outlook, the hedge income are not more positive than you seem to be pointing to, interested in your view on that?

49:12 So, Jonathan we'll talk as ever more about twenty two in February. So, let's see what happens in the next little while.

I think the important thing is to remember it's an average life of two point eight years. So, we rule about nine billion a quarter in terms of what’s going to coming off.

We added seven billion on there. 49:30 The impact in twenty one was circa two fifty million, which we've down from early in the year, but we expected it to be three hundred million down.

So, it's definitely improved quite a bit, and we've gone from that down compared to prior year to flat, sorry, neutral to slightly positive into 2022. 49:47 I think what I'm really interested in seeing is this movement that we've seen in the last literally only in the last sort of six seven weeks in terms of the particular spike.

Let's see how let's see how that balances out and we'll take it from there a bit. I think neutral to slightly positive feels the right balance sitting here today.

50:06 But I am right just, sorry, just to finish on this point. I am right in saying that for instance, the thirty two billion of net new hedges that we'll put on in the twelve months to June, a lot of those were put on a shorter duration rates ensure there’s no cliff hedge in five years.

As I say, back then that was a short duration. Yields was very, very low, but directionally that's correct isn’t it.

[indiscernible].

50:35 That is [indiscernible].

50:38 Okay, great. Thanks for all that.

50:40 Lovely. Thanks, Jonathan.

50:50 Hi, good morning. Thanks for taking the questions.

And the first one was on commercial [indiscernible] volume the margin perspective, a bit more color. So, NIM side on the commercial division, I think by about eleven basis points this quarter.

I think you said captures having distortion there. I don't think you can say that, sort fully explains it.

And then as we look forward, excluding anything from rates, how we should think about the dynamics of government guaranteed lending volumes to new lending in terms of whether that's margin accretive or not? And then also whether this de-risking that you're doing in commercial does that have a negative new impact at all?

Any comments there and then more broadly how you're thinking about growth in the commercial division as you still have those headwinds, but then hopefully, areas like invoice finance etcetera start to come through? 51:38 And then the second question, just a point of clarification really on strategic costs.

So, you're tracking quite a bit below the full year guidance. So, on share should be expect quite a big step up in the fourth quarter there?

Thank you.

51:48 Great. Thank you.

Well, on commercial, let me talk a little bit about that and particularly on what we're seeing in the government guaranteed lending. So, you can see, we gave you some detail on how those loans are performing, so we've had one point one billion of those bounce back loans repaid.

The environment continues to remain benign; we think around thirty percent of the balances from the bounce back loans are still sitting in current accounts of businesses and around ninety percent of them are repaying on time or ahead of schedule. 52:24 Clearly, at the moment demand for new lending, particularly at the small end, it's a difference to in the mid and larger end and specialized end of our businesses, but at the small end demand is relatively muted and we would expect that growth to and lending to come back over coming quarters as the economy continues to recover and particularly as all the support schemes taper.

52:49 Any new lending that comes on will be more accretive than the bounce back loans, which obviously are at lower rates because they benefit from the government guarantee. So, I think, as you look for the degree of commercial lending, growth is going to depend on a number of things.

53:09 Firstly, the degree and speed of the economic recovery and the result in increasing working capital requirements. We are seeing good signs of that with invoice financing and working capital lines increasingly being used and we would expect that to continue.

I think business confidence is obviously a key driver, and that will be a driver of investment spend, and then this continuing behavior of customers paying down the government scheme. 53:37 So, I think that's the dynamic between the government lending and the margin accretive.

I think the larger end of commercial, we're seeing much higher levels of activity, particularly in specialized finance infrastructure and large mid-corporates. Those tend to be lower RWAs, so returns again remain sort of positive on that side.

54:03 So, I think that's how I would think about it from that perspective. Strategic costs, Katie.

54:09 Can I just finish off on the NIM point to remember on the tax point of it. So, if I can cast your mind back to a Q2 guide, when we had the enactment of the corporation tax change that came through and so that required us to change the tax treatment in our operating leases that we do with the customer base.

So, we had a benefit that came through on that, then what you've seen is the reversal of that as it’s come through this quarter. 54:37 So, NIM looks down when you take that tax out, it's flat.

So, there's nothing in there that we're concerned about.

54:45 And strategic costs?

54:47 Alison, I can’t remember the strategic cost question, could you remind me what it was? I’m terribly sorry.

54:51 What are we expecting [indiscernible]?

54:52 Sorry. Thank you.

Thank you very much. If you look back over strategic costs for the last number of years, I got the team actually to run it for me the other day, just completely confirm I was comfortable and this is that Q4 is always a bigger strategic cost number that comes through as we kind of push towards the end of the year to get decisions made on property and things like that.

55:13 So, what you can see is there's always a little bit of a bump up in the air. So, not changing our guidance on strike costs as we know the Q4 is often – it's a month where you get the last things done and pull through.

So, it’s often a higher month and that's looking over the last number of years that's exactly what's happened. So, I think just stick with the guidance as we got just now.

Thanks, Alison.

55:32 Thanks. And thanks very much for the color on commercial.

And if could just quickly push Alison perhaps on appreciating really difficult, there's lots of puts and takes there, but in terms of commercial whether you expect to see balance growth from here or is it probably a bit too soon for that, taking some headwinds?

55:47 Yeah. No.

No. I'm happy to cover.

I mean, look, I think we really expect to demand to start coming back. I think one of the dynamic and we can see the signs of that demand businesses are trading and we can see those indicators in working capital and invoice financing.

There is still a lot of liquidity. So, average revolving credit facilities are, you know joins around nineteen percent, so there's still a lot of liquidity, but we are seeing demand coming back.

56:18 I think the big question, which is, you know, the one you're pushing on is, is business confidence, that's a big dynamic and I think at the smaller end, the SME end they are the ones who’ve absorbed a lot of the lending on the government scheme. So, they're more indebted and this is confidence, it's certainly affected by some of the short term issues, but we are expecting commercial lending demand to come back at them.

56:43 At the moment, it's a demand issue. We've got the capacity to lend and we are lending at the upper end and in specialized areas, you know and across the business.

So, I would expect that demand to come back subject to confidence levels remaining, you know, not too much knocked by things like supply chain issues.

57:13 Good morning, both. Thanks for taking my questions.

One on targets and one on [indiscernible]. So, on your target, if I think back to your twenty twenty three guidance you gave a full year twenty results, you would say nine and a half [indiscernible] twenty twenty three and that was on a zero percent base rate.

And if we look at the curve now, it's probably going to be one hundred bps, if that's right, expect it might change again, but that's where the rates market is. So, if I take a look at sensitivity, post tax, it's about nine hundred million.

And I think your guidance back in February implied and that's income of two point six, two point seven billion, so it’s quite a big uplift that we're talking about here proportionately for you in terms of where the range market is, that would be implying a RoTE of maybe twelve percent to thirteen percent. So, what is it that's offsetting that do you think?

Are you going to be revisiting target, should we be thinking about something in low double digits now given where the curve is? I mean, NatWest Markets has obviously been a problem area in recent orders, but I know you're reiterating the medium-term revenue guidance, it doesn't feel like that's a big change in you're thinking.

What is it, if anything that's offsetting that big change in the rates outlook please, when we're thinking about your medium term RoTE target? 58:38 And then of the bank, I understand you necessarily want to comment too much on ongoing transactions, but given that you’ve moved the AIB book to hold for sale now and that's at value where you think you're going to clear that transaction, including any cost, so could you please guide on the expected capital impact of that transaction?

I know you said, capital accretive, but I presumably now have a number of that transaction given you reclassified it. 59:05 And on a related point, given the progress you're making with the Ulster Bank transactions, looking at your current consensus, Ulster Bank direct cost of two hundred plus million in twenty twenty three, how should we be thinking about the number?

I would have thought that the direct costs have dropped away rather than more sharply than that given the transactions are likely to close, but may be I’m misunderstanding the dynamics there? Thank you.

59:33 Thanks, Chris. So, I think I'm going to disappoint you on my answer.

I'm afraid, just from the perspective of, I mean, clearly we're happy with the progress we're making. I've always said it's going to be a phased withdrawal over a number of years, but progress is being made and yes, absolutely moving those assets gives you comfort in terms of how we're doing.

59:59 And as we complete those transactions, we will look to update you, we'll probably update you in our full year results in February around the costs and the disposals. We do expect it to be capital accretive over the multi-year period that we've always talked about.

60:17 On your specific point on costs, I mean clearly, costs are going to – cost reduction will lag because we need to support the exits of our customers as we migrate those and we complete the sales, but we'll update you in February, but I guess I would just reaffirm. We're positive about the progress.

We're pleased with the direction of travel on the transactions. We're remain confident this is a capital accretive, and it will be faced and we'll give you some more specific guidance in February as we conclude some of these elements.

And obviously, we'll keep you updated on other transaction as and when they happen. 60:56 Katie do you want to take the target [Multiple Speakers]?

Yeah.

60:58 Absolutely. So, I mean, Chris, probably a bit more frustrating set of answers for you.

Look, as I look at twenty twenty three guidance, clearly rates are very helpful to us. You can see where that is and let so see where the excitement of consensus lands.

I think by the time we get to February; you know we’ll certainly will look at it at that stage, but in terms of that with our cautious optimism, I think, that that's good. 61:21 If there were offsets, I think the mortgage completion, which we've talked about, you can see where those rates are, just now, and little bit about some of the muted commercial loan growth, that we feel we’re at the pivot point of that coming kind of back on.

But certainly, you know where you can, sorry, optimistic as we move forward from here, and this rates increase is a very different picture from when we announced them. So, that will certainly be helpful.

And we'll talk more about it in twenty twenty three. Sorry, no in twenty twenty three, we will talk about it February Chris forgive me.

61:50 Okay. Thanks.

61:51 Thanks, Chris.

61:59 Hi, Aman.

62:01 Good morning, Katie. Good morning, Alison.

Couple of questions if I might. Can I come back to the net interest margin, please.

So, thanks very much for the disclosure around the application spread. It looks like you've got about sixty basis points of refinancing pressure to digest on a book versus one hundred and eighty odd billion pounds, if I have to run the math on that, that does look like that could offset quite a significant chunk if you deposit be it a rate hike benefit?

I guess coupled with the comment that the structural hedges is not necessarily a tailwind, could I trouble you for your view on, do you think net interest margin can actually rise from here given the various moving parts that you can see on the horizon? 62:52 And second would be on NatWest Markets, it's interested for a trading update actually, how are conditions through October, how is that performing relative to Q3 that would be really helpful?

And then I guess just a final one, I guess, we've kind of proved costs a fair amount. I do know that your current cost target at the moment is to reduce the cost base four percent per annum ex-Ulster, should we wait until February for you to kind of merge those kind of two comments together?

I mean, is it a case that given the inflationary pressure that we're expecting four percent is probably the best that we can expect or do you think Ulster can be incremental to your cost reduction target? Thank you.

63:37 Thank you. So, on costs, yes.

I suggest you wait till February to address that in terms of Ulster position. On NatWest Markets, I mean, in terms of how it's performing, you know, I think we're still seeing a very strong performance in our currencies and capital markets.

Business, I think we've in terms of October, there's no real change to the trends we’re seeing in Q3. So, continued weakness in the fixed income performance in Q4 as we finish the reshaping of that business.

64:18 I think that's what I would say, but both our currencies capital markets are performing well. Our sort of new pipeline in terms of syndicated lending and corporate remains very strong.

So, that is continuing to [keep full] [ph], but you'll still see weakness in the fixed income business. NIM, Katie?

64:40 NIM, sure, absolutely. So, as we look at it, and I think all you've got to look at is not just the point in time, but obviously on that graph as you’ve got on page twelve, as you've got the higher rates that we wrote, they will continue to kind of flow through as well.

But certainly, this recent fall down to the one zero five is significant. 65:04 It's the way that we can offset that, a couple of things.

And one is obviously continued focus on volume, which we've been good in the past of volume and margin kind of offsetting with a nice progress in the [bank delay] [ph], which will help, but I do think as I look at mortgage income, that the level of rate where that is, is hard, which is why you've seen us and others do a number of price increases in the last couple of weeks. 65:26 We did another one yesterday to offset it.

Clearly the strategic hedge also will provide some most particularly you can see that it does grow into year two and year three, and obviously the volume will go and that will help as we go forward as well. 65:41 Other things is I look at margin for the whole group, we’re pleased to see the growth that we've seen in the unsecured space.

I bought across personal loans in this quarter and now for the second quarter on a row in terms of commercial. 65:55 And then obviously in commercial, sorry, the second one in a quarter, forgive me in terms of credit cards.

And then in commercial, as we start to see the kind of the growth coming back there, we do hope there will be some benefit as we move forward as well. 66:09 And then you heard me talk about the, kind of the AT1 reclassification from debt in Q3.

It won't repeat. I do think among the mortgage spread clearly that that does have an impact as we go through.

We need to focus on the offset of that through the price rise and to make sure that we add volume. And as I say every call, the NIM is really important, what the NII is generating and the ROE for the business, which continues to be strong, is also very important as well, so don't get too focused on that one metric.

Thanks, Aman. 66:41 Oh, sorry, you also asked on February cost reduction.

We will talk about it more in February as we do that. Thank you.

Alison has obviously covered that already. She’s nodding at me across the table, forgive me.

Thank you, Aman.

66:53 Thank you.

67:05 Hey, Martin.

67:07 Hi, Katie. Hi, Alison.

Just one question on capital please. I mean the capital print today is better than expected in terms of core Tier one and also the new some of the headwinds you have previously guided for seem to have shrunk a little bit, I guess partly due to obviously the strong impairment trend today.

I was just wondering how should we interpret the stronger capital print today? Does this mean, there's increased scope for capital return or do you see some of these changes and drivers here as more temporary in terms of nature?

And just in terms of next key dates, I think in the presentation that you stated that the whole market program is expected to complete early in 1Q twenty twenty two, could it be a scenario that there is an update on this potentially ahead of full year results, if that's I mean the one you frequently assess scope or should we really wait here for FY twenty twenty one for any update? Thank you.

68:09 Great. Thank you.

Well, look, I mean, obviously, we're very pleased with the capital bills we've shaped to capital generative business. So, fifty basis points up, you've got very clear guidance around, you know our –and very clear that my intention is to return capital to shareholders.

68:30 We're investing the businesses. Growing in the areas that we have targeted to strategically grow.

So, we're pleased with performance and continuing to generate capital. So, I think that should be very positive.

Obviously, we've giving you guidance on the billion pounds that we want to distribute as a minimum, as well as any other opportunities that may arise. So, I think we're pleased with the capital generative nature of our business, and that's positive.

69:03 In terms of share buyback, we'll talk about that in February and we see as an important tool that we have at our disposal.

69:16 Thank you very much.

69:23 Great. Thank you very much.

Well, look, thank you for your questions and time today. I mean, obviously, we think this is a good performance, strong delivery operating profit one point one billion, capital benefit business and growing in the key areas that we've targeted in mortgages in unsecured, you know strong performance in our AUM and strong commitments in terms of the targets that we set out.

69:55 So, pleased with the performance and good to see the resilience in the underlying customer base as we move forward. So, thank you again for your time, and look forward to catching up with all of you soon.

Thanks very much.