Earnings Call: Q1 2021

Apr 29, 2021

Good morning, and thank you for joining us today. As this is a quarterly update, we'll be relatively brief this morning. I'll cover progress on our performance and strategy before handing over to Katie to take you through the financial performance in more detail. We'll then open it up for questions. So let me begin with the headlines on Slide 3. We delivered a profitable performance in the Q1 as we continue to support our customers to advance our strategy and to accelerate our digital transformation in response to changing customer needs. We are reporting operating profit before impairments of GBP 844,000,000 and have made an impairment release of GBP 102,000,000 during the quarter as defaults continue to remain low with little change in stage migration. Taking this release into account, we delivered an operating profit of ZAR946 1,000,000 and an attributable profit of £620,000,000 up from £288,000,000 for the same period last year. We are seeing the potential for a more rapid recovery taking shape. However, at this point, our economic assumptions remain unchanged, and we will review them at the half year. Net lending grew $2,200,000,000 driven mainly by mortgage growth. We reduced costs by CHF72 1,000,000 year on year ahead of our targeted reduction rate, and we continue to benefit from a strong capital position with a CET1 ratio of 18.2 percent after a ZAR1.1 billion directed buyback from the government of almost 5% of our share capital, the maximum amount possible in any given year. This capital strength continues to give us flexibility to navigate ongoing uncertainty, to consider options for creating shareholder value and to return capital to shareholders. As you know, we intend to maintain a payout ratio of 40% of ordinary shares with distributions of at least $800,000,000 each year up to and including 2023. The purpose led strategy we set out last year shown on Slide 4 is designed to drive long term sustainable shareholder returns by serving customers across their lifetime, powering the organization through innovation and partnerships, simplifying and digitizing the business and maximizing capital efficiency. Our purpose is also exemplified by 3 focus areas: enterprise, to financial capability and climate change, all of which strengthen our ability to drive returns. I'm not proposing to cover Gisarea is in detail today, but I do want to mention our €1,000,000,000 affordable housing social bond, the first of its kind issued by any U. K. Bank. This is the 3rd issuance under our green, social and sustainability bond framework. Our first social bond in 2019 has helped to create almost 7,000 jobs to date. And our first green bond issued last year has allocated proceeds to renewable energy projects around the U. K, supporting customers' transition to a low carbon economy. So let me move on now to how we are serving customers to generate growth on Slide 5. It is too early to comment on the impact of this month's easing of lockdown, but credit and debit card activity has already been trending towards more normal levels. Spending on debit cards is now above levels in March last year before we saw any impact from COVID-nineteen, whilst credit card spending is approaching those levels. We're also seeing recovering demand for personal loans and new cards. Across the Retail and Commercial businesses, net lending grew by ZAR2.2 billion during the quarter, excluding government schemes. And we continue to see strong deposit growth of ZAR12.1 billion, bringing the total to ZAR 415 1,000,000,000. In the Retail Bank, gross new mortgage lending was resilient at ZAR 9,600,000,000 with healthy margins as we maintain strong pricing discipline. Commercial Banking Lending has been more muted as businesses take a cautious approach during ongoing uncertainty and continue to deleverage. Demand for government support schemes continues to taper, and the majority of those who ask for payment holidays have now returned to normal payments in both retail and commercial banking. 2 new government schemes were introduced in early April, Pay as You Grow and the Recovery Loan Scheme. Pay as you grow enables businesses which have started repaying their bounce back loans to request an extension of their term from 6 to 10 years, take a repayment holiday or pay interest only for 6 months. We've received around 14,000 applications to date, and the majority of which are to extend the term of the loan. But this number could increase as we have recently contacted over 100,000 customer accounts to advise it is 60 days or less to the 1st repayment date. On the recovery loan scheme, we received around 3,000 applications in the 1st week, although demand has dropped since then to between 100 150 applications a day. I want to move on now to talk about how we are using innovation and, in particular, digital transformation on Slide 6. The acceleration of digital adoption that we saw last year has continued during the quarter. 61% of our retail customers now use only digital means to interact with us, up from 50% a year ago. This means people are able to access our services at any time of day from any place they want, making their lives easier and more convenient. In Commercial Banking, 68% of sales are now via digital channels. And use of our chatbot, Quora, has grown 58% year on year with over 40% of interactions completed without human intervention. We're also using video banking for an average of 13,000 interactions a week, up from around 7,000 a week in the Q4 last here. This enables us to deliver personalized customer service efficiently despite the pandemic and without the need for customers to travel. These are all good examples of how we are creating a relationship bank for a digital world. We are also actively managing capital to drive returns, which I will cover on Slide 7. As I mentioned earlier, in March, we announced a directed buyback from the government of almost 5% of share capital for $1,100,000,000 the maximum amount possible in any given year. We've also made strategic choices in relation to capital in NatWest Markets and to bank. In NatWest Markets, we're ahead of plan as we reduce risk rated assets, which are now 26,500,000,000 and we expect to achieve the majority of the remaining RWA reduction by the end of the year. On Ulster The bank negotiations are ongoing with AIIB about the performing commercial loan book as well as with other third parties about retail and SME assets, liabilities and operations. We will update you in due course when we have anything new to report. In addition, we are actively managing portfolios and using synthetic trades across the business to reduce capital consumption and to manage risk. For example, in Commercial Banking, active capital management has resulted in a reduction in RWAs of $600,000,000 in the quarter. We also optimized our regulatory capital with ongoing liability management exercises, and we repurchased 1.6 of Tier 1 and Tier 2 secondurities during the quarter. So before I hand over to Katie, let me update you on Slide 8 on the progress we're making towards the targets we announced in February. We are pleased to report that our progress is on track, but of course, we do not expect this to be linear on a quarterly basis. Net lending of ZAR2.2 billion in the quarter equates to annualized lending growth of 3%. Costs fell by $72,000,000 or 4.5 percent, ahead of our targeted reduction rate of about 4% per annum. And our CET1 ratio of 18.2% It's down from 18.5% at the year end as we move towards our target ratio of 13% to 14% by 2023. Our intention remains to return capital to shareholders or pursue other options that create value as we move towards that target. Though bear in mind we have yet to experience any procyclicality. And with that, I will hand over to Katie to take you through our performance in more detail. Thank you, Alison, and good morning, everyone. I will start with the group income statement, taking the Q4 as a comparator. Total income of £2,700,000,000 was up 4.9% on the 4th quarter. Within this, Net interest income was down 2% to £1,900,000,000 and non interest income was up 29% to £728,000,000 This increase reflects seasonally higher trading income and higher lending volumes. Operating expenses fell 22% to £1,800,000,000 driven by the absence of the annual U. K. Bank levy, lower strategic and conduct costs and, of course, ongoing cost reduction. This means we are reporting an operating profit before impairments of GBP 844,000,000 up from GBP 194,000,000 in the 4th quarter. The net impairment release for the Q1 of £102,000,000 represents 11 basis points of gross customer loans and compares to a charge of £130,000,000 or 14 basis points in the 4th quarter. This release reflects improvements in underlying credit metrics. Taking all of this together, we reported an operating profit before tax of GBP 946,000,000 And attributable profit to ordinary shareholders was £620,000,000 equivalent to a return on tangible equity of 7.9%. I'll move on now to net interest income on Slide 11. Banking net interest income for the Q1 It was £35,000,000 lower than the 4th, as strong mortgage growth and improved mortgage margins were offset by lower commercial balances and 2 less days in the quarter. Turning to bank net interest margin, this reduced by 2 basis points to 164 basis points. The lower yield curve accounted for a 3 basis point decline due to the structural hedge, which was partially offset by 1 basis point increase for mix and pricing as a result of stronger mortgage margins. As you can see, liquidity had no impact as our TFSME repayment was offset by an increase in deposits. Turning to the drivers of net interest margin on Slide 12. Asset yields and funding costs were stable in the quarter after period of decline following base rate cuts in March last year. On the asset or lending side, gross yield for the group was broadly stable at 184 basis points despite a slight reduction in the retail banking loan yields as a result of lower unsecured balances. On the liability or deposit side, group funding costs were broadly stable at 49 basis points, with a further small reduction in retail deposit costs to 8 basis points. There are 3 main factors to consider in relation to net interest margin for the 2nd quarter. 1st, Ongoing pressure from the structural hedge. We have increased the hedge by £8,000,000,000 in the quarter due to increased deposit growth in line with our policy. If deposits stay broadly stable, we would expect to add a further £15,000,000,000 over the next 12 months. Taking into account the current yield curve and our expectations for the size of the hedge over 2021, We now expect a reduction of income of around GBP 250,000,000 from our hedge portfolio compared to 2020. This will not be completely linear and equates to around 3 basis points per quarter. 2nd, a change in liquidity, which, as you know, affects average interest earning assets and therefore NIM. The third factor is mix and pricing. In the Q1, mortgage margins on the front book increased from 161 to 179 basis points. This is above the back book, which improved 12 basis points to 159. These improvements include around 5 basis points from our transition to SONIA from LIBOR at the beginning of the year, which has no impact on group income, but does affect individual product lines. Average application margins in the Q1 were 180 basis points. However, these reduced towards the end of the quarter due to higher swap rates and market pricing. And our March margin was around 165 basis points, slightly above the back book. Mix is also affected by demand for higher margin unsecured and corporate lending, which will ultimately depend on the shape of economic recovery. Moving on now to look at the volumes on Slide 13. Growth banking loans were stable in the first Quarter at £363,000,000,000 Mortgage growth of £2,700,000,000 was 1.4%, Reflects continued strong demand in the UK post the stamp duty extension. Our mortgage flow share in the Q1 was 13%, Above our stock share, which increased from 10.9% to 11%. Gross new lending in the quarter was £9,600,000,000 Unsecured balances declined in the Q1 across both personal advances and credit cards. Demand for government schemes also slowed, but this still accounted for £600,000,000 of additional lending. However, this was offset by repayments from Commercial Banking customers, including £300,000,000 of RCF repayments and utilization stable at 22%. Average interest earning banking assets grew by £7,000,000,000 or 1% driven by mortgages. I'd like now to turn to non interest income on Slide 14. Non interest income, excluding notable items, was up 15% on the 4th Quarter to £742,000,000 Within this, income from trading activities increased 33% to £162,000,000 This reflects a stronger performance in fixed income with higher levels of customer activity, though it is clearly lower than the Q1 of 2020, given the volatility we experienced last year. Moving now to fees and commissions for the Retail and Commercial Bank, which decreased 4.3% from the 4th quarter to £470,000,000 This was driven by lower card and lending fees as a result of lockdown. The outlook for fees and commissions is uncertain given the ongoing restrictions due to COVID-nineteen across Europe, but we expect them to grow as the economy recovers. So to round off my comments on income. There is no change to our guidance from February. We continue to expect income, excluding notable items, to be slightly lower this year than 2020 due to 2 main headwinds: The impact of the structural hedge and the lower income in NatWest Markets as we refocus the business to better serve corporate and institutional customers. I will now move on to look at costs on Slide 15. Other expenses, excluding operating lease depreciation And the direct cost base of Ulster were $1,500,000,000 for the Q1. That's $72,000,000 or 4.5% lower than the Q1 last year. Naturally, these cost reductions will not be linear, and we continue to expect savings of around 4% for the full year. Strategic costs in Q1 were £160,000,000 and we expect these to be around £800,000,000 for the full year. Turning now to impairments on Slide 16. We are reporting a net impairment release of £102,000,000 or 11 basis points of gross customer loans in the Q1. This compares to a charge of 14 basis points in the 4th quarter. The release was driven by a continuing low level of defaults in the commercial book and Stage 3 defaults broadly in line with our historical experience in the Retail Bank. Coupled with further positive migration of Stage 2 loans back to Stage 1, following improvements in the underlying credit metrics. The economic assumptions we presented in February are unchanged, and we include these in the slide appendix. We will update these in line with our usual practice in Q2. Our post model adjustments for economic uncertainty are also broadly stable over Q4. We have not changed our guidance for impairments for 2021, and we do expect these to be at or below our cycle range of 30 to 40 basis points. Though clearly, if economic outlook continues to be favorable, then we would be below 30 basis points. Turning now to our credit risk profile on Slide 17. There has been some positive migration during the quarter, reflecting improving credit metrics as government support measures continue and customers build healthy cash balances. 80% of our loan book is in Stage 1, up from 77% at year end, reflecting migration of Stage 2 loans back to Stage 1, in particular in the Retail Bank. Over 98% of loans are in Stage 1 or Stage 2. Stage 3 loans are slightly down to CHF6.1 billion or 1.6 percent of gross loans. ECL coverage of 1.6% is down slightly due to write offs with Stage 3 coverage of 39%. As you know, some of our wholesale loans are in sectors that we monitor particularly closely. These amounted to £27,000,000,000 or 7 percent of gross loans. Similar to the trended group, Stage 3 gross loans in these sectors was down slightly at around £700,000,000 and we remain comfortable with coverage at 47%. Turning now to look at capital and risk weighted assets on Slide 18. We ended the quarter with a common equity Tier 1 ratio of 18.2 percent on a transitional basis under IFRS nine, which is 30 basis points lower than Q4. The CHF 1,100,000,000 directed buyback and associated pension contributions together accounted for an impact of 72 basis points And an accrual of CHF200 1,000,000 for the 2021 dividend reduced the ratio by a further 11 basis points. This was largely offset by a 48 basis point benefit due to lower RWAs and a further 31 basis points from attributable profit. The impairment release had negligible impact on our CET1 ratio as this relates to Stage 1 and Stage 2 expected credit loss that is currently added back to our capital position in line with the IFRS 9 transitional rules. RWAs decreased £5,600,000,000 in Q1, including a £1,300,000,000 benefit from currency exchange rates and a £900,000,000 benefit from our annual and we'll be able to take a look at the operational risk recalibration exercise. Credit risk reduction of GBP 4,800,000,000 was driven by lower commercial and unsecured retail balances as well as a benefit of £1,000,000,000 from post cyclicality largely arising in the Retail Bank. NatWest Markets RWEs reduced to £26,500,000,000 And as Alison mentioned, we still to achieve majority of our targeted reduction to around £20,000,000,000 this year. Our guidance on RWAs remained unchanged, and we expect them to be in the range of €185,000,000,000 to €195,000,000,000 at the end of 2021, including all regulatory impacts affected on January 1, 2022. Where we are in this range will depend on pro cyclicality and loan growth throughout the balance of this year. Turning to my final slide on our strong balance sheet. Our CET1 ratio is now between 4 20 5 20 basis points above our 13% to 14% target range and more than double our maximum distributable amount despite the directed buyback and 2021 dividend accrual. Our UK leverage ratio of 6.2 percent is 2.95 basis points above the Bank of England minimum requirement. We have also maintained strong liquidity levels with a high quality liquid asset pool and a stable diverse funding base. Our liquidity coverage ratio decreased in the quarter to 158 percent due to the £5,000,000,000 of TFSME repayment, and our headroom above our minimum requirement is now £65,000,000,000 So to conclude, we have delivered a good operating performance with strong lending growth and continued progress on both cost reduction and capital optimization. And with that, I'll hand back to Alison. Thank you, Katie. So in summary, we have delivered an operating profit of R844 1,000,000 in the Q1 with an impairment release of $102,000,000 as default levels remain low whilst government support schemes are still in place. We are comfortable with our position, but we recognize there may be economic challenges ahead. And against this backdrop, We remain focused on supporting our customers whilst advancing our strategy and accelerating our digital transformation. We're making good progress on our targets and have increased net lending by 3% on an annualized basis, reduced costs ahead of our target reduction of about 4% a year and used our capital strength to make a $1,100,000,000 directed buyback from the government as well as meet our commitment to distribute a minimum of $800,000,000 in dividends each year for the next 3 years. Our focus remains on driving improved shareholder returns by growing income, reducing costs and maximizing capital efficiency. And with disciplined execution in each of these areas, we aim to deliver a return on tangible equity of 9% to 10% by 2023. Thank you very much, and we're now happy to take your questions. And we will take our first question from Arman Raka from Barclays. Good morning, Katie. Good morning, Alison. A couple of questions actually, if I may, on income, please. I I was just trying to stitch together your commentary on the net interest margin. So you're flagging structural hedge drag. The benefit of mortgage margins In Q1, probably, it's going to be a bit lower going forward. So rough ballpark, a couple of basis points of NIM each quarter, I guess, is The first part of the question. And then in terms of what that implies for the full year net interest income print, I mean, if that is the case, You should probably be able to offset that with some balance sheet growth in Retail and Commercial such that can we take Q1's net interest income is a decent run rate for the full year because I think that would imply a number above 2021 consensus. So sorry for asking a question relative to consensus. I know we do that a lot. I guess second was just around your expectations For NatWest Markets for the full year, I guess, is probably a touch softer than what we were looking for. Does That guidance that you gave us before, dollars 800,000,000 to $1,000,000,000 still stand? That would be really helpful. Great. Thank you. Well, look, on NatWest Markets, yes, Our guidance for NatWest Markets is unchanged, €800,000,000 to €1,000,000,000 Katie, do you want to take the walk through the And then the first question. Yes. No, sure, absolutely. So in terms of the Q1 performance, as we know, fell by 2 bps. The lower yield curve It was 3 bps of that decline, and then that was offset by the mix of pricing in terms of a positive one basis point, which was Largely driven by the higher mortgage margins. In this quarter, Central Liquidity was flat. So as you know, I mean, when we look at the NIM, there's 3 buckets that we think about. The yield curve, we expect to continue with a 3 basis point decrease in Q2 through lower hedge income, driven by the higher yields on certain positions due to the roll off that's happening in 2021. You'll have noted in my comments that we are helped by an improvement in the swap curve in that piece, but it's still going to be around the 3 basis points number. Liquidity, of course, remains sensitive to the movements. We'll leave you to decide what might happen in terms of liquidity. But when we get to mix and price, I think there's a few things to consider. The positive mortgage trend that we saw in Q1 It is reducing. The average application margin in Q1 was 180 basis points for the quarter, but this decreased to the 165 basis points kind of from March and primarily due to the higher swap rates as well as some competition in the market. We know that the commercial loan book will continue to be by lower front book yields, and we do also continue to see a bit of a mix effect in terms of lower unsecured balances. So I think you're right, it does all kind of come back a little bit to what's The volume story to make sure that we manage that margin impact as well as on the volume. And I think we've always done well on that in terms of mortgages, And I think we'll then see customer behavior dictate ultimately what happens in terms of volume across retail and commercial in unsecured and corporate lending as we return back to a post lockdown world. Thanks for that. Do you think then that Q1's Net interest income might be an indicator of a full year. Do you think we could annualize that? So what I would probably do with you there, I would take you back rather than give you Just kind of total income guidance and kind of just refer to the revenue guidance that we gave in February, which I'm sure we'll get into more later as other questions kind of go on. But I We go in that basis, and we'll come into that until later. Okay. Thank you very much. Our next question is from Jonathan Pierce from Numis. Please go ahead. Good morning, both. Thanks for the questions. I've got 2 actually. The main one is on the hedge. I have to confess that I'm a bit confused about the margin guidance as it relates to The hedge drag because if we think 3 basis points in Q1 and we're going to see something similar in Q2 and what happens towards the end of the year, but That applies to the interest earning assets. It's suggesting there's a sort of annualized impact each quarter for the next few quarters of about GBP 150 £1,000,000 which given you're only rolling, I don't know, probably £8,000,000,000 a quarter, something like that, it's pretty mechanical, right? The delta on the reinvestment rate is huge. It's sort of 150 to 200 basis points. And That's before the benefit you're going to get from the scaling up of the hedge that you've just talked about. So I don't know whether I'm missing something here, whether you're being ultra prudent On the drag from the hedge that's coming through, maybe that drag just abates completely into Q3 and Q4. But am I missing on the hedge? The 3 basis points a quarter, given where swap rates are at the moment, is it just looks very big. Yes. I mean, I think the important thing, just to really reiterate there on the hedge is what I said in the speech, it's around GBP 250,000,000 Impact full year on full year. Jonathan, I know you understand our hedge well, but just for the sake of others, it's all about sort of Being very mechanistic and very consistent. We've got the average size of GBP 177,000,000,000 in Q1. So we added GBP8 1,000,000,000 onto the hedge and since year end. So you're right, about $8,000,000,000 a quarter. That's $20,000,000,000 since the end of 2020. We work the hedge on a rolling 12 month basis. So if deposits were to stay stable as they are broadly stable as they are today, we'd expect a further CHF 15,000,000,000 to come on over the next 9 months, which would take the hedge size to CHF192,000,000,000 Kind of further growth on that would be more upside. Clearly, some outflows would have a little bit of an impact. But given the Rolling 12 month basis, it takes a little bit of time to come through on that. When we look at the hedge, you know it's a blend of our product hedge with an average with a 5 year maturity, an average life of 2.5 years and Equity Hedge with 10 year maturity, An average life of 5 years. And together, they have an average of 2.9 years. We have we've given you the sensitivities around And what would the 25 basis point move do? And so we know that in year 1, it only adds about £37,000,000 But by year 2, you see that increasing Up to GBP 180,000,000 When we did our base case budget, I think we just seen the swap rate down at about 8 basis points. The current 5 year is about 47 basis points, so you've got a delta of 39. You can kind of work out what the math would do in terms of the yield Compared with the growing of the hedge within there. So I would reiterate, we're looking at $250,000,000 this year As long as rates and our expected volumes stay the same. Jonathan, you said you had a second question. Sorry, I didn't give you a chance to ask Yes. Thanks for that. Yes, the second question actually is just much more simple. Consensus income ex notable items So this year is down 3% on the income last year ex notable items. Is that within the bounds of your Slightly lower and consensus is being too optimistic, too pessimistic. I'm thinking in particular of the miss in Q1 on NatWest Markets. But We're talking around on whether you're happy with consensus income this year, that'd be helpful. Yes. I mean, there's no change to our 2021 revenue guidance that we gave you in February. So that Gives you some guidance as well. So just to remind you what we said. We're expecting the 2021 income ex notable items to be slightly down on 2020, driven by the 3 factors: lending growth across U. K, RBSI, Retail and commercial, excluding, obviously, government schemes that will be above the market rate. We're comfortable with our performance on that in Q1. The The impact of the structural hedge we've just talked about, the reduction of £250,000,000,000 and I think Aman asked in the last question around the income reduction in NatWest Markets, So 2.8 to 1,000,000,000 There's then a few puts and takes. We obviously, in February, talked a lot about the fact that we hit a rate cut. Clearly, that's no longer there. We've got the swap curve movements we've talked about. We've had a little bit of a longer lockdown. But then at the same time, we're quite we can see a scenario of a positive growth out of where we are. So I think comfortable kind of in the round. Okay. Thanks for taking the time. Thanks, Jonathan. Your next question is from Benjamin Thomas from RBC. Please go ahead. Good morning, both. Thank you for taking my questions. First one is on cost of risk. I think your guidance is at or below through the cycle of 30 to 40 bps. I think to hit a cost of risk of 30 bps for 2021, taking into account the buyback in Q1 implies something like 33 bps cost of risk The remaining 3 quarters of the year. Given that you also need to update your economic assumptions, markets, more positive outlook, can you just give some more color on why you're not happy To get more positive on cost of risk guidance. And then secondly, on buybacks, you've executed your direct buyback of 5%. I'm right in saying that you now have to wait 12 months to do another one. But I think there's also technically scope to do a general buyback, although it's not favored by investors. Can you update on your thoughts on this method of capital return for the rest of 'twenty one versus special dividends? Thank you. Right. Thank you. And we'll look on the cost of risk. I mean, I think we expect impairments to be below. And we will update our economic guidance at the half year. And I think, as I said, we are seeing potential for a more rapid recovery to take place. If you look at the impairments that we've released, the $102,000,000 in this quarter, that's really reflective of the low level of faults that we're seeing and an improvement in the book and things migrating back from Stage 2 to Stage 1. So We would expect to be below our 30% to 40% that we guided. Katie? Yes. No, thanks very much. And good morning, Benjamin. When When you look at the direct buyback, you're absolutely right. It's a rolling 12 month calendar, maximum 4.99%. So we did the transaction on the 19th March, Which means we couldn't do it again until the 19th March next year. At the AGM last week, we would have sought permission and would have received Permission so it was only this week. Gosh, a lot happens in a week. But to get to do an end market buyback, I think it's something we'll when When we talk with our investors, our preference has always been directed. I think what we did at the year end was to be very clear in terms of the guidance, that we wanted to return a minimum of 800,000,000 and which should be across a mix of ordinaries and specials in line with our dividend policy and to make sure that we had capacity to do the directed buyback. We're very pleased that we managed to do that in Q1, and I think let's just see how the rest of the year unfolds. But we've always been very clear around our preferences to return to the shareholders. Your next question is from Alvaro Serrano from Morgan Stanley. Please go ahead. Good morning. I had a A question on revenues, which is kind of a follow-up of what you've already touched on and then on provisions. On revenues, I mean, I duly noted That you're sticking to your guidance, but with the rate cut now out of the equation as Bigger structural hedge is deepening, the staff duty extension. You obviously bought back some of the sub debt. What and you're keeping NatWest Markets guidance. So what's gone worse for you to keep Your overall guidance unchanged. And are you building any buffer for NatWest Markets given the slow Todd, I don't know if there's any change in seasonality that gives you more conviction that € 800,000,000 to €1,000,000,000 is still valid. And the second question on provisions. Can you sort of update us how much your stock Of provisions related to the management overlays where it is, but I haven't seen it. I think it was close to CHF 900,000,000 in Q4. And is there any reason Sort of assuming your macro assumptions aside, any reason why we should we I mean, you can release those over time? Thank you. Great. Thank you. Well, look, I won't repeat what Katie has given you on the revenue guidance. I mean, as I said, it's relatively early days in terms of coming out of lockdown. We are as I said, we see potential for more rapid recovery to take place, and I gave you some information on what we're seeing around debit and credit card spending and activity. I think where we're seeing more muted Recovery at the moment is in the commercial banking side, where I think we're seeing our customers be very cautious. They've deleveraged quite significantly and well prepared for the recovery. And I guess the degree of commercial banking loan growth in 2021 remains uncertain. I think what you will see is 3 real sort of dynamics coming through, and we'll see more of that over the coming quarter. Firstly, customer behavior in relation to paying down current government schemes. Secondly, how customers use the pay as you grow features as well as the new schemes, and I can give you some more information on that if you'd like. And then the degree and speed of the economic bounce back, and that's where we see more potential for a more rapid recovery. We also see scope for growth within large corporates in areas such as infrastructure, ESG lending, all of which will recover. So I think We're not seeing anything bad. We actually see opportunity there. On the NatWest Markets side, our guidance remains the same. To both our $800,000,000,000 to $1,000,000,000 revenue guidance as the business completes its refocus and reaches steady state. And it's making good progress and significant progress on reshaping the business. So I'm very comfortable in Q1 that business has performed well in the areas where we support our customers. So there's been good growth. Clearly, we haven't had The same volatility in the market that we had last year, but the business is performing in the way we expect it to, and our guidance remains the same. Katie, do you want to pick up the Yes. No, let me I will pick up that PMA question. Look, our PMA for economic uncertainty, It's unchanged from the year end. It's $878,000,000 that we disclosed. We're continuing to hold that at this stage. When we look at it, we're looking at to we've had a lot of conversations to tell you about what would be the hurdles you that would you need to cross to trigger that release? So if I look at some things, For example, in retail, you would reference factors such, obviously, as unemployment, what's happening in your arrears trends, what's happening in your high risk sectors. For wholesale, you'll be looking at variables such as the performance of different wholesale sectors as well as what the government scheme debt performance is doing in terms of take up of further schemes and deferral of debt. We expect to be continuing to assess this economic Adjustment each quarter over the next 12 to sort of 18 months, I would imagine. There's no specific time line on when we would release it. I would say, Alvaro, I don't want you to go away thinking, oh, that means they're going to hold it in perpetuity till that time. I think it will be a number that will start to evolve as we get later on to this year and we start to see the real impact of what's actually happening in the economy. But at this stage, it feels the appropriate thing as we've literally just left lockdown to continue to hold that. Very clear. Thank you. Lovely. Thanks, Alvaro. Next question is from Andrew Coombs from Citi. Please go ahead. Good morning. I think Alvaro just answered both of my questions actually. So let me just throw in one, which is on the FDA investigation. Obviously, you have flagged this in your annual report. Previously, there was a news flow in March, and I think the case is due to be heard on the 20 6th May. In your commentary, you talk about substantial potential costs or provisions. But my understanding is that this investigation is into a single customer, and it's around GBP365,000,000 That's being investigated. So can you just elaborate on, A, if there's any provision that's already been booked for this case? And b, what your definition, broadly speaking, of substantial is? I'm slightly surprised by the wording in the context Of what's being investigated. Thank you. Thanks. Well, look, I think, as I said, we're disappointed by the announcement, obviously, but we have been fully cooperating with that. There's nothing more that we can say at this point. The only other thing I would reiterate is how seriously we take our money laundering and financial crime responsibilities. It's an area of significant investment that we have in the business. We have over 4,000 people doing that as their full time job. But beyond that, nothing further to add at this point. The only one thing I would add on to that is that there's a confirmation is that we have not taken any provisions. And Andrea, you wouldn't, I think, expect me to do a definition of what substantial might mean as It would be quite dangerous if a number out there is a point of negotiation. So but no provisions at this point, and we're comfortable with all the points Alison made. Thanks very much. Thank you. Our next question is from Omar Khiman from Credit Suisse. Please go ahead. Good morning. Thank you very much for taking the question. I just had a quick question on customer behavior and what you've seen since the exit from the lockdown. Just on Slide 5, the debit and credit card spending, it's Very helpful. I think it was to the middle of April. Do you have any data perhaps that's a little bit later than that? And just on a related question on the corporate side. So from what you've seen so far, what kind of Clues have you got on business behavior with respect to the business loan schemes and how much they might Pay down. I think you've given a number historically of what the utilization rates were of those loans versus What may just be particularly in deposits on the balance sheet. So any color there would be very helpful. Thank you. Sure. So I think we've given you some sort of data on activity on debit and credit card spending that is tracking up. Let me talk about The government lending schemes and give you a little bit more color. So in terms of, as you know, our Lending under the government schemes is around $14,000,000,000 In terms of the bounce back loans, around 20% to 30% of The cash that has been borrowed under that is still sitting in the current accounts of the businesses. The new schemes that have launched, so the pay as you grow scheme, that launched on the 6th April. As of Yesterday, we've had 14,000 applications coming through The bounce back loan pay as you go portal, as we call it. And of that, 75% of the Locations coming through are asking for an extension where customers can extend from 6 to 10 years. Now we expect those volumes to increase quite significantly. We've recently written to 100,000 of our customers to give them 60 days notice that their first payment under the Bounce back loan is starting in 60 days, and that would be the trigger for the application in the pay as you grow. So I think The behavior that we will expect to see is something that you'll start to see more data on. I think initial very, very early days show a reasonable uptick in requests for taking that extension. And I think at this point, we that's not what that's exactly what we would expect if you're Small business, bear in mind, most of these loans are average size, £37,000 extending them for 6 to 10 years as you come out of lockdown to give you a bit more breathing space, I think is not an unexpected behavior we would expect to see. But I think as the economy and the lockdown sort of releases and businesses come back online, I think you'll either see them paying down their loan, commencing repayment or extending through the pay as you grow. But that's the early data that we're seeing at the moment. That's wonderful. Can I just ask a quick follow-up question? So the 20% to 30% of cash that's Still sitting in the current accounts of the businesses. How has that changed since a couple of months ago? I think you remember a 50% number, but I Could be mistaken. No, it hasn't changed significantly. We haven't so for example, we haven't really seen the cash burn that We've talked about of people spending the money. I think as businesses come out of lockdown, the question and the dynamic behaviorally you may see is I'm using that cash for working capital purposes as they ramp up, but broadly, that's stable. And I think it's really then as the trigger point is really as the loans start falling due for repayment. So if you think about The history, the bulk of drawdown, the big ramp of drawdown and application of bounce back loans was in May, June, July. And so May, June, July is when those loans will start falling for their first repayments. And I think that is the trigger point at which you'll see whether they will repay their loan, whether they'll advance through the pay as you grow or use the cash for working capital purposes. So I think we'll get more granular data over the next quarter that we can share with you. Our next question is from Martin Litgeb from Goldman Sachs. Please go ahead. Yes, good morning. Could I have 3, please? And the first one, I think along your earlier comments on excess capital and obviously the intention To return it to shareholders. You also mentioned that you might look to pursue other options, which might be accretive to shareholder value. And I was just wondering if you could Shed a bit of light, what you mean with that? Are these potentially potential deals similar to the mortgage book acquisition last Yes, in terms of size, so could this be potentially bigger items? Secondly, I was just wondering if you could elaborate on your credit card strategy in the U. K. I mean, you have made a tremendous In the U. K, I mean, you've made tremendous progress in increasing mortgage stock share over the years And where the market share of NatWest compared to the current account still remains markedly below its credit card in particular. How should we think about progression, in particular, share gains, going forward as the economy recovers? And thirdly, just to come back to the unchanged revenue guidance on the back of 1 year yesterday, Slightly improving the guidance. I was just wondering what is driving that conservatism, if so. Is this essentially a view that mortgage competition could continue and potentially mortgage growth could slow? Or the way around, are you still targeting 13% flow share? Or is it simply could this be driven that NatWest market is obviously a range of €800,000,000,000 to €1,000,000,000 Given the Q1 print that we might end up towards the lower end rather than the upper end. Great. Well, look, I think we've answered the revenue guidance. I think Katie went through sort of 3 buckets of that, and we are pretty confident about our position and no updates The guidance, we've been pretty clear on that West Markets as well. So I don't think there's anything more I can add to that. In terms of Capital and our position. Now I'm very clear, my clear preference is to return capital to Our shareholders, we have a capital generative business, and we intend and expect to operate within a CET1 ratio of 13% to 14%. We have robust capital levels, as you can see, and we're at 18.2% now on CET1. And my intention is to distribute capital to shareholders, and we've given you the guidance of the minimum 800. In terms of other options, we would look at other options that we would consider would be accretive of value to shareholders. So the Metro Mortgage acquisition that we made It's a good example of something that adds value to shareholders, is in line with our strategic priorities and aspirations and areas of growth. So we would always look at those options opportunistically and proactively, but it would be in those sorts of ranges. But clearly, preference is to return capital to shareholders. On the credit card strategy, as you know, that's an area where we have significant capacity to grow, and we would look to grow in the unsecured space within strong risk appetite, and we are starting to see a good uptick in that So I think that is an area which David Lindbergh is very focused on as an area that he will look to grow, and he can probably give you a bit more detail on that when we have the spotlights later in the year. Our next question is from Joseph Dickerson from Jefferies. Please go ahead. Hi. Most of my questions have been answered, but just Could you just describe briefly the philosophy around that? I know it gets we ask it like every other quarter. But I suppose just in the current rate environment, why wouldn't you be more dynamic with the hedge in terms of duration, etcetera, in addition to the amount that you're deploying into the hedge. Thanks. Thanks, John. Good morning. I think the thing for us is we're not looking to take punts on where rates are and where they're going. This is about Being consistent and mechanistic in our approach, it's an approach that served us incredibly well over the last number of years rather than Taking actions in 1 quarter that you could regret in quarters to come. So we're very comfortable in the way that we manage this. And it's growing nicely in terms of the size of it. And as I said, we expect to put another €15,000,000,000 on over the next 9 months, and that Will benefit us. And if the rates continue to improve, well, we'll take the upside as it comes through, but very comfortable with the approach rather than Taking a punt on what won't be happening on the interest rate at any one time. Thanks. Thanks, Jules. And our next question is from Ed Firth from KBW. Please go ahead. Yeah, good morning, everybody. I just have two questions. The first question was the fixed income business in NatWest Markets. I just wondered if you could help us understand a little bit what's going on there because my recollection was that the reason you were restricting the size of that business or making it smaller was The focus on customers and produce a more stable income stream. And yes, I'm looking at the quarterly numbers in your financial supplement. And I mean, It's like a random walk. It's anything between minus €12,000,000 and plus €230,000,000 a quarter. So I'm just trying to get a sense of what drives that business? And can we can you give some sort of idea Is it going to stabilize soon? Or was there something one off in last year that was sort of throwing it around? And if so, can you roughly what So the level might it stabilize at? So I guess that's my first question. Yes. And then the second one question was on surplus capital. You talk a lot about group surplus Capital, but I guess we can all see the aspect of it is, for example, in somewhere like Ulster. So I'm just trying to get a sense, I suppose you must know the number. So I guess Could you just tell us or give us some indication of how much surplus is actually at group and distributable today? I guess it's the easiest way I could ask that question. Okay. Thank you. Well, look, on NatWest Markets, what I would as you know, we're strategically refocusing that business, and the team are making good progress. In Q1, sort of the FX and capital markets income was in line with our expectations. Rates Income was lower due to reduced activity levels across the market. And also, our by a one off in the quarter from an LME exercise. But in terms of having that business focus around The areas that we want it to in supporting our customers, it's doing exactly what we want it to do. So and The one off, sorry, could you give us roughly what I mean, sort of orders of magnitude so we can sort of get some sort of idea of what our run rate might be? I think my mind is going a little blank. I think It was about €50,000,000 in terms of the number that was in that piece. Look, if I look at how I would look at the numbers. So we've said €800,000,000 to €1,000,000,000 What we've also said is currencies are going to be relatively stable. Capital Markets, that's where our core work is. That's Working with our numbers, you can then see the revenue share. The revenue share doesn't impact rates. The revenue share on that, given its capital intensity, is not there. And then that kind of gets you to, Well, the rates is kind of the balancing number of what might go on. You know and you're being a little bit naughty in saying looking at the numbers over the last Number of quarters, we made very specific decisions because we didn't like the volatility of this business in history. So I think what we'll get to is a kind of a steady state number where the business is balancing as it should be in that $800,000,000 to $1,000,000,000 number In terms of that place. And in terms of cash we're sitting with at the holding company just now, I mean, happy to share that with you. It's about £4,000,000,000 that's what's sitting there today. So I mean, there's There's no issue at all around our capital commitments. We've got the cash in the right place to be able to make that. So there's no there's nothing hidden in terms of the numbers there. And No, no, that's right. All of the capital commitments that we made over the year. So the SEK 4,000,000,000 and that's above your MDA, is that Comfortably, I mean, but there's issues. Very comfortable. So absolutely not an issue in terms of and clearly, that number will move as dividends flow up and within the group as well. So if you ask me in a few weeks, it would be a different number again. But I wouldn't look for ghosts in terms of the capital distribution around Where capital is sitting, there are none. No, that's perfect. Great. Thanks very much. Thanks. Thanks, Ed. Our next question is from Chris Can't from Autonomous. Please go ahead. Good morning. Thank you for taking my questions. I just wanted to come back on the hedge again, I'm afraid. And I understand you don't want to take On the rates market, as you put it. But I guess, do you worry that you're leaving money on the table there at the moment? And again, thinking about some of the commentary from your nearest domestic peer yesterday, They have improved their guidance on the drag from $400,000,000 to $300,000,000 And I don't think previously they were assuming a rate cut this year. And you were previously seeing a rate cut this year. You've gone for a more modest improvement in that guidance. And obviously, you're not being as proactive in the hedge. So just wanted to get your view on whether that's something you might revisit in future. And in terms of the longer term outlook for the hedge, could I invite you to comment on what you expect the drag to be into 20222023, again, thinking about some of the commentary from your nearest competitor, They do not expect to drag in 2022 at all, for example, year over year. And then on the NatWest Markets, answer to the previous question. Could I just confirm, is that a €50,000,000 negative one off in the rates business, which you have not This is a notable item in terms of how you presented the numbers this morning. I just wanted to make sure that it seems like a notable item. But Yes. Could I just confirm that I heard that correctly? Thank you. So Chris, let me deal with that last point first. Obviously, the it's an LME. It was In internal LME, so actually, it sorts itself out for the group. So therefore, the group result, it is not a notable item. But on that line, within their NatWest Markets results, It is obviously of interest in that line. So it is not a notable item for the group. If I look at the hedge, And Chris, you understand the hedge well, so I won't go through the whole kind of long question. But what we know is the kind of 25 basis points Kind of uplift is €37,000,000 in year 1, €180,000,000 in year 2. So clearly, given the spread where it is today, That will be a kind of a further benefit into year 2 as well. And that will grow a little bit given the that we're putting a bit more on in terms of volume. But it's not something that we're looking to change our approach on. We spend a lot of time looking at it, talking about it. But ultimately, When you look at it on a multiyear basis, we're very comfortable that we're doing the right approach. And we're very comfortable that we provide the clarity and visibility for you so that you're able to see what we're doing in that space. Thanks for the question, Chris. Could I just ask the where's the other side of that, LME, just in terms of our understanding of the divisional numbers? I presume there's a I mean, it will come through the center and then it will disappear on the consolidation. Okay. All right. Thanks. And the center, as you know, is always a mishmash of many things. The number that number is not big enough to call out anywhere particularly. Thanks, Chris. Well, final question for today is from Guy Stebbings from Good morning, Alison. Good morning, Katie. Good morning. I'll refrain from asking another question on compliance. So can I just come to RWA first actually? And it starts at €165,000,000,000 today, even pro form a for some of the volume growth, The regulatory change at the start of next year and some credit migration, the 2022 guidance does look quite conservative. I think you said, Katie, the extent sort of where you sit in that range will depend on the extent of credit migration. But is it not possible that credit migration was quite modest, you could be even below that range? Am I being too optimistic there? And then the second question, just on India, actually. I think you've got quite sizable middle back office operations in India. So I just wondered whether the current There is having any impact on how you operate, any associated costs with that? Thank you. Thank you. Well, in terms of let me take India. So we do have back office operations. I mean, India, we're working very closely with our team. There are no operational impacts from what's happening. Clearly, we're very concerned on behalf of our colleagues in India with the situation. We're putting a lot of support in there and have relieved some of the pressure just in order to help the human side of the equation for our colleagues there who are doing a great job, but no business impact. And as you know, We have no direct customer call centers or service centers in India, although we do have some web chat services. But no disruption to business and all of our incident management operational side and our main focus is really on supporting our colleagues at the moment on what's a pretty tough situation. On RWA, look, I think we've given you the guidance. I would say we've been surprised by the resilience of the credit environment, and I think the ongoing government support measures have clearly longer than we anticipated and the tapering off of that, I think, is really you will start to see pro cyclicality if It's going to come in later in the year. But yes, absolutely, it is possible that we will come in below that guidance if the pro cyclicality doesn't come through. I think the dynamic we're all managing is clearly the support measures have been extended, which we think is very helpful. The economy is opening up. The lockdown is ending. So as I said, we're seeing potential for a more rapid recovery to take place and the opportunity for businesses to get going again and recover faster means that that procyclicality is either deferred or may not come in as much. So it is possible, and that's something we're obviously keeping a very close eye on. Okay. Very helpful. Thank you. Thanks, Colleen. Great. Well There are no more questions. Thank you. Well, look, thank you very much for your questions. As always, Katie and I really appreciate you taking the time to join us. As I said, we're happy with the performance this quarter. We're on track and delivering on all the guidance that We gave you a strong, good operating performance in our core franchises. I think, as you will see, we are taking an appropriate and conservative approach to impairments, and we'll update our guidance at the half year. But we are seeing potential for a more rapid recovery to take place, so we are cautiously optimistic. I'd like also just to remind you, later on In the year, we have our meet the ex co spotlight. So we'll be putting a spotlight on the commercial bank in NatWest Markets. That's on May 20, which will give you chance to talk to our team more directly there. So I hope you'll be able to join us for that. But thank you very much.