CFO Katie Murray. After the presentation, we will open up for questions.
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. Starting with the headlines. We're reporting operating profit of GBP 1.1 billion, up from GBP 400 million for the same quarter last year. This includes an impairment release of GBP 242 million as underlying credit metrics improved and defaults remained low, resulting in an attributable profit of GBP 674 million. We continue to make good progress on our targets. Net lending was up 3.1% on an annualized basis, driven primarily by growth in mortgage lending.
Costs were down 4.3% for the first nine months compared to the same period in 2020, and we're reporting a CET1 ratio of 18.7%. As you know, this capital strength has enabled us to increase our annual dividend distribution to a minimum of GBP 1 billion for 2021, 2022 and 2023. It has also allowed us to make an initial on-market buyback of up to GBP 750 million this year, of which GBP 402 million has been executed to date. Taking into account the GBP 1.1 billion directed buyback in March, this brings total distributions for 2021 to around GBP 2.9 billion, of which we have already booked GBP 2.6 billion.
As you'd expect, our focus is very much on executing our strategic priorities in order to drive shareholder returns and deliver on our 2023 targets. These priorities are all about generating income growth, reducing operating costs, investing to make our business more customer friendly and efficient through digitization, and allocating our capital wisely in order to maximize returns. 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 target of delivering GBP 20 billion of climate and sustainable funding and financing. We have recently announced a new target to deliver a further GBP 100 billion by the end of 2025. 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 3.1% on an annualized basis to GBP 305 billion, GBP 7 billion 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. 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. We're also seeing good momentum in unsecured lending.
The issuance of new credit cards has almost doubled year on year, and we have brought new products to the market. Around a third of this growth has been in the last four months following the launch of a new purchase and balance transfer card in June. Spending on credit cards is up 20% 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 and balance transfer card available only for existing customers, just as we did with the government lending schemes. Our mobile app helps customers both to track and set limits on their card spending.
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 19% compared to a peak of 40% in April last year. Looking at government lending in particular Bounce Back Loans, since the first anniversary of the scheme when repayments started, about 7% of these loans have been repaid in full, and around 90% of customers due to start repayments are repaying on or ahead of schedule. In NatWest Markets, our currency and capital markets businesses are performing in line with expectations while we continue to reshape our rates business to better serve corporate and institutional clients.
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 11% in assets under management and administration. This includes growth of GBP 1 billion in the third quarter, bringing assets under management and administration to GBP 35.7 billion. Just over half our growth in the first nine months was net new inflows, of which about 30% was via our digital platforms. While all these trends are positive, we continue to monitor customer behavior closely in the light of recent supply chain challenges and inflationary cost pressures. 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 7 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. We are using data and analytics to deepen customer engagement in retail banking through increasingly personalized messaging. Tailored messages have grown from 72 million in the first nine months last year to 318 million in the first nine months this year, and they have resulted in a significant improvement in customer engagement. Meanwhile, branch transactions remain below pre-COVID levels, while mobile payments and video banking have grown year-on-year. We have 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 GBP 1.5 billion worth of transactions since inception, of which around GBP 500 million took place during the third quarter. 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 have now reclassified EUR 3.7 billion of commercial loans. The vast majority of those we are selling to Allied Irish Banks as assets held for sale. We're working with Permanent TSB on the sale of EUR 7.6 billion of performing retail and small business loans, along with the transfer of associated colleagues. If completed, we expect these two transactions to be capital accretive. We are also reviewing options for other elements of the portfolio and will continue to keep you updated on our progress.
Actively managing our capital and commercial banking has contributed to a 700 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 GBP 150 million in 2021, down from our estimate of GBP 300 million, of which GBP 70 million has been realized to date. 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 18.7% is well above our target ratio of 13%-14%. As I said earlier, this has enabled us to commit to an annual distribution of at least GBP 1 billion for 2021, 2022, and 2023.
We expect to complete our initial on-market share buyback program of up to GBP 750 million in the first quarter of 2022 and have already executed on GBP 402 million. Taking into account the directed buyback of GBP 1.1 billion last March, this brings total distributions for 2021 to around GBP 2.9 billion. With that, I'll hand over to Katie to take you through our financial performance in more detail.
Thank you, Alison, and good morning, everyone. I will start with the group income statement. We reported total income of GBP 2.8 billion for the third quarter, up 4.3% from the second quarter. Within this, net interest income was down 2% at GBP 2 billion, and non-interest income was up 21% to GBP 820 million. This increase reflects a number of notable items, including a GBP 79 million pound share of gains from our collaboration with the Business Growth Fund and gains of GBP 45 million on the liquid asset bond sales in the quarter. Excluding all notable items, income was in line with the second quarter. Operating expenses increased 14% to GBP 1.9 billion, driven by litigation and conduct costs.
This means we are reporting an operating profit before impairments of GBP 832 million, down 13% on the second quarter. The net impairment release of GBP 242 million represents 26 basis points of gross customer loans and compares to a release of GBP 605 million or 66 basis points in the second quarter. This reflects improvements in underlying credit metrics and a low level of defaults. Taking all of this together, we reported operating profit before tax of GBP 1.1 billion. Attributable profit to ordinary shareholders was GBP 674 million, equivalent to a return on tangible equity of 8.5%. I'll move on now to net interest income on slide 10.
Banking net interest income for the third quarter was GBP 6 million 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 1 extra day in the quarter. It was partly offset by the reclassification of AT1 from equity to subordinated debt for the period before redemption in August. This accounted for a GBP 14 million decrease. Turning to bank net interest margin, excluding the liquid asset buffer, this reduced by 3 basis points to 234 basis points after adjusting for the one-off tax adjustment in the second quarter. This reduction was driven by AT1 classification and a full quarter of debt costs following new issuance in Q2. Business trends were broadly stable in the quarter, which you can see in our yield and cost data, slide 11.
On the asset or lending side, gross yield for the group fell by 3 basis points to 178, reflecting further growth in lower yielding liquid assets. 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. On the liability or deposit side, group funding costs at 34 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 2022, excluding the liquid asset buffer. First, the yield curve, and second, price and mix. I will talk more about these factors on slide 12. Mortgage margins are returning to pre-COVID levels.
Average application margins in the third quarter reduced by 37 basis points to 115 basis points, and then continued to reduce towards the end of the quarter to around 105 basis points, reflecting the higher swap rates. This is broadly in line with January 2020. Front book margins on mortgages that completed in the third quarter decreased from 165 - 143 basis points below the back book. Lower margin roll-offs resulted in the back book margin improving by one basis point to 164. 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 swap rates through our structural hedge. We have said that the majority of the GBP 250 million year-on-year decline in our hedge income was in the first half, and the hedge impact in the third quarter relative to the second quarter was negligible. We also expect the hedge impact on net interest margin to be broadly neutral in Q4 and in 2022. 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, though we welcome the improved consensus rate outlook.
At the half year, the yield curve suggested that UK base rates would remain at 10 basis points until Q4 2022 before rising to 25 basis points, and a further hike to 50 basis points was expected in Q4 2023. You will see that the majority of our sensitivity comes from our managed margin or the unhedged balance sheet. This shows a benefit of GBP 414 million for an upward shift in the yield curve from 10 basis points to 35 basis points. This reduces in year two and three, reflecting higher pass-through assumptions as base rate increases. The overall benefit from a 100 basis point increase would be GBP 1.3 billion in year one, which shows you the sensitivity is not linear. Moving on now to look at volumes on slide 13.
Gross banking loans decreased by GBP 2.9 billion or 0.8% in the quarter to GBP 358 billion. This includes growth of GBP 2.7 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. UK mortgage growth of GBP 2.5 billion or 1.4% reflects continued robust demand following the first deadline for stamp duty relief at the end of June. UK unsecured balances grew by GBP 300 million, the first increase since the fourth quarter in 2019. We were pleased to see growth in personal loans of GBP 200 million or 2% and continued growth of credit card balances up a further 3% in the quarter.
In commercial banking, gross customer loans fell by GBP 1.3 billion, reflecting continued repayments on government schemes and targeted sector reductions, mainly across real estate and retail. This was partially offset by growth in specialized business. Average interest earning banking assets, excluding the liquid asset buffer, increased by GBP 1 billion to GBP 331 billion. I'd like to now turn to non-interest income on slide 14. Non-interest income, excluding notable items, was in line with the second quarter at GBP 667 million. Within this, income from trading and other activities decreased by 7% to GBP 137 million. 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 2022. Fees and commissions in the retail and commercial businesses grew by GBP 20 million to GBP 504 million. This was driven by higher payments due to increased corporate activity as well as card and lending fees as consumer activity increased. I will move on now to look at costs on slide 15. Other expenses, excluding operating lease depreciation and the direct cost base of Ulster, were GBP 1.5 billion for the third quarter. That's down GBP 30 million 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 4.3%, and we continue to expect to deliver savings of around 4% for the full year.
Strategic costs in Q3 were GBP 77 million, bringing the total for the first 9 months to GBP 409 million. Turning now to impairments on slide 16. We're reporting a third-quarter net impairment release of GBP 242 million or 26 basis points of gross customer loans. This brings the overall release for the first 9 months to GBP 949 million. 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.
Second, credit performance. While we see a low level of defaults and no tall trees at the moment, we will monitor credit conditions carefully as COVID support continues to roll off. Third, our post-model adjustments. Our ECL provision at the end of Q3 was GBP 4.5 billion, down from GBP 4.9 billion at Q2. This includes GBP 1.1 billion of post-model adjustments, of which GBP 729 million relates to economic uncertainty. This is down by GBP 105 million in the quarter, reflecting a GBP 54 million reclassification of the PMA held against the Ulster portfolio we have agreed to sell to Allied Irish Banks. At the end of the payment holiday support for a number of our customers.
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 2022. We are comfortable with our ECL coverage of 1.19%. Turning now to look at capital and risk-weighted assets on slide 17. We ended the quarter with a common equity tier one ratio of 18.7% on a transitional basis under IFRS 9, up 50 basis points over the second quarter. This increase reflects a 28 basis point increase from attributable profit net of changes to IFRS 9 transitional relief and a 37 basis point benefit due to lower RWAs. This was partially offset by the updated dividend accrual and linked pension contribution, which together reduced the ratio by 26 basis points.
Our IFRS 9 transitional relief reduced by 13 basis points in the quarter to 60 basis points. This reflects the release of stage one and stage two expected credit loss, which would previously have been added back to our capital position. RWAs fell by GBP 3.2 billion in the quarter to GBP 160 billion. This was driven by lower market risk, which decreased by GBP 2.9 billion, reflecting the GBP 2.4 billion impact of our updated model following the transition from LIBOR to SONIA. There was a small decrease in RWAs of GBP 100 million from positive procyclicality, which reflects a positive GBP 600 million in commercial banking, offset by a negative in retail banking.
As we look to the year-end, in NatWest Markets, we no longer expect to achieve the majority of the remaining RWA reduction towards the medium-term target of GBP 20 billion this year. However, we now expect group RWAs to be below our previously guided range of GBP 185 billion-GBP 195 billion on 1 January 2022. You will find more details of the various regulatory impacts in our appendix. Turning to my final slide, which shows the strength of our balance sheet. Our CET1 ratio of 18.7% is now between 470 and 570 basis points above our 13%-14% target range and is more than double our maximum distributable amount.
We continue to expect to operate within a range of 13%-14% CET1 by full year 2023, and you will find more details of the CET1 ratio drivers in our appendix. Our UK leverage ratio of 5.9% is down from 6.2% in the prior quarter and 265 basis points above the Bank of England minimum requirement. The reduction was driven by the redemption of one of our most expensive US dollar AT1s following successful issuance during the first half, for which we recognized a gain of GBP 150 million through reserves in the quarter. 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 166% due to ongoing deposit inflows, and headroom above our minimum requirement is now GBP 79 billion. 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. With that, I'll hand back to Alison.
Thank you, Katie. To sum up before we open up for questions. We're reporting operating profit of GBP 1.1 billion, which includes an impairment release of GBP 242 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. Lending is up 3.1% on an annualized basis. We're on track to reduce costs by around 4% per annum, and we continue to work towards a CET1 ratio of 13%-14% with the aim of delivering a return on equity of 9%-10% by 2023.
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 GBP 2.9 billion for 2021. Thank you very much, and we're happy to take your questions.
Ladies and gentlemen, if you would like to ask a question, please press the star key followed by the digit one on your telephone keypad. We will pause for a moment to give everyone an opportunity to signal for questions. We will take our first question from the line of Omar Keenan from Credit Suisse. Please ask your question.
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 GBP 450 million for 25 basis points, is there any color that you could add around what deposit beta assumptions are behind that number? And then secondly, on mortgage margins. So the application margins were 105 basis points in September versus a back book of 1.64. I think kind of historically, you know, the level of around 100 bps was seen in 2019 as quite low.
A few peers, like Nationwide at the time, made comments that similar levels didn't meet their hurdles. 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? Secondly, how do you get comfort that mortgage margins and volumes are being balanced in the most optimal way, you know, considering price elasticities, for example. Thank you.
Thank you. Katie, do you want to pick up the question on the rate pass-through in the mortgages?
Yep, sure. Absolutely. Thanks very much. Morning, Omar. Good to hear you. Let me try to give you a little bit of color on this one. Our economic assumptions, they're based off H1. They're not updated in Q3 in line with our usual process. Just to remind you, at H1, the yield curve suggested that base rates would remain at 10 basis points until Q4 2022, before rising by 15 basis points to 25, with a further hike to 50 basis points was expected in Q4 2023. Clearly, consensus rate expectations have increased significantly since then.
On the managed margin slide, as you look at it in terms of the Q3, the GBP 414 million for a 25 basis point shift in the base rate. Within there, that's around 90% of that number is sterling-based. This sensitivity is built bottom up, incorporating different pass-through assumptions for products across all franchises. The actual pass-through rates will be reviewed and adjusted subject to prevailing market conditions and upcoming capital charges, et cetera, including expectations of the pace and the number of rate increases that we might see. Omar, you'll be a bit disappointed to hear that I'm not going to get into the finer details of the pass-through rates today, but this is a built-up from the bottom 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 to those higher base rates. You can also see from our disclosure that a 100 basis point shift in the sterling GBP yield curve would be GBP 1.3 billion income benefit. The sensitivity incorporates higher pass-through rates, and it is not as simple as a multiplication of the 25 basis point level. But clearly from this you can see that any rate rise is very positive for us. If I go to the mortgage margin question, you're right again on that slide 12, September at 105, the back book at 164.
What I would say is that we continue to meet hurdle, but 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. So that gets us comfortable. We're still okay on the internal ROE. We do a lot of analysis internally to make sure that we are clear on the elasticity of pricing and that we're comfortable in terms of how we do all the extra charging over of costs into this business. So very comfortable that it makes sense.
I think it's important also to look at the whole book, and I think that's what I was really trying to demonstrate to you on slide 12, is actually the movement we've seen in pricing. Obviously, one helps compensate for the other, but overall we're very comfortable on this book, and that's seen in the very strong ROE that you see for the retail business as a whole.
Thank you.
Thanks, Omar.
Thank you.
Next question comes from the line of Fahed Kunwar from Redburn.
Morning, Alison. Morning, Katie.
Morning.
I just had a couple of questions, and they're kind of related. If I think about the kind of revenue and costs in isolation, they do make sense. When I look at the jaws coming through for the next few years, given the cost reductions, they're one of the most ambitious in Europe. I guess given the cost inflation we're seeing across the market right now, how confident are you that, you know, you can see, you know, revenue growth while cutting costs 4% per annum? Just specifically on it feels like NatWest Markets is a real kind of microcosm of that point. When you look at the kind of annualized quarterly number, it's kind of annualizing it around GBP 400 million.
The guidance, I think, you talked about being GBP 800 million-GBP 1 billion in the medium term. How much of that is actual growth expected in kind of rates improvement, currency improvement, capital market improvement? How much is just mechanically, if you've got any negative funding lag still running in the business from the old non-core, and that just kind of rolling off would just move that kind of GBP 400 million up towards GBP 800 million. I'm just interested to know, you know, how much do we need to kind of make an assumption on growth and how much is mechanical? That would be very helpful. Just a final question on NatWest Markets.
The kind of GBP 25 billion or the kind of the liquidity in cutting the risk-weighted assets, I think that was to do with a particular position that you have on your balance sheet you're going to keep on. When that rolls off next year, what would be the revenue loss that you would see when that little bit of balance sheet comes off? Thank you.
Thank you. Well, look, let me start and see if I can help you with some of that. On costs, you can see we've got very good trajectory on our costs. As Katie and I both said, it won't be linear, but we're very confident about the 4%, 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. We also see continued revenue opportunities across different parts of our business. You can see the strong performance in mortgages. You can see, you know, 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 GBP 1 billion of assets under management and almost 11% year-to-date growth. We see continuing growth trajectory from the strength of our franchises and with our continued investment in technology and digitization, which is where 80% of our investment is going, opportunities across there. I think probably that's all I'll say there. On NatWest Markets specifically and just to sort of talk through that and give you some help on that.
I mean, 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 business as we continue to reshape that. What we expect is that as we continue to grow in our capital-