Okay, thank you, everyone. I think, we'll leave the back door open, for people as they come in. Thank you, everyone. Welcome to the European track of the Barclays Global Financial Services Conference, here in New York. I'm Aman Rakkar. I lead coverage of the U.K. banks, research team at Barclays. I'm delighted to be joined here this morning by Katie Murray, NatWest Group CFO. Katie, thank you very much for your time.
Lovely to be here. Good morning, everybody.
Cool. So to kick in, to get into things, many U.S. and international investors with us today will be worrying about an uncertain macro backdrop in the U.K. and the implications for its banks. Given your unique vantage point, I'd be interested in your assessment of the operating environment. How would you characterize the outlook for your business?
Look, I think it's important to first of all kind of just confirm the business is performing well in this environment. We've structured it so that it can perform well in both sort of higher and lower rates, kind of environments. You know, we still have maintained our guidance of this 14%-16% ROTE in terms of what we believe we can deliver. But certainly there is a lot going on in the macro. We can see that inflation has remained a bit higher and a bit longer than people expected it to. But I think what's been really important against that as well is that wage inflation is kind of slightly above there.
Now, that's causing different challenges, but it means from a kind of cost of living and an impairment perspective, actually, our balance sheet is relatively secure because, although people are seeing increases in rates, they're also being paid for by their wage inflation. So there is the kind of inflation angle. Interest rates, you know, you all watch it closely. They've gone up significantly and very quickly. In our own models, we had them going up to 5.5%. At the last end rate hike, they actually only went up to 5.25. You know, the next meeting of the MPC is on the twenty-first. We'll see what we do there. And I think certainly the narrative is, and the market expectations is, maybe that the rate rises aren't over, but we're getting to the end of those rate rises.
So whether there's another 25 or 50 basis points to come over a couple of hikes. But I think for us, as I look at the macro, we feel comfortable that we're able to deal with it. We've had very good performance in the first half of the year. We continue to perform well, I'm very, you know, comfortable about the maintenance of that 14%-16% ROTE number.
I guess recent developments on the senior management-
Yep.
Up front, the firm CEO departure, the recent appointment of, or recently announced, impending appointment of a new chairman. Interested in any reflections around the impact on the management team, the business. Is there a chance of a shift in any strategic direction from?
So I mean, I think what's really important to say is that the transfer over to Paul Thwaite was incredibly well managed. It was known, and that he would be the succession candidate if there was any need for a short-term successor to come in. And that was something he was aware of, the board were, we were all aware of. So that, I think, was really helpful and important. And I think from a strategic perspective, he's been intimately involved in the development of the strategy that we announced. He is, you know, a fully fledged CEO. If he needs to make any strategic changes, he must look at them and propose them, and the board ultimately kind of confirms and sets the strategy. So but I'm not, I'm not concerned about a change in direction. If anything happened, it would be some kind of tweaks around the edges.
So very much part of getting to where we are today and then very much part of the delivery of that. Then, what's been really interesting is for the business, because Paul is very well known. He's been with the business, you know, for 20 years. He's worked here in the States. He led the CNI business with Robert Begbie, you know, very well known in the organization. It's been pretty seamless in terms of actually the transfer from one to the other, mainly because he has been such a big part of things. You know, the search for the new chairman was already announced. It was all very much underway, so it's progressing kind of as planned.
Then when Rick, who I met a couple of weeks ago, is in place, he will then take a view as to what to do around the CEO in the longer term. But for the moment, Paul is very much behind the desk and driving the business forward as you'd expect him to.
Yep. I guess a related follow-up question. It's a key question that we get from investors that we speak to is the kind of extent of government involvement in, you know, the running of the business or, you know, that relationship, noting, you know, the U.K. government still owns a significant chunk of the share base. I mean, is there anything you can kind of shed the light on there in terms of that relationship?
No. So I mean, I think this is the fifth time we've done this conference together, Aman. It's in terms of that piece, and what I can absolutely say is kind of hand on heart, it's throughout that entire time, you know, and I meet our UKGI on a monthly basis; they haven't been involved in the day-to-day running of the business. You know, they'll have some views on Rem, but you'd expect any major shareholder to have some views on Rem. So that's very kind of typical, and it's always been very comfortable to be able to make that statement. Nothing's changed, and since the moments of sort of late July, I think, though, what investors need to see is the comfort that that really is the case.
But certainly from what we're experiencing on the ground, I think the particular set of circumstances which we can all kind of recognize, but, you know, they have always wanted to make sure that they were independent and very much a separated entity. On my agenda, just to give you a kind of point of detail, the very first bit on every agenda says, "Please do not pass over any insider information," in terms of that piece. So I think it's really. They do want to be at kind of arm's length. I think the job that Paul and I have is to make sure that we're building a business that's delivering to our 14%-16% return.
We're managing at a 13%-14% to enable them to do their continued sell down, which they've been very public about, about doing, and we're very keen that they continue, they continue to return us into private ownership.
Thanks very much for that. I guess turning focus to revenues, NIM, key driver of the investment case for domestic U.K. banks. I guess, pressure in recent quarters has seen a lowering of market expectations f or the interest income, and that's primarily driven by rising deposit costs. Can you talk about the main drivers — the major drivers of revenues from here, and in particular, if we might expect some stability in the interest margin and in the coming periods?
Yeah. So if I take you to kind of what we talked about when we met at the end of July. You know, we've got the target of around GBP 14.8 billion for the year in terms of income. NIM is certainly one of the main KPIs. I would say, though, for us, it's an output rather than the original driver. I'm very comfortable to take actions which are income accretive and ROTCE accretive, but it could be NIM damaging.
In terms of that piece, because I feel actually in the round that that's very important. And I think actually, the deposits are a really good example of that. You know, as we've seen, monies transfer from kind of instant access and current accounts into term, obviously, we've tried to make sure that they go into our term accounts rather than others. So while that has an immediate kind of impact on the NIM, it's more valuable for us to keep them on balance sheet than it is to not offer that product and have them go elsewhere. But I do think it's important when we look at NIM to understand that it is a very important KPI, but for us, it's a bit of an output of the actions that we take rather than the kind of sole drivers.
Then when I look at what's kind of driving the kind of NIM. Obviously, what's happening on deposits, we were stable at the end of Q2, and what we said was to kind of stable from there onwards. I think what's really interesting is the shape of those deposits.
Yeah.
You know, we've seen that they're now 11% kind of fixed versus, I think we were, we were at 4% or 6% when we kind of started. So that piece obviously has an impact on it. So the timing of rate rises, I mentioned earlier already that, we thought it would be 50 basis points in August, it turned out to be 25. That has a little bit of a —I mean, that's a short-term impact on NIM, but the timing is then they happen. What pass-through decisions that we make, is that, like, that kind of comes through, and then also what's kind of happening in the mortgage market.
You know that we're in this kind of period of transition where we had written mortgages at very high rates in kind of 2020 and 2021, and they're kind of all kind of in the, the final stages of rolling off. But we can see that kind of working its way largely through the book by the end of this year. They'll be a little bit into early next year, so that, that kind of, that sort of balances down. So what we sort of said was that we'd take it to sort of around 3.15%. That does mean that in Q3 and Q4, you'd expect the NIM to be lower in the second half than the first half, the average down to 3.15%. So I think it's important not to be surprised when that comes out to be the case.
But I do think what's really important is the management of income and the management of the ROTCE, because in that, you're managing the whole balance sheet and, all of the activity that we do, not, not just the net interest line.
I mean, deposits are a key source of market focus at the.
Yeah.
Moment.
Absolutely.
Key sensitivity for earnings. We're seeing deposit costs rise amid a backdrop of, you know, rising competition, political pressure, evolving customer behavior, in particular, mix shift, you know, the transition from non-interest bearing current account to things like term deposit. History suggests we potentially have some way to go on that transition if we look at, you know, pre-financial crisis, for example. You know, where do you think mix can settle from here?
It's for me, it's one of the, I mean, it's one of the most interesting questions, and I think particularly in the States, you've also had the, you know, different behaviors because of the kind of the prevalence of money market funds. But as I look at it, if we think of our non-interest bearing, for NIBs, and our interest bearing with the IB, we were at 40, 60 for many quarters. And it seemed it was really stubborn. They weren't moving, and you kind of thought, well, that doesn't feel kind of quite logical. Then in last quarter, we went to kind of, you know, 37, 63, in terms of NIBs and IB kind of balance, and that was the beginning of that transition.
I would expect that transition to continue, and if I look at the assumptions we made for the end of this year, and as we look forward to our 2025 guidance, that we are expecting that to continue to move. I think what's really hard is where does it land? And I'm not convinced that history is the best dictator of where it would land. It's what we look at all the time to try to kind of get there. But I've been surprised at how slowly they had moved to date, you know, getting up to 11%. And then what I'm really interested in is if we have only one or two base rate rises to go, does that mean it starts to stable out as well, and customer behavior kind of stables out?
Then you balance with all customer behavior lags, so is there still, there's still more to come. I do think what's going to be very interesting, and we'll see, I think, some atypical behavior, where in the past we've seen kind of pass-throughs much more linked to the base rate rise. What we do know is that many of our ourselves and many of the peer groups have got significant TFSME, which was some funding that was given during COVID into banks to repay, and that repayment starts in 2024 and goes on, I think, out to 2028. And I think as people are trying to secure some of those balances, you start to see some changes, I think, in terms of how they do some of the pass-through. And some of them, I think, will be quite short-term. They’ll be looking to raise particular amounts for certain periods, and then it will kind of smooth itself out. So I would expect it to be a movable road from the backside as we move forward from here, and I think customer behavior will be very intriguing.
One of the debates that we have, and I know you have it as well a lot, is, you know, if you haven't moved now and there's already 5.5% available, what percentage are you waiting for to move your excess funds?
Yeah.
And it's, I think it's interesting. And then to think of, you get the best returns if you're willing to tie your money up for a year. People, when we particularly see this in the SME market, they really value liquidity. And actually, the tying up of funds for a longer period of time is something that they value far less. So I think there's lots of twists and turns. We have made, we think, pretty prudent assumptions in terms of where we think it will go. We're not at the point of where it got to in history yet, but we continue to watch, and we'll update those assumptions as we move forward. But I do think it's one of the things that it's the hardest to know at the moment in terms of that piece.
Clearly, the financials of a current account or even an instant access account versus a term account are quite different. So to make sure you have kind of that balance. So we were very pleased to see kind of stability in volume, and obviously, term accounts are very valuable to us from a liquidity perspective. So although there might be a smaller margin on them, they are very valuable assets for us, and the liability for us to be holding on our balance sheets.
I guess just to round out the discussion on deposits, the FCA's implementation of Consumer Duty.
Yeah.
At the end of July. Most notably a 14-point action plan on cash savings. Interested in your thoughts on the extent to which Consumer Duty might affect your business, the industry more broadly. Is this the kind of thing that could see pass-throughs rise, fees cut?
Well, I guess, I think what's important to see obviously is, as a large kind of high street bank, it's something that, you know, the outcome for our customers is something that's been key to us, all along. So we probably expect to see lesser impacts of it on our institution. It's been a big program for us as we've kind of gone through to make sure that we've got the right things in place. What we don't have is a history of back book versus front book pricing or things like this. There's some very small pieces in some kind of remote parts of the bank that we need to deal with.
Yeah.
but they're, they're utterly immaterial in terms of that piece. So that, I think, is very helpful.
Yeah
A s we move kind of forward from here. You know, I think while it's gone in place, the board itself has to attest that it's all up and working only a year from now. So it's still got a huge focus in terms of actually, are we in the right place? And I think the FCA is also working out what it means for them. We have seen other players in the market make some significant changes to their fees, I mean, across different aspects, not just in banking. So that obviously shows it's a piece of legislation and guidance that's needed-
Yeah
To make sure that you kind of get to the right place. But at the moment, we're obviously taking it very seriously. We have a significant project led by one of our senior executives on the ground doing that, but we don't see it as having a particular impact on us on a day-to-day basis.
Great. We might shift to the ARS questions. We have the remote handsets on your desks. We've got six of these questions.
Perfect.
I'll do a couple now, and then we'll.
Super.
We’ll do some later. Question one, please do participate if you’re in the room. So what would cause you to become more positive on NatWest’s shares? Number one, better NII. Two, better fee income. Three, better cost savings. Four, better asset quality. Five, distribution. Six, reduction in U.K. government stake. Seven, clarity on U.K. macro. Clarity on U.K. macro.
A pretty emphatic point, isn't it? So in terms of the responses, look, I think, you know, any business in any country, stability and clarity on, on politics and macros is clearly. It's very, it's very impactful. And, I need to make sure that I do the best I can on numbers one to five, because those are the things that are far more in, far more in my control.
Yeah. Question two: What are you most concerned about at NatWest? One, weaker earnings. Two, weaker capital. Three, lower distributions. Four, reg risk. Five, political risk. I guess that's in the context of a subdued share price for U.K. banks. Again, political risk, followed by weaker earnings. Question three: How are you thinking about NII into 2024? Number one, growing, driven by loan growth. Two, growing, driven by hedge. NII flat, NII falling, given deposit headwinds, NII falling, given other headwinds. Structural hedge. That kind of neatly brings me on to this topic, I guess, you know.
It's a perfect segue.
Perfect segue. I guess, you know, NII is going through a period of adjustment.
Yeah. Definitely
Right now, as you know, we've got to catch up on deposit costs. I guess you've alluded to the fact that mortgage margins are, you know, a source of margin compression at the moment. Structural Hedge is a significant tailwind. Balances are shrinking, I guess in part because things like current accounts are shifting, but this does look like a pretty substantial multi-year tailwind. So, you know, how are you thinking about the hedge, and does it give you confidence around?
I mean, certainly, we've, we've talked very openly about the strength of the hedge and the strength of that tailwind that it, that it gives to you. So, I mean, at the moment, the hedge is GBP 202 billion, fell GBP 3 billion in the quarter. What we've guided to is that by the end of the year, it will go to GBP 190 billion. Now, for us, we do it very mechanistically. We look at the last 12 months of deposits and then kind of calculate what the size of the hedge would be. So you can see what, what we need in terms of that piece as we go forward. We've had one quarter of stability and three quarters that are falling. So the fall in the hedge is very—it's kind of very predictable.
I think what's really important, though, to remember, is that GBP 40 billion matures every single year. At the moment, we're putting it on at around 4.4%. You know, earlier in the year, I was talking about 3.3% and 3.6%, and now it's at kind of 4.4%. Interestingly, what rolls off in 2024 is at 80 basis points, and what rolls off in 2025 is at 50 basis points. So there's a huge natural kind of benefit to that. So even though I have a falling volume, you know, if we see that, that deposit stability, and the stability needs to be both in volume and shape.
Yeah.
So if they were all to move, they would not obviously all move, but into term, then that would have an impact as well in terms of what you were hedging. But, you know, that certainly gives us confidence as we move forward from here. And just the mechanics of it, that given the significantly improved rates with the lower volume, it still is a nice, strong tailwind and a very important part of the shape of our income as we move forward over the next couple of years.
I guess the size of the hedge has increased quite significantly since 2019. Kind of in line with deposit growth on the balance sheet. I guess now we're entering into a period of monetary tightening, deposit outflows and mix shift. So is it? You know, should we expect the hedge to go back to a kind of pre-COVID size in terms of notional?
Yeah, and I, I probably like in my answer to that a little bit in terms of do you go back to this, the same level of term deposits? But what I think is important to do is to remember, in terms of the hedge, what we actually do with it. So we are predominantly hedging current accounts and to a much lesser extent, instant access in terms of that piece. So what we can see is that as people continue to keep good funds in their current accounts, it would kind of—y ou could see that control the decrease in the hedge. So what I really— we really need to answer that question is actually the monetary tightening, we can see impacts the commercial bank much more.
Yeah.
Actually, which of our customers are being impacted by that? Not necessarily immediately, but over time as well, and how that kind of flows through. I think we haven't made any kind of public statement into where we think the hedge might land over the next couple of years. I think the deposits and the shape of those deposits, you know, I did say earlier that we've been relatively conservative around the move into terms, so I'd still expect it to shrink a little bit, but we're comfortable with the benefits that we have in that 2024 and 2025 rate increase. But really, the shape will be very interesting for us.
Yeah. Mortgages. Feels like a difficult backdrop for mortgages in the U.K. Demand is subdued, volumes are relatively weak at system level, and spreads are low. Competition remains intense in that space, as ever. You actually seem to have done a pretty good job of navigating that in the last couple of quarters, but interested in what your take is and the outlook for the mortgage market here.
Yes, I mean, look, it has, if we think on mortgages, it came off such highs in sort of 2020 and 2021, and I think that 2022 actually surprised everyone a little bit to the upside in terms of the strength of the continuing mortgage book. So it's, it's definitely much lower in this year. We have been pleased, and you can see from the recent market data that we've gone to kind of 12.7% stock share. So that's a kind of point up from when we spoke before. So we have, we view mortgages really importantly, as a really important growth area for us. We do know that they are. You know, in the U.K., we have a kind of a 2- and 5-year kind of model. They're, they're something that the 2- and 5-year is very much the initial relationship.
We have sort of 77%, I think, our retention is at the moment. So therefore, three-quarters of them, you keep on for many, many years in terms of many renewal periods. So they're very valuable, both in that first moment, but also as they renew, as we go forward. But it is challenging. There's lots of competition, people ask me a lot, does the market behave in a very rational way? I think over, it does over a year, but you can see movements in, you know, one week or this week, as we all kind of try to manage our flow, manage our balance sheet, make sure we're using the hedges we've got in place in the right kind of way.
You know, we've always talked about we like to write the book over time at a kind of 80 basis point piece. When swaps move up very quickly, you can see that that can fall, and then we kind of work to how we kind of get back to that kind of around that 80 kind of level. So definitely under pressure at different points in this year, but I think again, it's one of those things that we look at a lot as very much it's income and its ROTE impact, and very comfortable with it. What we're writing is at the right level in terms of the ROTE. So, again, a really important product for us. It is challenging. We've invested hugely.
We invested in our relationship with the brokers to make sure that it works well, and at the moment, we're kind of comfortable with the performance we see in that. We see it is a major continuing growth area. You know, I think when I was here a number of years ago, I was talking about 9.7% or 9.8%. That's a huge move i n terms of the size of that, that market over the last five years. So I mean, significant continued growth in the book, and that's what we'd expect that to continue going forward.
I think you alluded to it due to this idea that the negative mortgage margin churn or the headwind from mortgage margin pressure is something you'd expect to kind of, you know, be a feature for the coming quarters, but thereafter, maybe we're past this headwind.
Yeah. So as I, as I kind of look at it, it's definitely sort of Q3, Q4 it's in the future, but Q1, it kind of starts to diminish, I think. And you can see that at the moment, the book, if I look at our published numbers for Q2, the group was earning kind of 101. You know, it has fallen 15-18 basis points each quarter for the last number of quarters as we've seen that kind of churn. When you get to the kind of 101, then you think, well, Kitty, you talk about over time trying to write to 80 basis points. Ultimately, those things would vary.
It's a bit simplistic because there's SVR and buy-to-let and all sorts of other things going in there, but we're definitely reaching the end of that, the level of pressure that we've seen in the past.
Yeah
In it, which is good to see.
Asset quality? Clearly, many of your customers are facing a pretty significant step up in borrowing costs, most notably your mortgage customers. With rates set to be higher for longer, the kind of asset quality outlook is uncertain. It's a key feature of the conversations that we have with investors. Remarkable observation so far, how benign things have been. I mean, how sustainable is this level of credit performance? And are there any particular areas of stress that you're observing in your portfolio?
I mean, first of all, I would say, no, there aren't any particular areas of stress. We have obviously spent - we spend an inordinate amount of time looking at this, and if I think of it in two different buckets. If I look at the retail side, you know, our mortgage book is now 66% five-year. And so when I look at wage growth, and it's not just wage growth in 2023, it's wage growth since five years ago when you took that mortgage out. And five years ago, you'd think, well, that wasn't very much, but actually 1%, 2%, you know, for three years, and then now 3%, and now kind of 6.5%. So you've had pretty significant wage growth in those, in those five years.
When I tested your mortgage at the time that you took it out, I tested you at rates that were higher than the rates that you're paying today. And so therefore, what we can see, and we've done a huge amount of work with this, with the economics team, that actually the rate, the wage rises people have seen, and it's true for two-year and five-year, are bigger than the wage rises, the rate rises that they're seeing in their mortgage. And I think it's important to remember that they are multi-years, so therefore, you've got multi years of, of wage increases. So therefore, that gives me some comfort. I think the most important thing for mortgage is actually, are you employed?
If you are employed, you will have had the benefit of wage rises. Now, people have taken different paths over those five years. Some people, wages will have gone down for different kind of personal reasons. But we know, and this, where history is a really good, example, we know that people will move hell and high water to pay their mortgage sort of thing.
So while they might be suffering challenges as well, and cost of living and their food basket and things like that, we know that as we look at it, actually, they're more comfortable. So that's why I think we're not seeing a particular issue on the retail side. If you look to the commercial side, the economics aren't quite as neat. There's lots of different things going on within there. What we have done, as you know, over many years with our commercial group, is to try to make sure that we moved out some of the more risky aspects of the balance sheet. You know, we try to make sure that we trade debts that are in trouble before they get into trouble to kind of protect us from any of those kind of impairments.
I mean, I get a weekly report from the credit team and the credit officers, so we kind of talk about the funnel. What I would say, we're seeing as many things going into the funnel as we saw in 2019. That's unchanged, but what we're actually seeing is them recovering back out of the funnel as well. And I think that, COVID in many ways was a fantastic learning experience, particularly for the small and medium-sized businesses, as to how they could manage those things, the kind of pressures well. You know, I think in the U.K. press, we love to talk ourselves down, you know, and then we, we kind of some of the more recent reports are actually, the economy is doing a bit better than we kind of realized.
We can see that when I go out to visit customers, and I talk to them, and they say, "We're doing okay, but we're a bit worried about the other guys." And so they're doing okay. We're watching it very closely. We've got a lot of work that we do. We try to preempt people before they come into problems. And at the moment, you know, we are rate for the—it was 12 basis points, I think, up cumulative overlay, it might be 14, forgive me. So I mean, really very low, and we'd have to see rates move significantly, or if situations change quite a lot to get into that 20-30 guidance as we move to the second half of the year. So at the moment we're comfortable.
We did add a bit more onto our PMA, the kind of post model adjustment that we make. About GBP 500 million of that is kind of protection against things going. So the balance sheet is good, it's performing well. We spent a lot of time making sure we've got a strong balance sheet in that space. We are worried that things will get harder.
Yeah.
So that's why we put the PMAs in place, and we'll just continue to look at them as we move forward. But at the moment, I'm not seeing any particular signs of stress in any particular areas.
Commercial real estate has historically been a big part of your balance sheet. Much less so now.
Yeah.
But it is a market focus. People do worry about commercial real estate.
I think we've changed our commercial real estate group so dramatically. You know, it's less than 4% of the group. It used to be 20%. It used to be loan-to-value in excess of 100%. I think it was 120%.
Yeah
If it's worse, it's now about 47%. What we've also done is changed a lot of where it's invested in terms of that. So we've got more in kind of the manufacturing kind of level. If you're trying to buy a warehouse in the U.K., it's almost impossible sort of thing. So and that's kind of where we're investing. So it's to make sure that you're looking at the right kind of pieces. It is an area that we spend a lot of time on, and we'll continue, we will continue to do so, but it's not one that would have given us the worries that we'd have done in the past, mainly because we have shrunk it so significantly.
Looking very much working with kind of prime developers, invested in the areas that we feel are the right areas as we move forward in there. That's not to say that there isn't anything in the group that we, we wouldn't rather not have, but in the round, we're very comfortable with what we've got, and the size of it and relative to the total group is something that we're, we are comfortable with.
Okay, great. Maybe we'll shift back to the ARS questions. How do you think NatWest will perform versus market expectations for capital and dividends? One, beat expectations given better earnings. Two, beat expectations given lower cap requirements. Three, miss expectations given weaker earnings. Four, miss expectations given higher reg requirements. Half the room thinks you'll beat expectations given better earnings. I might actually ask a question then on the outlook for M&A across your business. So I don't want to be too leading in the way that I ask the question.
Don't worry. Don't worry. It's a question I'm well used to. You can ask it any way you like.
I guess around your fee income and ambitions at a group level, I guess, you know, the net interest income tailwind has been so strong that the balance of revenues has shifted towards net interest income. I think you've been pretty clear for a while now that growing fee income is a strategic priority for the group, and hopefully, that's driven by growing fee income rather than losing net interest income. But the kind of growth rates that you'd need to deliver in order to rebalance the income, you know, suggests that it might have to come from outside. Do you share that view? I mean, can you deliver on fee income in-house, or do you need to go?
So I think when you look at our fee income over a multi-year basis, you'll see that we've got a very nice CAGR that's coming through. The challenge is, and I do think it's one of the things, and Alison and I have always been very public, and Ross before her as well, that actually it is misshaping. We are too dependent on net interest income. It's an absolute reality. You know, when I look at it, it's about 20% of our income is non-interest income. It may be sometimes 30, depending on what's happening on the top line.
Yep.
So to see—even though we've seen nice consistent growth in there, and if I look at where our investment is, and a huge amount of our management effort is around, how do you grow that line? How do we make sure the product that we have in there is sort of better utilized across all of our different customers and things like that? You're going to just get that kind of 2%-4% CAGR, which is fine, but the problem is, you're not gonna change it from kind of being 20-25% of the balance. So we've been always very public, that when we look at acquisitions, it is something we're more interested in things that can move that non-interest line. I do think, though, as we look at it, it's very important for our investors.
We're an entity that's delivering 14%-16% earnings. You know, where our price to book is now, it's relatively hard to make the case for some of the very big kind of wealth acquisitions. So we do look at things. We're quite interested in buying kind of groups of business. You've seen the acquisitions we've done to date have been very much around kind of capability. So we do have an active team. I spend a lot of time with them. We do look at it. If the right opportunity came up, we would certainly seek to add it, and that is the thing I think that would pivot that number. But in the meantime, it's very important that a significant share of our investment portfolio goes into continuing to develop that kind of growth within that non-interest income line.
But I would agree that to change it significantly, it's M&A, but I'm also very clear on the commitments and the conversations we have with our investors around returning capital and the hurdles that we would be making as part of any of those acquisitions.
Yeah. Maybe we'll shift through the last couple of ARS questions. What do you see as the biggest risk to NatWest earnings? 1, rate cuts, 2, competition, 3, cost inflation, 4, loan losses, 5, government or regulatory intervention. Competition. Competition, followed by government or regulatory intervention. I guess it, it, you know, it has been a concern for European bank investors. You've seen, speculation around bank taxes in places like Italy and Spain. I seem to get regular incoming from various people telling me that a bank tax could be coming in the U.K.
I think it's really important to remember that the U.K. already has two bank taxes.
Yep.
So it's not an area that hasn't already been accessed. So we have the bank levy, which we pay in Q4, which costs us around GBP 100 million. It's very much dependent on deposit levels, but think of it around, sometimes a bit higher, rarely any lower, in terms of that piece. And so then, we also have a 3% surcharge on our corporation tax in terms of that piece. So I personally don't feel that that's—yo u know, we already are in that position. We. It's not something that we expect we would see more of.
You know, I said it earlier, my job is to make sure that we deliver the right investment case, you know, but I think it would be the government also recognizes we do need to have a very, you know, working banking system as well. So I think we've already been taking for that. I mean, I think competition for deposits, I think that's real.
Sure. That field.
I mean, just I do think we'll see some atypical behavior, and, you know, all of these things are things I spend a lot of my time on. That one is probably the one that can have more impact than others because of the TFSME and things like that. So let's see how that kind of flows through. I can see the benefits coming through, certainly on the medium term, on our income of the hedge and how it's gonna deliver, and also on our kind of continuing growth that we see in the IAs. But, you know, the competition and deposit piece is probably one we spend a lot of time modeling as to what it might do, but comfortable, obviously, on our 14%-16% return.
Question 6, final one. So just returning to the theme of acquisitions, how would you view significant acquisitions at the group level? 1, very positive, given potentially high return on investment, 2, marginally + 3, marginally - 4, very - 5, prefer the capital back to shareholders. It's quite a balanced set of responses there. The main answer or main response there is, prefer the capital return to shareholders.
And what's interesting is if I take the very positive and marginally positive, it kind of outstrips that. So for me, what that tells me is if you do something, make sure you do it wisely.
Yes. Yeah.
You know, and that we've got the right, the right return so that we continue to, while you could see a short pause in the capital return, it's something that comes back on, on play. So actually, if you take one and two together, I, it's, you know, that, that's interesting to see, and we'll, we continue to look, accepting we know that what our commitments and our expectations on us are.
Yeah, I mean, guess while we're on the topic then around distributions, you're a very capital generative bank now. I guess it's moved away from a return of surplus to driven by the online profit of the business, which I guess is a good transition. How do you think about the priorities for capital returns, things like buybacks? You've done specials historically.
So I mean, you're absolutely right. We over the last couple of quarters, we've generated kind of 50 basis points of capital a quarter. You know, there are movements that will come through as Pillar 3.1 kind of drips in. Post-recession, we're always worried about, if I go back to my comments earlier when we were on impairments, that it's sometimes hard to kind of guess where that number is. So but the kind of RWA movement will have some impact on that. We've always been very, very clear, you know, 40% dividend return, and then the excess over that, our first priority is the directed buyback. The next priority would be an in-market buyback.
You'll recall, I think it was summer last year, that we did a very large special because we didn't want to toggle the U.K., the U.K. government back over 50% ownership. They're at 38.7% today, so that's not something that we're so worried about. So you could think, well, that would become less, less likely. But I think the kind of the dividend and the directed buyback are things that are, are our real priorities.
Then obviously, we also use a lot of our excess capital to invest into the business, and it's very important that we continue to do that as we move forward. But I think, you know, we've talked about M&A, but we've been very clear that the capital we generate, our preference is to return it to our shareholders and to use it to continue to bring down the ownership structure of the bank. And from conversation with shareholders, that's very strong feedback that we get as well.
We've probably got just enough time. If anyone had a question on the floor, please do put your hand up. Happy to kind of field it for, for Katie. On a final question then, just on the cost base, I mean, inflation has been running high, higher than expected.
Yep.
I can't imagine it's easy to control a cost base in this environment. I mean, how are you doing it, and.
Oh, you're right in your imagination. So GBP 7.6 billion is what we said we'll do for this year. We'll be there, you know, or thereabout. So I'm probably chasing a 10 or a 20 around the building at the moment to kind of make sure we hit the numbers. So GBP 7.6 billion, and that, that's an important, important number for us. It is helped by what's been going on in Ulster, so there's a little bit of a benefit in that piece. But look, it's really. It has just been really important that as you manage the impact of kind of the wage inflation, that you also manage the size of your workforce in terms of that piece and how you kind of, you marry both those things together.
So we've made investments where we really need to, in the right kind of specialist kind of areas, whether that's in data and tech, and kind of managed elsewhere. But it's really—i t, it's something that, you know, we've done cost takeout in that way, you know, for the last 15, 20 years, very, very, kind of significantly over the last decade. It's something that is part of the DNA. It's an annual kind of cycle. We're in the conversations as we are for next year. What we did indicate this year is that because of inflation, we'll be going up rather than down.
Yeah.
You know, and I think as we get into 2024 and then into 2025, we've obviously got a commitment there around a 50% cost income level. So it's still a huge focus. There's only three ways to take out costs. It's people, processes, and kind of technology, and we try to work on all of those levers. What's been really pleasing for me is the amount of the activity we do now that is just digital straight through processing.
Yeah.
You know, and that, that's been really fundamental to make sure that, you know, our sales are done that way, credit cards are opened that way, mortgages are managed that way. And I think just continue to take that through every single process. We have both externals to our external customers, but also internally. And I think we've still got more we can do in that space.
Okay, great. With that, we'll bring the session to end. Thank you very much, Katie.
Lovely. Thanks a lot, everyone. Thanks for your time this morning. Take care.