Good morning, and welcome to NatWest Group's H1 2025 Results Management Presentation. Today's presentation will be hosted by CEO Paul Thwaite and CFO Katie Murray. After the presentations, we will take questions.
Good morning and thank you for joining us. I'll start with a brief business update. Katie will take you through the numbers, and we'll then open it up for questions. You will all be aware that since our first quarter results, the government has sold its remaining stake in NatWest Group, so we are now privately owned for the first time in 17 years. This is clearly an important milestone. With government ownership and a significant restructuring of the bank behind us, we are attracting new investors and driving growth. Customer activity has helped to deliver a strong first half, so let's turn to the financial headlines. Customer lending grew 3.2% to GBP 384 billion. Customer deposits were up 1% to GBP 436 billion, and assets under management and administration grew 5.9% to GBP 52 billion. This has driven strong financial performance.
Income grew 13.7% to GBP 8 billion, while costs reduced 1.4% to GBP 3.9 billion. This resulted in operating profit of GBP 3.6 billion and attributable profit of GBP 2.5 billion. Our return on tangible equity was 18.1%. Earnings per share were up 28% at 31 pence. We have announced an interim dividend of 9.5 pence, up 58%, reflecting our higher payout ratio. And TNAV per share grew 16% to 351 pence. Our CET1 ratio is stable at 13.6%, with strong levels of capital and liquidity. Successful execution of our strategy is driving strong capital generation, which allows us to invest in the business, support customer growth, and deliver attractive returns for shareholders. We are pleased to announce a new share buyback today of GBP 750 million. Together with the interim dividend, this brings total distributions declared to shareholders in the first half to around GBP 1.5 billion.
The chart on the right shows how the dividend and TNAV per share have grown year on year. Our new buyback program will deliver further share count reduction in the future. I'm also pleased with the progress we are making on our strategic priorities, so let me update you, starting with disciplined growth. We continue to grow our customer base across the bank. We attracted over 100,000 new customers as a result of organic growth during the first half. In addition, the Sainsbury’s transaction completed in May, adding around 1 million new customers, with about GBP 2.4 billion of savings and GBP 2.2 billion of unsecured lending. We have grown across all three of our businesses. In retail banking, we grew lending 3%, including both mortgages and unsecured lending, and deposits increased 1%.
We continue to build out our mortgage proposition, including for first-time buyers, which has driven a 4% increase in our application share of this market since early last year. During the first half, we helped 24,000 people buy their first home. We recently launched family-backed mortgages to help customers get on the property ladder by enabling them to add a second person to their mortgage while retaining independent ownership. Our share in credit cards increased from 9.7% to 11% as a result of the Sainsbury’s transaction. We launched a whole-of-market offer for personal loans at the end of last year, extending them beyond our own customers, following our successful extension of credit cards to the whole market. In commercial and institutional, we grew lending 4% and deposits 2%. In corporate and institutional, growth was driven by project finance, infrastructure, sustainable finance, and funds lending.
In commercial mid-market, we grew in a number of areas, including social housing, where we delivered another GBP 2.7 billion of lending. In private banking and wealth management, we grew lending 2%, as well as attracting new assets under management, where net new inflows of GBP 1.5 billion represented 8.1% of opening AUM. You will remember from our first quarter results that we have over-delivered on our GBP 100 billion target for climate and sustainable funding and financing, and have now reached GBP 110 billion. We are announcing a new target today to deliver GBP 200 billion of climate and transition finance by 2030. We have extended the scope to include transition finance in line with the government's transition finance strategy. Our second priority is bank-wide simplification, where we continue to enhance customer and colleague experience and increase productivity. Let me talk you through some examples.
We have digitized over 30 customer journeys during the first half. In retail, this includes being able to change credit card and ATM limits, as well as accessing our new US Dollar Travel Account. In commercial and institutional, we made it possible last year for business banking customers to access up to GBP 100,000 of unsecured lending within 24 hours. We have now extended this to our commercial mid-market customers, making life easier for them, as well as our colleagues, who save on average around two and a half hours on each application. In our private bank, this includes the automatic renewal of fixed-term deposits. We continue to streamline our systems and modernize our technology estate. In commercial and institutional, we have moved our commercial customers onto a new, modern Bankline Platform, which has allowed us to start decommissioning the old one.
Our private bank is rehosting their core banking platform from a third-party provider in Switzerland to the group data center in the U.K. This both reduces spend and increases capacity. We are accelerating the use of data and AI. For example, we have just announced a strategic collaboration with Amazon Web Services and Accenture to modernize our data capabilities. This includes the creation of a platform that uses AI to give us a single view of customer data across the bank. This will enable greater personalization, faster onboarding, better protection against fraud, and stronger customer engagement. We also continue to simplify our operational model as we streamline our legal entities and branches in Europe, reduce the number of branches we operate in the U.K., and relocate our private bank investment operations and technology teams from Switzerland to the U.K. and India.
As a result of growing income and lowering costs, we have reduced the first half cost-income ratio from around 56% last year to around 49% this year. Finally, as we actively manage our balance sheet, we have generated 101 basis points of capital in the first half, including 139 basis points from earnings. We have taken action to reduce risk-weighted assets by GBP 2.9 billion through a range of measures, including three significant risk transfers. As a result of our strong performance, we are upgrading our 2025 guidance for both income and returns. We now expect income greater than GBP 16 billion and a return on tangible equity above 16.5%. We continue to target returns greater than 15% in 2027. With that, I'll hand over to Katie to take you through the results.
Thank you, Paul. I'll cover our second quarter performance using the first quarter as a comparator. Income, excluding all notable items, was up 1.5% at GBP 4 billion. Operating expenses were 3% higher at GBP 2 billion. The impairment charge was GBP 193 million, or 19 basis points of loans. Taking this together, we delivered operating profit before tax of GBP 1.8 billion. Profit attributable to ordinary shareholders was GBP 1.2 billion, and the return on tangible equity was 17.7%. Turning now to income. Overall, income, excluding notable items, grew 1.5% to GBP 4 billion. Excluding the impact of one additional day in the quarter, income across our three businesses increased 1.1%, or GBP 43 million. Net interest income grew 1.6%, or GBP 50 million, to GBP 3.1 billion. This was driven by volume growth across lending and deposits, including portfolios added from Sainsbury’s Bank.
It was also supported by margin expansion, as tailwinds from the product structural hedge more than offset the impact of the base rate cut in May and lending growth. Net interest margin was up one basis point at 228 basis points, mainly reflecting deposit margin expansion. We continue to assume two further rate cuts this year, with rates reaching 3.75% by the year-end. Non-interest income across the three businesses was down 0.8% compared with a strong quarter and up 2% compared to the prior year. Retail banking and private banking and wealth management benefited from higher debit and credit card fees. In C&I, our currencies business continued to perform well given the heightened volatility. Given the strength of the first half total income, we now expect full-year total income, excluding notable items, to be greater than GBP 16 billion.
As a result, we now expect return on tangible equity to be greater than 16.5%. Moving now to lending. We continue to be disciplined in our approach, deploying capital where returns are attractive. Gross loans to customers across our three businesses increased by GBP 8.4 billion to GBP 384 billion, evenly balanced across our personal and wholesale customers. Taking retail banking together with private banking, mortgage balances grew by GBP 1.3 billion, with growth improving throughout the quarter following the stamp duty deadline at the end of March. Our stock share remained stable at 12.6%. Unsecured balances increased by GBP 2.7 billion, mainly reflecting the addition of the credit card and personal loan portfolios from Sainsbury’s Bank. In commercial and institutional, gross customer loans, excluding government schemes, increased by GBP 4.6 billion.
Within this, loans to corporates and institutions grew by GBP 2.1 billion, mainly driven by project finance, sustainable financing, and funds lending. Loans in our commercial mid-market business grew by GBP 2.1 billion, reflecting increased lending across social housing and residential commercial real estate. I'll now turn to deposits. These were up GBP 2.4 billion across our three businesses to GBP 436 billion, continuing the quarterly growth trend. Retail banking increased deposit balances by GBP 0.9 billion to GBP 197 billion. The addition of GBP 2.4 billion of deposits acquired from Sainsbury’s Bank was partly offset by a reduction in current accounts. Private banking balances increased by GBP 0.1 billion, and the increase in commercial and institutional of GBP 1.4 billion was mainly from larger customers in corporate and institutions. Deposit mix was broadly stable, as the proportion of non-interest-bearing balances remained at 31%.
Term accounts increased slightly from 16% to 17%. Turning now to our product structural hedge. The strength of our deposit franchise, combined with our mechanistic approach to managing the structural hedge, is an important driver of income. The product hedge notional was stable in the first half at GBP 172 billion, and we continue to expect it to be broadly stable in 2025, which means a reinvestment each year of around GBP 35 billion. As we show in the chart for 2025, more than 90% of the hedges are already written, and we have GBP 4 billion locked in. We expect 2025 product hedge income to be GBP 1 billion higher than 2024, given reinvestment rates. In 2026, we expect product hedge income to increase by more than GBP 1 billion when compared with 2025. We continue to expect the hedge to be a further tailwind in 2027.
Turning now to costs. These increased 1.6% to GBP 2 billion in the second quarter. Our annual wage awards and higher national insurance contributions both took effect in early April. We also incurred GBP 27 million of our guided one-time integration costs during the quarter, bringing the total to GBP 34 million for the first half. We remain on track for other operating expenses to be around GBP 8 billion for the full year, plus around GBP 100 million of one-time integration costs. This means expenses will be higher in the second half, driven by further business transformation, the remaining one-time integration costs, and the bank levy. Our focus remains driving cost savings to create capacity for further investment to accelerate our bank-wide simplification. I'd like to turn now to impairments. Our diversified prime loan book continues to perform well.
We are reporting a net impairment charge of GBP 193 million for the second quarter, equivalent to 19 basis points of loans on an annualized basis. This includes a GBP 81 million one-time charge on acquisition of balances from Sainsbury’s Bank, equivalent to 8 basis points. Excluding this, the charge was GBP 112 million, or 11 basis points, benefiting from post-model adjustment releases of GBP 64 million. We retain post-model adjustments for economic uncertainty of GBP 234 million. We have reviewed and updated our macroeconomic assumptions with minor changes that drove GBP 10 million of additional expected credit losses. Overall, we have no significant concerns about the credit portfolio at this point. Given the current performance of the book, we continue to expect a loan impairment rate below 20 basis points for the full year. Turning now to capital.
We ended the second quarter with a common equity tier 1 ratio of 13.6%, down 20 basis points on the first. We generated 53 basis points of capital before distributions, net of the 15 basis points impact from Sainsbury’s. Strong earnings added 69 basis points, and other CET1 capital changes added 11 basis points. Risk-weighted assets increased by GBP 3.1 billion to GBP 190 billion, including GBP 4.6 billion of business movements, which broadly reflects our lending growth, including Sainsbury’s Bank, and GBP 1.4 billion from CRD4 model inflation. Partly offset by a GBP 1.7 billion reduction as a result of RWA management. And a GBP 1.2 billion reduction in other RWA movements, including FX. RWA growth, excluding Sainsbury’s, consumed 12 basis points of capital. This brings our CET1 ratio pre-distributions to 14.3%.
As you know, we increased our ordinary dividend payout ratio from around 40% to around 50% and have announced an interim ordinary dividend of GBP 0.095 per share, up 58% on last year. We have also announced a share buyback of GBP 750 million. Together, these accruals consume 72 basis points of capital. Post-accruals, our CET1 capital increased in the quarter and is up GBP 900 million since year-end to GBP 25.8 billion. Our CET1 ratio, however, is stable since year-end at 13.6%, in line with our target range of 13%-14%. Turning now to guidance for 2025. We now expect income, excluding notable items, to be greater than GBP 16 billion. And based on the strength of income, we anticipate return on tangible equity to be greater than 16.5%. Our cost impairment and RWA guidance remains unchanged.
We expect other operating expenses to be around GBP 8.1 billion, including around GBP 100 million of one-time integration costs, the loan impairment rate to be below 20 basis points, and RWAs to be between GBP 190 billion-GBP 195 billion. Where the figure lands within this range still depends on the CRD4 model outcomes. With that, I'll hand back to the operator for Q&A. Thank you.
Thank you. We'll now take your questions. If you'd like to ask a question today, you may do so by using the raise hand function on the Zoom app. If you are dialing in by phone, you can press * 9 to raise your hand and * 6 to unmute once prompted. We ask that you limit yourselves to two questions to allow more of you a chance to ask your question. Now, pause for a moment to give everyone an opportunity to signal for questions. Our first question comes from Alvaro Serrano of Morgan Stanley. Alvaro, if you'd like to unmute and ask your question.
Hey, Alvaro.
Hi, Paul. Hi, Katie. Hopefully, you can hear me okay.
Crystal clear. Go for it.
Perfect. Just on the deposit sort of flows, obviously. We had the ISA season, which has made a lot of noise, but obviously, you've lost some current accounts. Just if you can talk to that, it was a conscious sort of management of yields and what do you see during the quarter. I'm also thinking as we look forward around presumably this won't affect the hedge notional further down the line. Maybe to speak to that sort of market share movement there. Second, on cost, you've now second quarter doing much better. I know that, Katie, you've called out the restructuring sort of charges in the second half, but still it looks like you're doing underlying a lot better. Can you help us sort of understand what the magnitude of the restructuring charges are and how that compares to a normal year? Thank you.
Okay. Thank you. Alvaro, that's great. I'll share a bit on deposits. Then maybe, Katie, you come in on deposits around the hedge notional.
Yeah, sure. Absolutely.
Then we'll come to cost, Alvaro. On deposits overall, Alvaro, I think your read is pretty accurate. We did grow the base, but obviously some of that was supported by the Sainsbury's acquisition. We've talked before about the kind of competitive ISA season, primarily driven by, I guess, the kind of wider media and kind of policy discussions around what may or may not happen to ISA. There was a competitive ISA season. From our perspective, it normalized relatively quickly. If you look at our market share, we saw our ISA balances go up. Our market share was consistent and stable. Likewise, our overall deposit share is stable as well. You'll also see from Katie's slide, our mix has remained pretty much consistent. We haven't seen any massive shift there.
As you rightly alluded to, we were very thoughtful and disciplined around our pricing, especially as there's quite a bit of volatility in the swap curves around the kind of tariff dates. We were very thoughtful about that, where we priced our products, and we're comfortable in terms of the deposit strategy and the deposit base. Katie, on hedge and notional?
Yeah, absolutely. In terms of the hedge notional, the reality is moves relatively small. I mean, Alvaro, I'm not expecting that to have any guidance on that. In reality, overall NIBS down $1 billion. Very stable in H1. Where the hedge is GBP 172 billion, we kind of guided you to think of that by the end of the year. We see no reason to change that. What's great, of course, the one the hedge is, it's because of this sort of higher average kind of rates, you can see that we've raised our reinvestment rate for the year to kind of 3.7%. We know that we're going to be GBP 1 billion this year in terms of income, and then greater than GBP 1 billion as we move into 2026 on the hedge.
It's good to see that stability coming through in terms of real kind of push towards the income line. If I go on costs as well, Alvaro, our guidance for operating costs, it's unchanged. I did mention some of our transformation costs that we've had coming in with integration, sorry, with Sainsbury’s coming in. We spent GBP 34 million of the GBP 100 million in the first half. We'll spend more in the second half. Our cost narrative, Alvaro, is kind of boringly similar each time we talk. We've given you the number that we'll hit this year. GBP 8 billion is the base and GBP 100 million of those additional costs. What Paul and I work really hard to do is to create capacity so that in the second half of the year, we can kind of go to our investment kind of shopping list and go back.
We want to invest in these things to help accelerate the simplification of the business. I would just sort of see that lumpiness will come through. We're very clear on the number we're aiming for at the end of the year, making sure we're delivering real benefit for the simplification of the busines s.
Thanks, Alvaro.
Thanks, Alvaro.
Thank you. Our next question, it comes from Sheel Shah of J.P. Morgan. Sheel, if you'd like to unmute and ask your question.
Great. Thank you. Two questions, please. First, on the lending outlook. I mean, the performance was quite strong in the quarter at just under 2% underlying, excluding Sainsbury’s. How should we think about the outlook? Is this something we should be annualizing, especially in the context of the U.K. economic backdrop, which looks a little bit more challenging compared to the start of the year? Secondly, on capital, could you talk through some of the moving parts we should be thinking about? I’m particularly interested as to how you’re thinking about potential M&A and maybe holding a bit of a buffer against that and how that plays into operating within the range and when we come towards the year-end, how you’re thinking about the definition of a surplus capital position. Thanks.
Excellent, Sheel. Thank you very much. I think, Katie, I'll take both of them. On lending overall, yeah, pleased to recognize the strong quarter, Sheel. It's been good to see the growth continue in quarter two after quarter one. I'd say it's encouraging because it's very broad-based. You can see growth in our commercial institutional business. You can see continued growth in mortgages and unsecured. Obviously, we've had the helping hand of Sainsbury’s as well. Year-to-date, from memory, it's just over 3%. That feels good. We don't guide on the kind of future lending, but what I would point to is our track record there of being able to deliver. Lending, broad-based lending growth in excess of kind of market growth. To your point on kind of U.K.
outlook, I think if you look at our track record over the last couple of years, you can quickly work out our lending performance versus the wider market performance, both on the business side and on the consumer side. I'd say we feel confident around our ability to continue to drive growth on lending. On capital, more broadly, we finished the half year at 13.6. It's a good print. You'll know it's well above our regulatory minimum, 11.7. That also includes the accrual for the ordinary dividend and for the buyback that we announced today. Very strong capital generation in the half year, 101 basis points, which is great. 53 basis points in the second quarter, combination of earnings and good kind of RWA capital management. That's allowed us to increase the interim dividend, but also announce the buyback.
We're very mindful in terms of the investment case and how important kind of returns to shareholders is. We hope that's a strong signal. The context, the second part of your question is really around, I guess, the broader allocation. I'd reiterate very clearly, no change there. We're happy to move between the 13%-14%. We think that gives us good balance in terms of being able to invest in the business, support customers, but also return to shareholders. Very much a balanced approach is what I'd say. What you should expect from us with the board, we'll review at the half year and we'll review at the full year in terms of surplus capital and distribution. We obviously have a model that's generating a lot of capital, which is great. As I alluded to earlier, we understand the kind of investment case and the thesis and the importance of distributions.
To be explicit, not building any buffer or war chest in respect to inorganic, our approach hasn't changed there. Very happy with the organic growth in the plan and the growth that we're delivering. Thanks, Sheel.
Our next question, it comes from Guy Stebbings at BNP Paribas. Guy, if you'd like to go ahead and ask your question.
Hi, good morning.
Hey, Guy.
I was going to ask around the sort of structural hedge, but also how it sort of interplays with other parts of the balance sheet. It is clearly working through very nicely, and thanks for some of the updated disclosure, which only reinforces conviction for support into 2026 and 2027. I guess a debate out there is how much this flows straight through the P&L or whether we see any give back on other line items, given plenty of other banks also seeing similar support. We have seen mortgage spreads tighten slightly this year. You report a couple of basis points decline in the lending margin in the Q2 bridge. One could argue it is starting to happen already a little bit.
Just to get your view there as we work through that hedge benefit, whether you see any give back elsewhere, whether that slight tightening in mortgage spreads will hold around these levels, or if you see a risk of it drifting lower, offsetting some of that hedge support, or if you think the market should retain enough discipline to keep the sort of floor in spreads. A follow-on to that question is just around what you are seeing on current application spreads in the mortgage book or whether you could give us maybe what the back book spread is now on mortgages. Thank you.
Thanks, Guy. Mortgage margins and up spread, Katie, and then you probably lead out with the hedges.
Yeah, sure. Absolutely. I mean, thanks, Guy. It is definitely doing what it is kind of we plan to do. We run a very mechanistic process, and it is great to see that kind of increase coming through on the yield. We know that that will continue to kind of increase as we go forward from here. You can see even as you look into 2025 and 2026, we have got the billion being delivered here, greater than a billion in 2026. We do expect that further tailwind to come through into 2027. I am not going to give you guidance on that, but you can see from our slides, 50% of the hedges have already written. We have got GBP 3.8 billion of that income already kind of locked in as you move forward.
In terms of then how do we think about it in terms of it kind of flowing through. We are very clear in our view here that returns are the metrics that we work towards. We work towards the returns within the individual kind of product class. There is obviously some level at the total of kind of cross-subsidization when you see that the lending margins are obviously a bit lower because you know in terms of our NIM, we are sitting there with 228 basis points of NIM. Mathematically, the mortgages are going to depress that a little bit given where they are. We do not look at it as overt, I will subsidize this product with that product. We make sure the products kind of standalone in terms of their returns.
Naturally, as you flow all the way down through the P&L, there is a little bit of that kind of subsidy that kind of happens. In terms of mortgage spreads, what I would say, if I look at the NIM walk at the moment, you can see minus two on the lending side. That is mixed, obviously, in terms of the pool that comes in there. As you look at it, I am not seeing a big back book, front book differential when I look at the totality of the mortgage book. It is definitely, mortgages are always competitive, and it has definitely been a competitive period.
I would say also the market seems to be quite rational. We have kind of gone to a bit where we are writing below the 70 basis points that we talk about a lot, but it seems to be stabilizing at that kind of level, and we will see it strengthen as other things kind of move around. It is good to see that kind of stabilization, but good to see overall on the book that we are happy with where the book is and obviously happy with the returns that we are writing mortgages at at the moment, which I think is critical.
Good. Thanks, Katie. The one thing, Guy, I'd add, which I think comes across in our slides, is in mortgages, we're also broadening the proposition. You can see the breadth we've added to the first-time buyer proposition. You can also see aspects of the buy-to-let proposition and our market share improvements there. 4% up in both areas on this time last year. Obviously, there's a larger margin there versus, I guess, what you call the traditional low LTV vanilla mortgages. As Katie said, there's some general dynamics. We also think, given where we are, around 12.6% stock share, we see opportunity in the mortgage market, and broadening the proposition opens up that opportunity to us. That's what we've been taking, that's what we have been and will continue to take advantage of. Thanks, Guy.
Great, thanks. Thank you.
Our next question's come from Aman Rakkar from Barclays. Aman, if you'd like to go ahead and ask your question.
Hi, Aman.
Hey, Aman.
Good morning, Paul. Good morning, Katie. Thanks very much for taking the questions. Yeah, there's two. There's two that I'll ask. The first one is, I'm just taking your revenue, kind of upgraded revenue guidance, at face value. It implies a decent step up in the revenue cadence in H2 versus H1, and probably in excess of consensus. I'm just trying to work out the drivers of that, if it's net interest income. I suspect there is a better run rate for net interest income in H2 that's underpinning this upgraded guidance, but also versus consensus. Could you lift the lid on that at all, confirm, deny, or otherwise if you share that view? The second question, yeah, I'm interested in your reflections, actually. I think where we are right now is at H1.
The assumptions that sit behind your revenue guidance in terms of interest rates haven't really changed that much since February, I think, when I scanned back to when you gave us the original guidance, looking for a similar rate curve here. Maybe swap rates were touched better. We're about to potentially beat your revenue guidance by about GBP 1 billion versus the kind of level that you were pointing us to at the beginning of the year. What's coming in better than what you expected, please? Is it volumes? Presumably markets is a bit better, but, and just full disclosure, the reason I'm asking is because I think it's a conservative guide. I think it was a conservative guide at the beginning of the year, continues to look conservative to me, and I want to be able to kind of calibrate that. Any color there is really appreciated. Thank you.
Very fair and very clear. Katie, I'll take the reflections. Got a question, the second one. Do you want to talk a little bit around the specifics around the rev guidance?
Yeah, coming back on that. Perfect. Thanks. Good morning, Aman. As ever, so good to hear from you. Definitely, as you look at it, guiding you to greater than GBP 16 billion. That, of course, implies at least GBP 8 billion in H2, which would be equivalent to this, but obviously, we're guiding you to greater. There's always a number of variables that we need to think about as we look at it, some of them NII and some non-interest income. Continued volume growth in H2. We've also obviously got the full run rate of Sainsbury’s as well, given the completion was on the 1st of May. We've got some extra days. It always frustrates me to talk about extra days as it feels so unscientific, but the reality is it does make a difference. That adds about GBP 100 million of income into the second half.
The structural hedge repricing. We've done 90% of the hedges are locked in now for next year, which means we'll have that higher hedge income coming through for about GBP 1 billion. I would say you're right on our economics. They've been very consistent in the main, but the swap curve, I think, was particularly a bit more generous to us in the first quarter. You can see that we've raised our kind of average repricing coming through. That's definitely helped a bit of the guidance and where we are. There's also a few headwinds. There are obviously two more Bank of England cuts that we're expecting this year to get us to 3.75% coming through very consistently. You'll have six-month impact of the two rate cuts we had in H1. Our non-interest income, it was up overall across the group 15.4% on H1 2024.
5% if I look just at that central kind of business area. We do expect some seasonality in C&I in the markets business in H2. We know that traditionally, April and August are that bit quieter. We've been very pleased with how that business has reacted to the volatility, really working with customers to make sure that they are able to kind of maximize the outcomes for them, but obviously been beneficial to our income statement as well. The other thing just to think about in terms of what could be in our minds for the second half of the year. We do have some contra revenues that come through from capital actions. We've got some of those planned in the second half as well, as you would expect, which would go across retail and C&I. That will have a little bit of a drag on income as well.
We do think it's a strong start, 13.7% up on last year. We're more confident about the outturn for the full year, and we are now expecting that income to be greater than GBP 16 billion. Paul, do you want to do some reflections?
Yeah, I feel like you've done quite a lot of the reflections, but that's fine. No, Aman, I guess the kind of big picture I'd say is you're right around there haven't been any fundamental changes to our interest rate assumptions, but kind of what's been different as we've traveled through the end of quarter one and into quarter two. Obviously, volumes have remained very strong. We've been pleased with the volumes, both in the retail bank on mortgages and on unsecured. If you look at non-net interest income, we've had two strong quarters. That's been very encouraging, and as Katie alluded to, really underpinned by strong levels of customer activity. We now have two quarters of that. The other thing is the reinvestment yield has been slightly higher, the hedge has been slightly higher.
There are things that really, I guess, as we've gone through quarter two, have given us confidence around the income picture, but also the returns picture. As you'll have seen, we've been very clear what we've said is greater than GBP 16 billion and greater than 16.5%. The one thing I would add to what Katie said is, and obviously, as you will have in your calcs, our tangible equity will build during the second half of the year as well. That does play into the returns outlook. Overall, I think quarter two has not only given us strong performance, but given us increased confidence in terms of the outturn for the year. Thanks, Aman.
Thanks. Is it possible to ask a follow-up? If so, is there?
You've got the mic, so go for it.
Thanks. Thanks. I mean, you've kind of lifted the ROTE guide this year, and just me being me, I'll emphasize the greater than 16.5% return on tangible equity. I am just trying to think into next year. Is there any reason to think of a meaningful step off of that level of return on tangible equity? I mean, if you did print 17% this year, I can. I know that we've got rate cuts and what have you, but there's so much momentum in terms of the hedge, in terms of volume growth. I can't actually see why we would be expecting any meaningful step off in the return on tangible equity that gets us anywhere near the kind of greater than 15% ROTE aspiration.
Yeah. I think let's chat a little bit about kind of 2026 kind of income outlook because that's obviously the numerator in there and the outcome of the denominator as well. We do expect annual growth as we go through all the way to 2027. We remain confident about the growth trajectory beyond 2025. The key drivers of 2026, as I look at it, first of all, there's growth. We've got a strong track record of growth across our three businesses, outpacing wider sector growth. Our breadth of businesses means we're well placed to capture demand where it's there. We remain very disciplined on our roti guidance, so we only deploy capital when returns are attractive. Second, the hedge, we've talked about it quite a bit on the call already. We do expect a stronger structural hedge tailwind into 2026, to at first is 2025.
Expecting over GBP 1 billion there, higher than the 2025 print. Third, of course, rate cuts. One further rate cut in 2026. A terminal rate of 3.5% at the moment. Whilst this would be less than what we had for four rates in this year, we will see a bit of an averaging effect of that coming through into 2026. Non-interest income, we are pleased with delivery from the business this year. Really strong overall, demonstrating the strength of our customer franchise, but also the strength of our kind of central activities in terms of that treasury activity. Our strategic efforts, I think, of bringing more of the bank to more of our customers is really paying benefit in that non-interest income line. Overall, we've got good confidence on that income coming through as we move into H2 and then beyond.
When you think a little bit about the numerator, we've obviously got nice growth coming through on TNAV. We do have some regulatory changes coming through as we get towards into 2026 in terms of that Basel number unchanged from the GBP 8 billion we've spoken about historically. They kind of come through. Overall, I'd say we're feeling pretty comfortable as we move forward from here. Paul, anything you'd add?
No, I mean, obviously, we're not going to get drawn into February will be the time for 2026 guidance, Aman, but you can sense from Katie's comments there that we feel pleased with the momentum and the outlook as we start to look ahead to 2026 and 2027. Thanks.
Thank you.
Our next question comes from Amit Goel of Mediobanca. Amit, if you'd like to go ahead and ask your question.
Hey, Amit.
Hi. Thank you. Yeah, so one question, just, I mean, maybe minutia, but just in the central items, there's the kind of negative NII and positive other operating income. It seems like that relates to these kind of FX risk management derivatives. I just wanted to check exactly what those are and what the contribution is, and then what to kind of expect on that going forwards. Second question, just on the back of, I guess, the leads reforms, just curious if there's anything there that you think could change your outlook a bit and/or if there's any incremental, for example, incremental volume that you could see from the loan-to-income cap and things like that. Thank you.
Can I take the essentials?
Sure, absolutely. We've talked about the FX kind of arbs, as we call them, a few times before. It's interesting, we talk about them as we see greater volatility in the FX markets because what we basically do is that with treasury, we identify opportunities on our surplus FX cash positions to take advantage of that volatility. It's negative to NII, and then you have this offset in non-interest income. It's a little bit annoying on the lines because it kind of makes a little bit of noise. Overall, it's positive in terms of income, not kind of giving you guidance in terms of how much that would be. It's also given that it depends on market volatility. It's not something we see is definitely coming all the time, but we do look to take advantage on it.
When you look at the center, it's always good to look at the center on a total income and not think so much about the line kind of split. I mean, to give you a little bit more kind of detail on it, when I look at NIM, this period, the funding and other is kind of flat, but there are two things that are going on within that line just to help you a little bit. There's the positive from some repositioning we've been doing of the liquidity portfolio into gilts. That's actually offset by the NII drag on the treasury FX activity. That was a minus two basis points in there and two positive on the other side. It does have an impact.
It's hard, and I'm not going to guide you on it would be this in this quarter because it clearly is dependent upon activity within there. It's a meaningful little kind of nudge in terms of our numbers and very happy to take that. Paul, can I give you a good use?
On lead reform, I mean, I guess the headline from our perspective is we're supportive of the direction of travel. We think that they're positive for the sector and ultimately for the U.K. In terms of the mortgage specific you mentioned, we've already implemented changes on the back of the FCA's earlier kind of affordability changes. That's increased the amount of borrowing that we can provide to some of our first-time buyers. We see that as a positive. Similarly, as has been referenced in numerous places, the current consultations we think will also be helpful and nudge things along a little bit. I just put that in context, though. The mortgage market is already relatively big. I think this will create opportunities to bring more people into the mortgage market, but it's in one segment of that wider market.
More broadly, I think some of the prudential reviews that are happening around capital and also ring-fencing have the potential to be helpful in terms of the level of support we can provide to customers and the economy. As you've heard me say before, and you'll have seen at our Wealth Investor Spotlight, the advice, guidance, and boundary review, and the review into savings and investments, we see as really an opportunity to bring more financial advice to more of our customers at lower cost and help them with their savings and investments. We see that as a positive as well. We're doing a lot of work on that ahead of, obviously, a lot of those reforms are still in consultation phase. Thanks, Amit.
Our next question comes from Chris Kent of Autonomous. Chris, if you'd like to unmute and ask your question.
Hey, Chris.
Are you there, Chris?
Chris, you're currently muted if you'd like to unmute.
Try that again. I was pressing the button on my headset and I had to click it on the screen. I'll get the hang of it one day.
Lovely. Thanks, Chris.
Two sort of follow-up questions, really. First, just on growth. I know it's relatively small now, but the Bibbles book is looking quite small in the context of the overall commercial book. I guess we're starting to see the underlying growth come through a bit more strongly with that run-off tapering. It seems to be a pretty consistent GBP 0.4 billion a quarter of run-off on the government guaranteed loan book. Is that what we should expect continuing for the next six quarters and then it's gone? Or do we get down to a sort of rump of the book where the remaining customers are going to take the full term? I think some of them could take 10 years. I think it was extended, wasn't it? That was the first question, just in terms of understanding the growth dynamics we might see coming through.
I just wanted to follow up, Paul, on your comment there about the prudential reviews, and particularly around capital. I mean, I read the FPC minutes earlier this month and didn't really make much of it, given that they said they think the level of capital is broadly correct. The fact that the Chancellor, in her speech, talked about the Treasury working with the Bank of England to assess the right level of capital for the system, suggested maybe there's going to be a bit of downwards pressure there. I'm just curious to know whether you have a view on what form that might take. Do you think we might have a revisiting of the through-the-cycle 2% countercyclical buffer calibration, for instance, which is quite high relative to many other countries?
If we did get something like that, how would you think about this as a management team in the context of your own capital target calibration? I think you're already targeting a higher level of buffer to MDA than one of your nearest domestic competitors. How much would you actually want to take into how you think about the capital target, or is really that 13% minimum just your management view of this is where the bank should run, and it doesn't matter if the underlying MDA changes? Thank you.
Thanks, Chris. It's a while since I've talked about Bibbles, so thank you for that. I have to test myself, bounce back loans. Yeah, I think you're, I mean, simply, your assumption is, I think your assumption is right, a pretty consistent level of roll-off quarter on quarter. There's very little incentive for customers to accelerate payments given the low cost of that borrowing. Absent some sort of big economic event, I don't think there'd be any driver for customers to extend their terms. You are right in that there was and is, was the potential for borrowers to extend to 10 years. I think your assumption is the right one. On the much bigger topic of prudential review and capital, I think the angle that you alight on around ensuring international competitiveness is the right one.
I think that's the, in terms of the discussions and inputs that we'd like to provide, I think that's where we'll be highlighting where it's important to have consistency both from an EU and a US perspective. You drop down into specific elements that are different. You mentioned the countercyclical buffer. That will be one topic, I am sure of, but there are others as well. That's your logic, and I guess your thought process is how we're thinking about it in terms of what the areas for review are. It is early days. Literally, obviously, the announcements were relatively recent, so it's hard to give you any more insight into that.
What that would then lead to, if there were changes or thoughts, obviously, we'd then, from a management perspective, look at that in the context of the absolute level of capital we hold, the percentage of CT1, our regulatory minimum. To me, they're kind of downstream events from the wider review of the capital. Do you want to add anything to that?
A little bit. We do look at capital risk, appetite, and buffers versus the supervisory minimum. Clearly, if that changes, then we would look to review that. I think the other thing, Chris, is as we look at the RWAs increasing over the next 18 months, that will increase our nominal capital requirement without a change in the risk of the balance sheet. As these things change, I think we might start to look and think about actually what kind of level of capital targets and buffers you might need, given that that target is now based on a much higher level of nominal capital. We will have a think about things as it evolves.
Yeah.
Thanks, Chris.
You're on the right track, Chris. Thank you.
Our next question comes from Jonathan Pierce of Jefferies. Jonathan, if you'd like to go ahead and ask your questions.
Hey, Jonathan.
Hello. Good morning, both. I've got two, actually. One is sort of a follow-up to the last question, but coming at it from the impairment angle. The metrics on every front are still extraordinary, really. Your ECL in the downside, extreme downside scenario is now only GBP 2 billion. That's with GDP down 4% and unemployment up at 8%. I mean, even if all that came in one year, that's only 45 basis points of loans or a quarter of your current pre-provision profits. I see that the commercial book, you had more loans flowing back to stage one than you had flowing into stage two in the first half. I'm just really looking for a comment around how you're thinking on the through-the-cycle impairment charge today after a number of quarters now of very benign, very low levels of impairment coming through.
Is it really 15-20 basis points, not the sort of 25-30 we might have talked about in the past? Linking it into the capital question, presumably, if your ECL calculations are right and that feeds into this year's stress test, your pillar 2B buffer is going to be very small. Again, is that putting downward pressure on your equity tier one target the way that you think about it? Second question, just quickly, the liquidity pool. In the second quarter saw about a GBP 9 billion drop in cash and GBP 7-8 billion increase in gilts. Is that you taking advantage of the gilt swap spread? Is there more of that to do because you've still got nearly 60% of the pool in cash at the moment? Thanks a lot.
Okay. I'll take your second question first. Simply, yes, it is us taking advantage of that. We'll probably do a little bit more into it as we move forward, but it's something that's been a nice kind of additional kind of improvement to income as well. Focused a lot on our equity hedge positions as well within there, which we don't talk about quite as much. Yes, very pleased to see that. In terms of the impairment angle, and the through-the-cycle impairment change, our guidance at the moment is 20-30 basis points. I mean, Jonathan, I'd absolutely agree with you as you look at what we've experienced over the last number of years. Our guidance again this year is below that end. I'm not kind of updating the guidance on that particularly today.
I think what we've been trying to give you more recently is just annual looks as we move forward on that. It definitely seems to be at the lower level. Even the print this quarter at 19 basis points, eight of that is the Sainsbury’s Goodbook recognition. Really, it's a kind of 11 number compared to the nine of last year. We'll, I think, continue to monitor that. If it's something people are more interested in, we could look about refreshing that. I think the annual look forward is quite helpful. Pillar 2B, we don't disclose that, as you know. I think what you see is our nominal CT1 capital in absolute terms is rising significantly. We added GBP 900 million to that in H1. We know that there's going to be more rises coming through with RWAs, and that doesn't reflect more risk on the balance sheet.
It's something I think we look at overall on the round, and we'll continue to do that as we move forward. Thanks, Jonathan.
Thanks. Sorry, it does sound like you are not even indirectly, pretty directly suggesting the 13%-14% equity tier one ratio target is under very firm review. Is that right?
I think it's something we've talked about quite a few times. If we think Basel was meant to be coming in at the end of this year, and it's now obviously been delayed a year. What I said there, once we got clarity on CRD4, the Basel kind of changes that were coming through, what was happening in pillar 2A, it's something that we would have a look at and see how things are coming through. We need to still get some of pillar 2A and things like that finalized, but we're always alive to how these things look and what's kind of happening in the market. We're pleased to see how our nominal capital is evolving and developing as these different changes are coming through.
I think it's responsible for management to do that, given all the changes that have come through. As Katie says, once you're through the back end of that, you have to decide where you think the right level of absolute capital is.
Absolutely.
Thanks, Jonathan.
Very good. Thank you.
Our next question comes from Edward of KBW. Ed, if you'd like to unmute and ask your question.
Morning, Ed.
Hello, Ed.
Good morning, everybody. Hi. Can you hear me okay?
We can hear you clearly.
Perfect. Yeah, I just had two questions. One was, can I just take you to the structural hedge slide on slide 12?
Absolutely.
It's possibly, just really, I hate talking about the structural hedge because you have your eyes rolled. Just to check my understanding, because what I don't understand is that in 2026, you're telling us there's a higher redemption yield and a lower reinvestment yield, but the benefit is bigger.
Yep.
Even though the roll-off is the same amount.
Yep.
I'm just trying to work out how that works. That would be my first question because it's just an understanding one. The second one is in terms of M&A. I think in the past, when you've been asked about this, you said that you look at things that would add a skill to what you have was one of the criteria. I guess if one looks at what's happened in the first half, clearly, you've been looking at stuff that, well, it'd be tough to argue that some of that stuff added any skills to you at all. I'm just trying to get a sense as to how do you look at acquisitions now. Has that shifted a little bit? Or should we take the buyback as a sort of indication that they're pretty much off the table for the foreseeable future? Thanks.
Thanks, Ed. Very clear. I think we nailed the first one virtually.
Yeah, through 2026, it's quite simple. You've got the averaging effect there. Also importantly, the lack of the offset from reducing the notional that we had through 2024. You've got a stable notional, and deposit build is important over there as well. We've done 70% of the hedge already. It's already that portion that's already locked in. Your redemption and reinvestment yield is only in relation to that last 30%. Paul.
Yeah. On the M&A piece, Ed, I would not characterize our previous position exactly as you did. What I have said consistently is when we do look at things, we look at them whether they can add scale or whether they can add capabilities, which I guess is your skill point. That lens has not changed. You will probably be bored of me saying it, but when we look at things, we look at it through those two lenses. If you look at the returns we are generating in the organic plan, it is a very high financial bar as well as operational bar to justify it, vis-à-vis the organic plan or the buyback. We will continue to look at things, but we will look at it in a very disciplined manner.
It is very much a balanced approach, making sure we are invested in the business, returning capital, giving good returns and distributions to shareholders, but also thinking about the opportunities that might come from either capabilities or scale. No change in philosophy. I guess just a reframing a little bit, Ed, of it was always about scale or capabilities, not just capabilities. Thanks. Thanks.
Thank you. Our next questions come from Jason Napier. Jason, if you'd like to unmute and ask your question.
Hey, Jason.
Hey.
Good morning. Good morning, both. Yeah. Just one for me, really. It goes to the continued outperformance relative to market expectations on costs. I can easily sort of see how things like bank levies and Sainsbury's day one costs can sort of get you to the 7-8% half-on-half growth in OpEx that you're guiding to. I guess philosophically, though, the other thing that sort of tends to happen is when you're beating. We're presented with the notion that you've got a long list of ways that you'd like to, in particular, simplify the bank. I guess inherent in that thinking is a sense that there's an appropriate level of cost growth that you ought to embark on, whether that's to run the bank or to change it.
I just wonder whether you might talk a little bit about how long the list is, how big the opportunities are, and indeed whether you think that the cost base ought to continue expanding at sort of 2% underlying on an ongoing basis. There's an appetite amongst investors for sharing in the benefits of outperformance that they see on OpEx. It looks like we're getting a better bank rather than one that might be more profitable in the immediate near term. You know what I mean?
Thanks, Jason. It was a bit your question or the reception was a bit scratchy, but I think we got the gist of it. Around costs, a couple of things I'd point out. First of all, I've been very consistent in the two years' updates I've been giving that we very much look at it as an all-in number. Everything is above the line. There's nothing below the line. It includes our cost number. Our cost guide includes wage inflation, national insurance inflation, tech contract inflation. It includes our significant investments in the business, and it includes our restructuring costs. I think that's a very clear and transparent way to do it. As Katie alluded to earlier, we work very hard on what I'd call BAU costs and efficiency. What that creates is capacity to invest in the business.
That's the bit that's building the better bank for the future, whether it's simplifying the tech architecture, whether it's digitizing the customer journeys, another 30 customer journeys we digitized in the first quarter of this year. It's that kind of hard yards and discipline around BAU cost management that creates the pools of investments, which are within our overall cost guide to invest in the business and create the better bank of the future. That's how we think of it. If you look at, I guess, what's happening, I think we have a really nice combination, Jason, where we are driving underlying efficiency out, and we're investing in the business. If you look at the cost-income ratio reduction, you can see year on year, we've come down by seven points, 49% at the end of half one.
The jaws are quite considerable if you look at absolute income growth and you look at cost reduction. Very strong jaws. If you take the guide that we were given today around income, depending on where you guys settle on income, the reality is what we're saying from a jaws perspective is we're going to have high single digits. What you can see there is not only good cost discipline, but also significant investments in the business. We're seeing that. I was going to say there's a number of levers. When we talk internally about it as a management team, one is digitization. We still see big opportunities to do more digitization across the bank and not only improve the cost base, but actually improve the customer experience. We've got lots of evidence of that. The second is the much broader technology simplification.
You'll have heard us talk about how we're simplifying the technology estate, how we're moving, for example, some of our technology estate from Switzerland to the U.K., how we're reducing the number of our applications. You heard me in the first quarter talk about some of the promising use cases from an AI perspective where we're driving a lot of efficiencies and customer experience improvements. We continue to simplify the operational model. Sometimes I think it's easy to think about NatWest, that kind of the simplification of the operational model has been done. That simply is not the case. We're reducing the number of licenses and branches in Germany from four to two. We're just about complete on our exit of Poland, which is great. We're moving a lot of our investment operations from Switzerland. We're right-sizing our branch network.
To me, we feel like we've got a number of levers we can pull that are building a better bank, but we're doing that within a cost envelope that is still, I'd say, aggressive and disciplined in terms of how we manage things. Hopefully, that gives you a sense of both how we're doing it, but also why we feel optimistic that it's creating the investment we need to create that bank of the future.
Thank you.
That's perfect.
Thank you for all your questions. I would now like to hand over to Paul for closing comments.
Okay, thanks, everybody. We appreciate your time on the Call. To wrap things up, I hope you've got a sense that we're pleased with the strong performance and the very obvious continuing momentum we have in all three of our customer businesses. In addition to that, we see opportunities across all three businesses to continue to take market share and grow. We've updated income and returns guidance today. If we don't see you, I wish you a very good summit, and I'm sure we'll speak to you shortly. Thank you.
That concludes today's presentation. Thank you for your participation. You may now disconnect.