Good morning, welcome to the NatWest Group H1 Results 2023 Management Presentation. Today's presentation will be hosted by Chairman Howard Davies and CFO Katie Murray. After the presentation, we will open up for questions. Howard, please go ahead.
Good morning, and thank you for joining us today. I'll start with a short introduction before Katie takes you through our financial performance. On Wednesday, we announced that Alison Rose had agreed with the board to step down as chief executive with immediate effect by mutual consent. It was a sad moment. She had dedicated all her working life to date to NatWest and leaves many colleagues who respect and admire her greatly. Subject to regulatory approval, the board has appointed Paul Thwaite, the current CEO of our Commercial & Institutional business, as interim group chief executive. Before Paul became CEO of our Commercial & Institutional business, he led the group's commercial banking division. He's a very experienced banker with a track record of success in senior roles in wholesale, corporate, international, retail banking, and risk, and has worked across the U.K., in Europe, and in the U.S.
He's been a member of our executive committee since 2019 and has played an important role in delivering our current strategy, which remains unchanged. Paul will present results from Q3 onwards and looks forward to meeting investors on a one-to-one basis in the near future. The board began the process of appointing my successor in April, as I will have been in post for nine years by July 2024, the maximum recommended tenure under the U.K. Corporate Governance Code. My successor will be responsible for leading the process to select a permanent CEO, and we fully expect Paul to take part in that process. With that, I'll hand over to Katie to run through the results.
Thank you, Howard. We have delivered a strong first half, with growth in lending of GBP 6 billion and new customer acquisition in key areas. We delivered first half operating profit of GBP 3.6 billion and attributable profit of GBP 2.3 billion. Income grew to GBP 7.4 billion, and costs were GBP 3.8 billion. Our strong capital generation gives us flexibility to invest in the business, consider other value-creating strategic options, and return capital to shareholders. We are proposing an interim dividend this year of GBP 0.055, up from GBP 0.035 last year. We have completed the GBP 800 million on-market buyback announced in February, and today we are announcing another on-market buyback of up to GBP 500 million, which we expect to start next week.
Together with a directed buyback of GBP 1.3 billion in May, this brings our CET1 ratio to 13.5%, within our target range of 13%-14% for the first time. Our return on tangible equity was 18.2%. We have updated our economic forecasting since we last spoke. Although the U.K. economy has been stronger than expected, inflation remains relatively high, and rates have continued to rise, resulting in ongoing economic uncertainty. We now expect peak rates of 5.5% this year, up from 4.25% in our previous forecast. We are also seeing liquidity in the banking system reduce. In the face of ongoing inflation and rising interest rates, customers are behaving rationally. Corporates are deleveraging. Overall demand for borrowing is muted.
We are seeing customers adjust their spending habits, and some are using deposits to pay down more expensive debt. Given the macroeconomic environment and higher rates, we have taken the decision to strengthen impairment reserves by around GBP 210 million. Against this backdrop, our strong balance sheet is more important than ever, with robust liquidity, a high-quality deposit base, and well-diversified loan book, enabling us to continue to support our customers and fueling the U.K. economy. I'll now take you through the second quarter performance, using the first quarter as a comparator on slide 6. Total income was stable at GBP 3.9 billion. Income, excluding all notable items, was GBP 3.6 billion, down 6.7%.
Within this, net interest income was 2.7% lower at GBP 2.8 billion, and non-interest income was down 19.5% at GBP 739 million. Operating expenses fell 3.1% to GBP 1.9 billion. The impairment charge increased to GBP 153 million or 16 basis points of loans, driven by higher postmodel adjustments. Taking all of this together, we delivered operating profit before tax of GBP 1.8 billion. We incurred some notable charges, bringing profit attributable to ordinary shareholders to GBP 1 billion, and return on tangible equity was 16.4%. We are pleased to have delivered further net lending growth in the quarter. Gross loans to customers across our three businesses increased by GBP 0.3 billion to GBP 356 billion.
Taking retail banking together with private banking, mortgage balances grew by GBP 1.9 billion or 1% in the quarter. Gross new lending was GBP 8 billion, representing flow share of around 15%. Our stock share has increased from 12.3% at the start of the year to 12.6%, demonstrating how we are delivering on our growth hit strategy. We're back at this level at the beginning of July as we have repriced customer rates. Unsecured balances increased by a further GBP 600 million to GBP 15 billion, driven by additional card issuance and ongoing share gains. In commercial and institutional, gross customer loans decreased by GBP 2.3 billion.
At the mid to large end, we saw some demand for asset finance and revolving credit facilities, and at the smaller end, demand does remain muted, and customers with surplus liquidity continued to deleverage, including repayment of government scheme lending. Let me now turn to deposits on slide 8. Customer deposits across our three businesses were stable in the quarter at GBP 421 billion. As expected, outflows in retail banking and private banking slowed following tax payments made in the first quarter. In Commercial & Institutional, deposits increased by GBP 1 billion. Our loans deposit ratio of 83% allows us to manage our deposit base for value, and importantly, allows us to support customers and grow our share in target areas.
The U.K. base rate has increased by 75 basis points to 5% since we presented Q1 results. Customers are increasingly moving balances from non-interest-bearing to term accounts. Non-interest-bearing balances have reduced from around 40% of the total to 37%. Term deposits are now 11% of the total, up from 6% at the beginning of the year. Customer behavior is difficult to predict. However, we do assume some level of ongoing migration. Turning now to what this means for income on slide 9. Income, excluding all notable items, was GBP 3.6 billion, down 6.7% on Q1.
Net interest income was 2.7% lower at GBP 2.8 billion, driven by lower Bank NIM in the quarter of 3.13%, driven by lower margins on mortgages and deposits, and lower group average interest earning assets, which reduced by 1.5% to GBP 514 billion, driven by a reduction of liquid assets, which more than offset loan growth. You will find our usual disclosure on net interest income in the appendix. Non-interest income, excluding notable items, was down GBP 179 million to GBP 739 million. Around half of this was due to lower market volatility. We continue to expect full year income, excluding notable items, of around GBP 14.8 billion. However, we now expect bank net interest margin of around 3.15%, down from 3.2%.
This assumes the U.K. base rate increases by a further 50 basis points in Q3 to 5.5% and remains there for the rest of the year, and the average reinvestment rate of our product structural hedge for the full year is 4.4%, up from 3.6%. The benefit from higher rates to Bank NIM is more than offset by our expectation of further deposit mix changes and pass-through, and a reduction in the product hedge notional from GBP 202 billion to around GBP 190 billion by the year end, reflecting a catch-up with eligible spot deposit balances. Moving on to costs on slide 10. Other operating expenses were GBP 1.9 billion for the second quarter. That's down GBP 57 million or 3% on the first quarter, driven by lower severance and consultancy costs.
In Ulster Bank, we have incurred GBP 163 million of direct costs in the first half. We continue to guide to around GBP 300 million for the full year. We continue to expect other operating costs of around GBP 7.6 billion for the full year, in line with our guidance. This cost performance is delivering a cost income ratio of 49.3% for the first half, benefiting from the notable income gains. Excluding these, the cost income ratio is 51.6%. I'd like to turn now to impairments on slide 11. We booked a net impairment charge of GBP 153 million in the second quarter, equivalent to 16 basis points of loans on an annualized basis.
This was driven by an increase in our post-model adjustment for economic uncertainty of GBP 129 million to GBP 462 million, together with further reserve building that more than offset the GBP 98 million expected credit loss release from the update to our economic assumptions. The PMA increase is largely against our wholesale book to cover any potential cash flow issues as a result of higher interest rates and inflation. Excluding this, we would have had further net impairment releases in our Commercial & Institutional business. In retail, overall, Stage 3 charges and defaults remain stable. The impairment charge, driven by new Day 1 provisions, relates to unsecured lending growth. As you know, our 2023 impairment guidance is 20-30 basis points. We see this as prudent, and we need to see a material deterioration in performance to be inside this range.
I'd like to talk a bit more about the composition and quality of our loan book on slide 12. We have a well-diversified prime loan book, which is performing well and which demonstrated its resilience in the recent Bank of England stress tests. Over 50% of our group lending consists of mortgages, where the average loan to value is 55% or 69% on new business. We continue to have low levels of arrears and forbearance in our mortgage book. 91% of our book is fixed, 5% are trackers, and 4% is on a standard variable rate. Over 2/3 of mortgage balances are fixed for five years, and less than a quarter are fixed for two.
The composition of our mortgage book means a lower proportion of our customers will face a change to their mortgage repayments in the second half relative to the sector average. The majority of our customers are rolling off five-year fixed rates, where the uplift is lower than those rolling off two-year rates. Since mortgage rates began to rise in Q4 last year, more than 70% of our customers in the pre-roll-off window have taken advantage of the opportunity to refinance early and had the advantage of lower rates. Our personal unsecured exposure is less than 4% of group lending and is performing in line with expectations. Our corporate book is well-diversified, and we have brought down concentration risk over the past decade, including reducing commercial real estate, which is less than 5% of the group loans, with an average loan-to-value of 48%.
As one of the largest lenders to business in the U.K., we were pleased to see in the Bank of England's recent Financial Stability Report recognize corporate indebtedness is at its lowest point in the past 20 years. Turning now to look at returns and capital generation on slide 13. We are pleased to have delivered 16.4% return on tangible equity this quarter, driving capital generation of 50 basis points, excluding non-recurring impacts, such as our acquisition of Cushon. This brings capital generation to 100 basis points for the first half. We ended the quarter with a common Equity Tier 1 ratio of 13.5%, down 90 basis points on the first quarter. This was driven by distributions which account for 114 basis points in the quarter. Our GBP 1.3 billion directed buyback consumed 71 basis points of capital.
We accrued 40% of second quarter attributable profits, equivalent to 15 basis points, in line with our 40% payout ratio. This excludes the foreign exchange recycling gain, which is neutral for capital. Finally, our GBP 500 million on-market buyback program announced today is accrued in our 13.5% CET1 ratio. Turning now to our balance sheet strength on slide 14. Our CET1 ratio of 13.5% is now within our target range of 13%-14%, which includes a buffer above our minimum requirements. Our U.K. leverage ratio of 5% has reduced from 5.4%, in line with the decrease in Tier 1 capital, and remains well above the Bank of England minimum requirements.
Our liquidity coverage ratio was 141% at the end of the first half on a spot basis, and 145% on a 12-month average basis. This remains well above our minimum requirements. Turning to 2023 guidance. We expect income, excluding notable items, to be around GBP 14.8 billion at a U.K. base rate of 5.5%. Net interest margin of about 3.15%, and group operating costs, excluding litigation and conduct, to be around GBP 7.6 billion, delivering a cost income ratio below 52%. We anticipate a loan impairment rate in the range of 20-30 basis points, and together, we expect this to lead to a return on tangible equity at the upper end of our 14%-16% range.
I'd like to now to talk more broadly about the first half and our strategy, which is delivering and remains unchanged. We maintain our focus on responsible targeted growth, continued cost and investment discipline, together with effective capital allocation, enhanced shareholder returns. I'll talk more about each of these areas in turn. I'll start with our progress against targeted growth on slide 17. The strength of our balance sheet and risk management means we retain capacity to grow even in challenging market conditions. We are doing this in three ways. First, we are focused on driving customer lifetime value. We are the leading high street bank for entrepreneurs and startups with a share of 17.7%, up from 13% this time last year, and we added 55,000 new startup accounts during the first half as we continue to strengthen our offering.
In retail banking, we continue to grow our customer base with a focus on personalization and particular segments such as youth and affluent. For example, we have significantly strengthened our youth offering with the acquisition of Rooster Money, which we have extended by connecting it with our app. Rooster card subscriptions increased by 93,000 during the first half, and we now serve around 20% of the youth market. In wealth management, despite more volatile markets, we grew assets under our management and administration during the first half, including net new money of GBP 1 billion. Secondly, we are helping customers transition to a net zero economy, which remains a strong commercial opportunity. Across the group, we have delivered over GBP 48 billion of climate and sustainable funding and financing towards our ambition of lending GBP 100 billion between 2021 and 2025.
This includes GBP 16 billion in the first half this year. Thirdly, we continue our digital transformation, which is delivering value for customer, employees, and the bank. Our services for small businesses, such as Mettle and Tyl, are great examples. Mettle is our digital-only business bank account with a customer base of around 100,000, which includes 17,000 acquired during the first half. Our award-winning payments platform, Tyl, has carried out 2.2 billion of transactions in the first half, up 64% on the same period last year. In retail banking, we have recently extended our credit card offering to the entire market, not just our own customers, taking our flow share to 9.6%, up from 5.7% this time last year.
You can see from a range of measures, whether it's customer acquisition, net new money, or share, how our targeted approach is delivering organic growth to achieve a sustainable medium-term target of 14%-16%. We continue our disciplined approach to cost and investment. We expect to invest around GBP 3.5 billion between 2023 and 2025 to future-proof the business as our ongoing digital transformation helps to drive efficiencies, improve customer experience, and deliver future growth. We have been re-engineering customer journeys since 2019, and expect this to deliver run rate savings of around GBP 250 million by the end of 2023. As a result of this simplification, 99% of our loans are delivered with straight-through processing, and our net promoter score for this journey has improved from 42 at the end of 2020 to 57 today.
We believe the responsible use of artificial intelligence will be a game changer as we embed it into our journeys and processes, so we are accelerating its deployment. We are now using natural language processing to analyze around 560,000 conversations a week, covering telephone and chat channels, so that we serve our customers better. We use AI to analyze around 36 million events a day to help predict patterns of behavior and identify financial crime or fraud. Finally, we are investing for long-term growth by deepening and diversifying future income streams. I've already spoken about how we are growing in startups, wealth, and the youth market. We are also expanding into new areas. We recently announced the acquisition of a majority stake in a fintech called Cushon, which allows us to enter the fast-growing workplace savings and pension markets.
We have also entered a strategic partnership with Vodeno Grou p in order to create a leading U.K. banking-as-a-service business branded as NatWest Boxed. While we continue to keep tight cost control, we're also investing in the future. Let's now turn to capital on slide 19. Over the past 3 years, we have significantly improved the allocation of capital to higher-returning businesses. Our phased withdrawal from Ulster Bank has contributed to this. We have now closed all our branches and around 95% of deposit accounts in the Republic of Ireland. In July, we completed the transfer of the asset finance business to permanent TSB, and we're migrating the majority of performing tracker and linked mortgages to Allied Irish Bank. We expect the remainder of this migration to complete by the year end.
We have also received a dividend of EUR 800 million in the second quarter, the first since 2019. We have made or accrued distributions of GBP 13.5 billion to shareholders since 2019, and expect to make significant returns to shareholders this year as we continue to generate capital through organic growth. We are building on the strength of our existing franchise to create value for shareholders. We serve over 19 million customers across the Group. We are the number one commercial bank supporting businesses and the U.K. economy. We play a leading role in sustainable financing. We are the second largest U.K. mortgage lender, and we have a strong and growing wealth business.
As we continue to grow our franchises organically, we are delivering a significant improvement in return on tangible equity, which in turn is driving strong capital generation, allowing us to deliver distributions to shareholders. Through our buybacks, we have reduced our share count by 26% since the end of 2019, which, in combination with profitable growth, means our interim dividend per share has more than doubled. The business continues to deliver a strong performance. This is underpinned by the strength of our balance sheet, which positions us well in the current economic environment and enables us to support our customers as well as the U.K. economy. We continue to drive operating leverage with disciplined investment in digital and technology transformation and cost management. We are benefiting from our focus on effective capital allocation with a EUR 800 million dividend from Ulster Bank.
We have significantly improved our return on tangible equity over the past three years and maintained guided range of 14%-16% over the medium term. This gives us scope to return significant capital to shareholders. We have made or accrued distributions of GBP 2.5 billion during the first half, while remaining well capitalized. Thank you very much, and we're happy to open it up for questions now.
If you would 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 star nine to raise your hand and star six to unmute once prompted. We ask that you limit yourselves to two questions each to allow more of you a chance to ask a question. We'll pause for a moment to give everyone an opportunity to signal for their questions. Our first question comes from Aman Rakkar of Barclays. If you could please unmute and go ahead.
Good morning, Katie.
Morning, Aman.
Hopefully. Good morning. Just had a couple of questions, please. Firstly, on the hedge, I just wanted to double-check your comments around the structural hedge. I think you said that the product hedge would be coming down from GBP 202 billion to GBP 190 billion by year-end. I just wanted to check the comment around the deposit experience. I think you talked about it being a catch-up. Is that based on kind of the backward-looking experience on deposits, tells you that the hedge needs to come down by GBP 12 billion in H2? To what extent does it capture any kind of forward look, you know, around your expectations on deposit behavior into H2?
As a, as a kind of, related question on that, you know, what, what have you naturally assumed for things like mix shift as part of this? How many current accounts are you assuming to have at year-end? You know, how, how does that kind of drive into your, your full year 2023 NIM guide? The second question was just on non-interest income. I know that you're, you're kind of sticking with the GBP 14.8 billion revenues this year. That looks like it's gonna be less net interest income than consensus has, but probably a bit more non-interest income. Indeed, I think the kind of H2 run rates that you're effectively pointing to suggest a better outlook for non-interest income, you know, through the second half of this year.
I guess, can you, can you confirm or kind of deny that, that thinking? Does that give you confidence? You know, if NII looks like it's a bit softer here than what we were looking for before, do, do you feel more confident around non-interest income, and if so, where, where is that coming from?
Thanks. Thanks, Aman. You managed to pack along two questions there. Look, in terms of the hedge, as we look at it, we're going from GBP 202 billion to GBP 190 billion. It's very mechanistic, as you know. We basically look backwards over the last, the last 12 months. Obviously, we had three quarters where we fell. This last quarter, we stabilized on deposits, and that's the impact of that coming back through. What's interesting is we've raised our rates to-- that we're expecting on the swap rate is around an average of 4.4. What you see on income side is, although you've got this fall off in the hedge, the 4.4 versus the 3.6 we talked about at the last time we spoke, is actually... it kind of it balances itself out, so it doesn't have a particular income, income effect.
I haven't taken any forward look in terms of that. We do it on a 12-month, roll backwards. In terms of the mix shift, we have seen some mix shift. You can see that very clearly, obviously, in the from the 40% to the 37% of non-interest bearing. You and then, if you look in the financial supplement, you can see that across private, which is actually a little bit further, and then, and in the, the retail, the retail bank as well, in terms of that piece. I'm probably not gonna go into specifics in terms of the exact percentages that we've picked on that, but I have I have taken thought of some further kind of migration as we go into there.
In terms of income, specifically on the non-NII, what I would say is, you know, H1 trends were, were positive, and we do expect to grow non-NII into H2. The numbers are impacted by volatility. What we can see in the C&I business is more normalising into H2, following some lower volatility in the trading business in the second quarter, particularly, due to things like the U.S. debt ceiling. Because we just didn't see that volatility in FX, that number is a little bit lower, and obviously, we know, and you know that people kind of held back a little bit from the capital markets. That will normalize, and our early performance in July is, is confirming, confirming that view. Hope that helps. Thanks, Aman.
Thank you very much. Our next question comes from Alvaro Serrano of Morgan Stanley. Alvaro, if you could please unmute and go ahead.
Mute. Hopefully, you can hear me okay now.
We can. Thank you.
Yeah, thanks. Just really a follow-up on, on deposit balances, and, and, and the outlook. When I've benchmarked, loosely benchmarked your, your offerings, deposit, term deposit in particular, I'm talking about now, versus your peers, it does seem like you've stepped up your offerings, during June, with a 5% term. First of all, do, do you recognise that, it's coming through from the balances, so, so maybe that's fair? Post that increase in remuneration after the last rate hike, are you seeing the migration accelerate, or, or what trends are you seeing? Maybe in July, you can speak to that, to, to give us a bit more, more color. Relate to that, maybe the second question is: how, how do you think the visibility is...
How much, how confident are you on the visibility? Obviously, you've lowered the NIM guidance today, and I'm not sure if you can reassure us of giving us some clear granularity around how low the mix on non-interest-bearing balances can go. Thank you.
Lovely. Thanks so much, Alvaro. If I, if I look at it, when I look to see what's kind of happening in terms of those customer deposits, what we do see is this kind of catch-up in customer deposit rates, and that there was that was very much because of the impact on some of the pricing changes that we did during the second quarter. You know, effectively, as you look at those last couple of rate rises, we passed through 75%, so that was a bit higher. That's taken our cumulative pass-through to date to kind of 50% of all of the, the rate rises. We do think we're now competitive on, on rates as we move through.
When you look at our sensitivity in terms of what we think of the impact of that competitiveness would be, we've changed the, the structural hedge sensitivity, which I'm sure we'll talk about more later, to a 60% pass-through, rather than the 50% model that we had done previously. I do think that kind of reflects a little bit more. You know, as I look at what's happening in July, the mix and move is, is kind of in line with our expectations. I think it would be a brave person to say today where we think NIMs a nd NIBs might land. It has been interesting for us.
In the last number of quarters, there was so little movement, but then what we, we saw as customers really then moved into the fixed term, that we did see movement from that 40% down to the 37%, and that was people really moving straight from non-interest bearing, kind of all the way into, into term deposits, so that's kind of why we saw that step up happening in that space. I'm probably not going to look to, to call in terms of where I think that, that might go. I think it will take some time to kind of get there.
Just a follow-up, because in the past, I think you and other banks said that the big shifts typically happen around rate hikes. That's when all the noise happens and when the mix happens. Do you still think that will be the case, i.e., if we're very close to the peak, it'll be much more stable progression later part of this year, next year?
I think-
... in terms of mix shift?
I think that's definitely a theme. I think we'd certainly expect the shift to slow as we approach that peak. I think there's other things that are happening as well that you've got to be mindful of. If I look within our own product offering, we've opened up our new bank, so therefore it's a whole of market offering, which we didn't have before. That will attract some funds as well. I think there's also the rollover that when we saw people starting to tie their money up in, in Q4 last year, what offers are available now and how that moves around.
I think we'll see a little bit of that, and then overall, you're obviously very familiar with the TFSME funding piece, and I think as that starts to get closer for repayments, you might start to see people behaving in a slightly different way. At the moment, it's very connected to rate rises, and given that we are certainly predicting further rate rises in Q3, I'd probably expect it to attach itself to that as well. Thanks, Alvaro.
Thanks, Katie.
Thank you. Our next question comes from Rob Noble of Deutsche Bank. Rob, if you could please unmute and go ahead.
Morning. Thanks for taking my questions. I ask on the credit card book. The growth in cards, what's the, what's the EIR that you assume against that now that you've gone at whole of market and kind of the, the quality of the customers that you're adding as, as you grow? Secondly, thanks for all the information on the risk profile of the mortgage book. Do you give what proportion of your book is on high loan-to-income multiples that are also refinancing soon as well? Because obviously, those are the customers that are more at risk. Thank you.
Yeah, sure. Absolutely. If we look at the credit card book, what we have seen as we've gone to, more of the whole of market, what we're actually seeing is it's actually slightly better quality that's coming in. It's kind of lifting the quality of, of that group, which we're, we're pleased about. If I look at the, the EIR, it depends on the card and how you're looking at it, but it would be low single digits in terms of EIR. It's quite, it's quite conservative in our approach on, on that piece, so certainly a, a better quality.
When you can certainly see, as we look at, mortgages, in terms of that risk profile of the refinancing of the high ones, I'm not, I'm not giving you the split of the book in that way, but you can see that our average, loan to value is 54%. We have, I think, less than, about 3% that's sitting at that low, that higher LTV level, so it's a relatively small piece of the, of the book. Given the structure of our book, it's, it's much more of a five-year book these days, that actually, you've heard me say earlier that only about 20% of the book is actually refinancing this year.
I think, given that high LTV is small and the lower level of refinancing, that's not something we consider a particular risk for, for our book as we move forward from here. Thanks, Rob.
Yeah.
Thank you. Our next question comes from Jonathan Pierce of Numis. Jonathan, if you could please unmute and go ahead.
Jonathan?
Hi, can you hear me?
Perfectly.
Hello. Couple of questions. The first on the margin. The margin looks now to be stabilizing a bit based on your guidance in the second half, so, you know, down a few basis points, but nothing that significant versus what we have been seeing. I was just wondering if you can talk to the moving parts in H2, the ups and the downs, but particularly into 2024, because one would assume that mortgage refinancing pressure is easing, maybe deposit churn isn't quite as significant as you're expecting for the second half of this year, whereas you've still got, obviously, the tailwind from, from the asset repricing from, from the structural hedge. I'm wondering about margin dynamics, particularly into next year. Could we start seeing it move back up a little bit again?
Just a supplementary to that, the other banks have told us now what the yield on the maturing hedges next year is. It'd be helpful if you could give us that. The second question is on non-interest income weakness. Hear your comments on FX and volatility, but the NatWest Markets subsidiary disclosure showed actually not a bad performance again in the second quarter. There was, though, I think deep in the group announcement, at the top to about page 83 or something, a notably big drop in FX trading revenue at the group level. I'm just trying to square the circle here. It, I, I'm wondering whether this is anything to do with this FX management of U.S. surplus deposits that you talked about just after Q1.
If it is, you told us at Q1 that there was a sort of natural offset in net interest income. If we get a recovery in non-interest income in the second half, if this is the reason for it in part, is that captured within the net interest income guidance as well? Thanks very much.
Yeah, sure. Thanks very much. Let me deal with the end of that question first. You're absolutely right, page 84 talks about the foreign exchange. It's gone from GBP 258 million down to GBP 125 million. I think what you've got to remember is as well, that we have the NatWest Markets is a subsidiary level of the group. It is important that you actually look when, when you're trying to look at the group result, is to look at the group, the group piece, 'cause obviously they've got revenue share and things are going in different kind of lines. It's not anything to do with the FX management of the U.S. surplus. It is the volatility of our, of our, of our numbers. There is a little bit of...
In the notable item side, we mentioned something about GBP 23 million, so that's, but that's not material in that space. As I look at that, I do see the strengthening of that performance, given that FX, we know or we expect to be more volatile this quarter, given the, the change in that. As I go then onto margins. I think certainly, you know, we're at GBP 313 million for this quarter, GBP 320 million for the half. We're saying GBP 315 million for the, the full year in terms of that, that average now, rather than the GBP 320 million we had originally said. I, the, I definitely do see some stabilization in terms of that piece. What will happen in terms of that piece, it is subject to a number of different factors, you, as you'd be aware of.
The timing of the U.K. base rate, we're assuming a 50 basis points increase at the August MPC meeting. If that comes through in August and September, that will have a little bit of an impact on it. Obviously, the pass-through to customer deposit rate, both the timing and the quantum, as well as, the customer behavior, and I've talked about that already in terms of that move from the, the NIBs to the IBs, and then from instant access into, into the fixed, the, instant access into fixed term as well has an impact on it. I'm not gonna give you the exact what I think on Q3 and Q4, I think you're, you're in the right kind of, of space. It will move around a little bit as we, as we move forward from here.
In terms of 2024, I do see the mortgage pressure easing as we sort of see the roll-through of the kind of COVID piece come to the end. We'll start to see that at the end of 2023 and into 2024 as we move, as we move forward in, in that piece. That, that is a benefit certainly to NIM. I think my last point, I just need to hit on your question, and Jonathan, if I've missed anything, let me know at the end. In terms of the roll-off yields, 2023, we're rolling off at kind of 1.1. You know, because our hedge is so mechanistic, it's easy for you to kind of work this out.
Look at what the swap, the swap rate curves were kind of five years ago, and you can, you can get a, a feel for in terms of what's happening. 2023 roll-off is 1.1. Then 2024, the roll-off rate is lower at around 80 basis points, and 2025, it's even lower, again, at around 50 basis points. That means that even as the five-year swap rate reduces, we do expect through to 2025 that the uplift from the hedge activity remains sizable, particularly with our narrative of the kind of stabilization of deposits.
That's really helpful, thank you, and sorry, just one follow-up to that.
Sure.
If the hedge, accepting the hedge itself may get smaller, but of course, then you'll just be rolling into floating rate assets anyway.
Yep
Given the strength of the hedge tailwind, and the easing of, of the headwinds into next year, is it, in your minds, reasonably plausible the margin could start going back up a bit and maybe accelerate into 2025?
Uh-
... reasonable scenario?
I think the other thing to, to think about in terms of the, the margin, of course, is, we- we'll also have is, so the hedge will work, certainly, but, you know, we're also in our own economics, assuming that the kind of rates start to fall a little bit as well. In terms of that piece, I'm probably not going to try to give... You know I don't like giving you quarterly views on NIM, so I'm not gonna try to give you one into next year, sort of six or nine quarters away from here. I do think often we talk about, you know, are we at peak NIM?
I actually think, it's, for me, as I look at my kind of income as I go forward from here, I think there are reasons that, you know, you can feel, sort of quietly positive about that in terms of that strong income tailwind we've already had from the hedge, the unwind of the mortgage piece I've spoken about already, and that is a positive for us as we move forward. You know, I think the level of lending, we are, in our, in our economics, predicting growth. It's not huge growth, but we are certainly forecasting that growth within there. You know, I do think the deposit stabilizing is there. In the medium term, you know, feel comfortable that we've got real growth in that kind of income.
I think the short-term dynamic of customer behavior, we're watching very closely, and the exact timing of when that moves in 2023 into 2024 is something I'm sure we'll talk about more at Q3 and Q4. Certainly, in the medium term, those other things are quite positive for income. Thanks, Jonathan.
Thank you.
Thank you very much. Our next question comes from Guy Stebbings of BNP Paribas Exane. Guy, if you could please unmute and go ahead.
Hi, morning. Thanks for taking the question. One on mortgages and then one back on deposits, if that's all right. I guess you're, you're growing quite strong, actually, in mortgages relative to many of your peers in, in what is quite a tough volume and, and spread backdrop. Can you just talk about your approach there and how you weigh up, you know, spreads versus volumes, whether you're driven by return hurdles or volume metrics, or market share, or a combination of, of all three? Also what you're seeing in terms of customer repayments of balances right now and sort of mix of lending between internal refinancing versus new to bank. Then on deposits, you know, thanks for all the comments, and thanks for slide eight. Not everyone gives that kind of granularity, and it is appreciated.
I was just wondering if I could maybe push you on that NIB movement from 40% to 37%. Do you have any updated views as to where that might eventually settle? Thank you.
Yeah, no, sure. Thanks, I'll, I'll come on to that. Let me start with mortgages. Look, if, if I look at our mortgages clearly, we manage this group on income and, and RoTE. Therefore, we will make decisions, you know, and given if you think that mortgages, we try to manage it on 80 basis points. As we write more, more mortgages, that's, that's gonna pull your NIM down a little bit. We're, we're comfortable on that because we're very much looking at the income and the, the, the RoTE aspect of, of that. The, the team would have would be very much looking to manage that piece. What we do see is that during the second quarter, the swap curves did move really quickly.
Therefore, there would have been a period where we were writing below where we'd necessarily wanted to write. Overall, still hurdling our metrics, but not kind of at that 80 basis point level that we talked to. By the end of the quarter, we were back up to where we wanted to be, and in fact, at the moment, we're probably a little bit, a little bit ahead of there. That's, that's that, which is fine with that. If I look at customer repayments, we have seen a increase in terms of the customer, customer repayments. You know, what we work with our, with our customers is since mortgages have started to rise at Q4 last year, more than 70% of eligible customers have taken the opportunity to refinance early in the six-month window that we give them, so that they can take advantage of those, those lower, those lower rates by securing them early in the process.
We can see that about 35% of customers are making an overpayment at the point of refinancing. You know, in absolute terms, we saw lump sum repayments in Q2 of about GBP 500 million. Just to give you a feel for that, that would be about double what we would have seen in Q2 of last year. People are definitely looking to pay up a little bit more on that.
I think it's also important to note that mortgage balances grew by GBP 1.9 billion in the quarter, net of this elevated lump sum repayment number. A bigger factor for the overall mortgage balances from here, I think, is the macroeconomic outlook. We do see that people are using some of their deposits to make that payment. Incredibly logical thing for people to do as we move, as we move on from there. In terms of, NIBs and IBs, we do expect the NIBs to reduce a little bit further. It's very hard to be definitive of where they settle. I think there's, there's, there's not really a historic, narrative that we can look at to help us, guide that, so we are watching different customer cohorts very closely. A couple of kind of supporting factors on them.
We do see wage inflation, we do see people re-engaging with savings, of course, which all kind of makes that, that move, and as well as the deleveraging of growth. At the moment, we've made some assumptions to where, where it will go from here, but, you know, we're comfortable in terms of that GBP 14.8 million income that we've guided for this year and being at the upper end of that 14%-16% RoTE as well. I think there's a lot of different moving parts, but hopefully that slide 8 is helpful to you, so I'm glad you, I'm glad you like it. Thanks very much, Guy.
Thank you.
Thanks. Our next question comes from Andrew Coombs of Citi. Andrew, if you could please unmute and go ahead. Andrew, once more, if you'd like to unmute and go ahead. Thank you.
Can you hear me now?
I can.
Yes, we can.
Okay. Thank you. I had one question for Howard and one for Katie, please. Just for Howard, on permanent CEO succession planning, how do you envisage the process playing out from here, and any thoughts on timing? Then for Katie, I just wanted to ask about liquid asset buffer, given that the AIEA is excluded from the bank NIM, but obviously NI is not. It's gone from 162 to 152. Any thoughts on the trajectory there going forward as well, please? Thank you.
Yeah, thanks, Andrew. Let's, let me take you through it as clearly as I can. I've been here for just over eight years. If you look at the corporate governance code, which says that nine years is pretty much effectively the maximum now, we decided to begin the search. We announced in April that the senior independent director would begin the search, they appointed headhunters then. You know, that's a matter for them. I'm not directly involved in that, that's underway. This, of course, has come in the middle of that period. Therefore, since I think the replacement for me, in due course, will need to be behind a choice of long-term CEO, we decided that we would implement what was already our contingency plan and ask Paul to take over as Chief Executive.
A good few months ago, we reviewed our contingency arrangements, and the board agreed that Paul was the short-term successor in a sort of number 11 bus scenario. It hasn't been a number 11 bus exactly, but something a little bit similar. That was all agreed with the regulator, so we implemented that. Paul and I agreed that the sensible way of doing it was to say he would be CEO for 12 months, so an initial period of 12 months, which could be, could be extended, which would allow time to find my successor, get my successor in, and that successor then to decide how he or she wants to proceed, whether they want to have a open contest looking at external candidates or what they want to do.
I think the position is quite stable for 12 months, and thereafter, my successor will have to take a view. Very grateful to Paul for agreeing to do it on that basis. He's very experienced in the bank, and the mood in the executive committee and elsewhere is positive about this. I can't say it's exactly what one would normally have done, but I think it's a pretty good interim solution.
Thanks, Howard. Andrew, in terms of that liquid asset buffer question, you know, the labs, average interesting assets, reflect changes in the customer funding surplus, of course, deposits. We think that deposits are broadly stable, so you should see stabilization in the lab, AIEAs as well as a result. Thanks, Andrew.
Thank you. Our next question comes from Chris Cant of Autonomous. Chris, if you could please unmute and go ahead. Once more, Chris, you want to just double-check that you're unmuted, and go ahead, please. In the meantime, let's move on to Fahed Kunwar of Redburn. Fahed, if you could please unmute and go ahead.
Hi, Fahed.
Hi, Katie. Thanks for taking the questions. I just had a couple. I just want to follow up, I think, on Guy's question on the loan growth. I think one of your peers talked about the remortgage spread being a lot lower than the new business spread. Could you give us the completion margins on that, or are you seeing similar trends right now? And, and I guess looking forward now on mortgage growth, it probably does shrink from here if people are paying off and, and if you're talking about the macro being an effect. Is that the right way of thinking about it? The second question I had was actually just on the NIBs question.
If I look at your NIBs, you know, it's, it's always been the mix of, like, 40%, now 37%. It's all been well ahead of your peers who sit at about 25%. I've always assumed it's because of your SME business. The drop-off from 40% to 37% in the mix, was it, was it retail customers or was it SME customers? What differences in behavior are you seeing? I'm gonna sneak in a third question, if you don't mind. In 2024, your costs are sitting at, I think, 1% year-on-year growth and consensus. How, how realistic is that, given wage growth is running at 7% in the U.K.? Thank you.
Yep, sure. Thanks. Thanks so much, Fahed. I'll deal with the cost one. A cost-income ratio of lower, lower than 52.6%. That's a little bit lower than, than reality because of that FX recycling game we've got in income, so it's better to think of it as a 51%, 51.5% kind of number. What we've then said to you is that we'd expect to get to a cost-income ratio below 50% by 2025. I'd expect that 2024 would be something on the journey to- towards that. I think we do manage our costs incredibly carefully. We've got a long history of, of that, in the bank, and we'll continue to make sure that we do that.
You know, cost is always a challenge, but comfortable in terms of the direction that we're, that, that we're kind of heading on that. If I look to kind of the loan growth piece, the remortgage spread is, is a bit lower than the new business. As you know, we manage around 80 basis points over time on a combined basis across the book. I think, you know, that, that remortgage piece is, is obviously part of it, but then it's lower LTV, so it's also very good returns in terms of that piece, just because of the amount of capital that, that it's doing.
As I said earlier in my speech, we were a bit lower on, on spreads at the beginning part of the quarter, just because of the move of the swap rates, but we're back to where we wanted to be by, by the end. I do think you're, you're right that the volume is a bit lower, most likely, in sort of Q3 and Q4, but I think it's really important to remember on mortgages, these are multi-year products for us. You know, we have sort of retention that's in that 75%-80%, so actually, the first year is important, but what's really important is the second, the third, and the fourth kind of renewal as well, which is there.
Then if I just move on to NIBs, look, we are seeing some migration across the piece, and in our financial supplement, I show you this split of current accounts, versus, savings accounts across retail and private. I don't show you that way annoyingly on the main section, but on the commercial section, but you can kind of get a feel for that. What we know that in the commercial piece is you're absolutely right. We've got very strong transactional, accounts within there, so therefore, they are themselves quite stable and as we look through on that piece.
You can see the kind of the fall-off that we got in retail and private, and then, I would, I would view, the, the commercial piece a bit more, a bit more stable, just because they're so embedded in that kind of transactional, kind of transactional saving piece. I think I got all of them, Fahed. Let me know if I missed anything. Thank you.
Thank you.
Thank you. Once again, if you would 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 star nine to raise your hand and star six to unmute once prompted. We're going to get across to Chris Cant of Autonomous. Chris, if you can please unmute and go ahead.
Good morning. Thanks for taking my question. Sorry, I was struggling with my, my other device. Can you hear me okay now?
Yeah, perfect, Chris. That's great. Thank you. I'm glad you got through.
Two sort of follow-up questions, really. Firstly, there was an earlier question around, trends on, on deposits during July. I'm just conscious you, you did also hike your fixed-term deposit rates in response to the, the swap moves in June, and just keen to understand whether what we're seeing as we look into the third quarter is a continuation of trends you'd already been seeing during the second quarter, or whether you were actually seeing, accelerating, terming out. Obviously, you've given us the, the sort of deposit split at the end of 2Q, but conscious that that could be sort of accelerating potentially into 3Q. Any further commentary there would be helpful. I also just wanted to return to, to a comment you made, Katie, around peak NIM.
I mean, the idea of peak NIM has sort of, I think, been plaguing the U.K. banks broadly for a little while now. I guess it comes down in part to the timing of the different pressures, puts and takes on, on the NII line. In the short term, you're obviously seeing, this, this beta catch-up you've referred to during the second quarter. As we look into 2024, I think, I think you, you were sort of indicating actually that the, the net of forces may then become a net positive relative to where we're exiting this year, just in terms of fewer mortgage pressures, deposit trends stabilizing, and then this very material structural hedge benefit still to come through.
I think I asked you a similar question on the, the 1Q call, but if I could invite you to talk about that again, based on sort of stable-ish base rates or something close to your trajectory into 2024. Is that the right way to think about it, that actually the structural hedge benefits should be outweighing the mortgage pressures and the, the deposit forces, at least the sort of short-term deposit forces around betas catching up to a more sensible level, sort of abate? Thank you.
Yep. If I look at deposits, the easy kind of answer is to say, look, Q3's behaving as we had, like, expected it to. There's nothing unusual within that. We're seeing good performance in the fixed-term account, which is nice, is we're pleased with. We've just also launched our instant access, which is our... Using our Ulster Bank Northern Ireland brand, we're expecting that to play a positive part in the mix as we go through. It, it's literally been launched in the last two days, so I invite you to have a, have a look at that. As, as we see, and we'll talk more about how that performance when we get to kind of Q3, but so far, it's been very much in line with the messaging I've been kind of talking about.
Chris, I'm probably going to give you a very similar answer that I gave to you in Q1. I don't really want to get drawn on a, on a quarterly Q4 NIM forecast, but I think the things that we need to consider is, you know this as well as I, what's happening on base rates, the timing of them. Is our assumption around the 5.5% right? Will it, will it go higher? Pass through to customer deposit rates, if we are at that kind of peak, peak kind of level, and then also just the mix and balances that we'll see kind of going through.
You know, I think the, the hedge and the, the kind of marrying more closely of the mortgage market margin is helpful to us, but I think let's talk more about 2024 when we get into 2024, if you don't mind. Going to avoid giving you any views on that. Lovely. Thanks very much, Chris.
Thanks.
Thank you. Our next question comes from Robin Down of HSBC. Robin, if you could please unmute and go ahead.
Good morning. Can you hear me?
Yeah, perfectly, thanks.
Just one really quick question. I would've asked this on Monday, but I'm gonna be walk crossed on HSBC, so I can't ask them.
Oh.
The, the mortgage back book spread, you've given us that number in the past-
Yep
... and it's quite useful to compare with kind of new business spreads.
Yep, I can.
I can't, I can't see it in, in-.
Let me, let me, let me give it to you. It's the back book margin is 102%, down from 115% at Q1.
Great, the new business, I think you were saying you were.
So you, you-
A bit lower than 80 in the quarter, but ending at 80.
I'm not gonna give you that exact number.
Okay, all right.
... in terms of that. We kind of try to manage it over time, and given this is a multi-year product, I can get too obsessed by.
Yeah, sure
... weekly and quarterly moves. Managing to 80, I said we're a bit lower in the beginning of the quarter. We're a bit better at the end. I think you can also... The one or two I've given you, you can also calculate it on the fin sop if you want, but that's, that's what the back book is at the moment.
Brilliant. Great. Thanks, Katie.
Lovely, thanks. Good luck to you on Monday.
Thanks.
If you would like to ask a question today, you may do so by using the Raise Hand function on the Zoom app. If you are dialed in by phone, you can press star nine to raise your hand and star six to unmute once prompted. Our next question comes from Ed Firth of KBW. Ed, please do go ahead.
Morning, Ed.
Morning, Katie. Thanks so much. Can you hear me okay?
Yeah, perfectly.
Yeah, I had two questions, if that's okay. I mean, the first one was just to explore, I think you made a comment about a 50% deposit beta was where you're running at today. I mean, if, if I look at your savings, you... By far and away, the biggest pool of savings is instant access, and I guess the biggest pool of that, again, by quite a large margin, as I understand it, is less than GBP 25,000, which you're currently paying 1.4% on, which is, so you're making somewhere around a 3.6% spread on that. Which, I mean, I've gone back 20 years, I don't think I've ever seen a spread that big on, on customer savings.
I'm just trying to think, in terms of your thing, I'm not asking you to tell me whether the, you know, exactly how that's going to move, but if we forget about rate changes and just assume rates were to, to stay flat here, or that you'd have 100% beta going forward, is your general thinking that that 1.4% is, is a, is a fair rate and is sustainable, I guess, in a market where, I mean, the biggest bank in the world is offering 3.8% today. I mean, I'm just trying to get a sense as to, you know, culturally, do you think that is a, is a good rate for your customers, or do you think even without rates changing, that may have to start moving up, given the current environment?
I guess that, that's the first question. Then the second question was, I'm gonna, I'm gonna tackle the Farage question 'cause people have generally avoided it. If I look in the press, you know, people are talking about sort of 10,000 subject access requests, and, you know, Twitter's going bonkers with people closing accounts and stuff like that. I mean, is it possible that we could see some sort of a charge in the second half in terms of the cost of managing all that? I do remember with things like PPI, even if you don't ever have to pay anything out, just the sheer administrative burden of dealing with some of this stuff can be quite onerous.
Any thought, I know it's early days, but any thoughts you might have around that would be, would be very helpful. Thanks.
Yeah, no, sure. Thanks. I'll say that. What I would say is, you shouldn't always read everything you read in the paper-
I know.
... should be my, my, one of my bits of counsel to you.
That and research.
We have had, we've, we've, we've had a increased number of SARS. They're still in the hundreds in terms of that, of that piece. Clearly, that will bring it... Given it's a higher number than we normally have, we'll have to put a little bit more money away to kind of manage them. I'm not worried about that. We've, we've, we've kind of calculated that number at this stage. It's, it's, it's not something that's a, that's a concern within there. On that piece, at the moment, given that they're in the kind of several hundreds, where it's, it's, it's, it's in the manageable kind of space, I'm sure we'll, we'll see some more continue to come through.
If I look then at your, your thoughts on the deposit pieces, I would actually probably push you a little bit and say that the majority of our balances aren't in that 20, less than GBP 25,000. It's, it's important, and they're significant balances, but as, as I kind of look up, I would see more of them across my instant saver and flexible kind of saver products being in that GBP 25,000-GBP 100,000, and still significant balances in the GBP 250,000+. They're at kind of 210 all the way up to kind of 310 in terms of, in terms of those amounts. I think that there are different rates that are available.
I think you need to consider that a portion of these balances are hedged, so the upside, in terms of that, of that, that change in the, between what we're paying and what, what we're receiving, it comes through over time, so the margins are a little bit lower. You can't just take base rate minus that because of the, the hedging that we've done over time on that. There are a wide range of deposits available, that people can go to look, and I think what we're all, doing more on, and what certainly the regulator is encouraging us to do, is to make sure our customers really know the different variety of, of rates that are available to them.
Great. I mean, just, just coming back on that a little bit, I sort of get the logic of that. I mean, it, it seems to me quite plausible that as the hedge matures, effectively, the, the savers will get the benefit of that. Because if you, you know, if one of the reasons you're paying 1.4% is 'cause I can see the asset side of that is hedged, that is completely plausible. Is that, is that a sort of, I know they're not directly related, but is that a way we should think about it going forward?
I mean, I think it, it's, it's really interesting. I think the, what you're paying to depositors, it kind of depends a little bit on market as well, in terms of what the kind of, what, what's happening elsewhere. I mean, I would say that sort of about 80% of our balances are actually above GBP 25,000, so actually, I think the rates that are being passed through are, are much higher than, than you probably realize.
Sure.
You know, the competitive dynamics, and I think importantly, the system liquidity and what happens as we approach things like TFSME, will all, will all kind of play their part as to how this, this evolves.
Perfect. Thanks so much.
Lovely. Thanks, Ed.
Thank you. Our next question from us comes from Adam Terelak of Mediobanca . Adam, could you please unmute and go ahead?
Morning. I just had a follow-up on deposits. You mentioned in your forward planning assumptions a Bank of England rate cuts. Just a, an update on how you're thinking about deposit pricing in, in the face of cuts, given you're still, a lot of your products are priced well below, Bank of England rates. Could that, in terms of, numerator going down, and the denominator going up, the meaner increase in beta, even when we've kind of got to the end of the rate cycle? Thank you.
Look, I think the end of the rate cycle is going to be an interesting time. I think there's a lot of different things going on. At the moment, our rates are, are looking through sort of mid-2024, that we start to see them come down. We've taken a probably relatively conservative view on this. In the, the documentation on the structural hedge, we show you the kind of sensitivity on that. We've given you a kind of a 60% pass-through, rather than our historical 50% pass-through, and, and we've given you a kind of 25% up and down.
What I would say that if, if the pass-through was kind of 10% higher or 10% lower, that would have about, on a static balance sheet, that would have about a GBP 50 million impact on, on income. Obviously, that's an annual number, in terms of that piece, so it, it would, you can kind of pro rate that through. I really think at the moment, it's quite early to be talking exactly what that might do to our numbers. What I would guide you back to, and for us as a bank, is that the sustainable 14%-16% return, we have clearly built in some views on that, and we remain very comfortable with that as our medium-term view on returns. Thanks, Adam.
Thanks a lot.
Thank you very much. I would now like to hand back to Katie for any closing comments.
Lovely. Thanks very much, and thanks, everyone, for your questions and participation this morning. It is very much appreciated. We have had a strong performance in H1. It demonstrates that the strategy is working, and we have a robust balance sheet, growing lending to support our customers. We're on track to meet our 2023 cost guidance. We've distributed GBP 2.5 billion to shareholders in H1, and we continue to target a sustainable medium-term RoTE of 14%-16%. With that, I'll thank you for your ongoing support, and I look forward to talking to many of you as we meet you over the next couple of weeks. Take care. Thanks. Bye-bye.
That concludes today's presentation. Thank you for your participation. You may now disconnect.