Good afternoon. Welcome to the NatWest Group full year 2022 results fixed income call. Today's presentation will be hosted by CFO Katie Murray and Treasurer Donal Quaid. After the presentation, we will open up for questions. Katie, please go ahead.
Good afternoon, everyone. Thanks for joining our 2022 fixed income results presentation. I'm joined today by Donal Quaid, our treasurer, and Paul Pybus, Head of Debt IR. I'll take you through the headlines for the year, give an update on our strategic priorities, and then move on to some of the detail. Donal will then take you through the balance sheet, capital, and liquidity, and then we'll open up for questions. Starting with the headlines on slide three. We delivered operating profit for the full year of GBP 5.1 billion, up 34% on the prior year, with attributable profit of GBP 3.3 billion. We're reporting income of GBP 13.1 billion, and we have continued our tight cost discipline, reducing expenses by 2.9% in line with our target.
This resulted in a much improved cost-income ratio of 55.5%, down from 70% for 2021. During the year, we distributed or accrued a total of GBP 5.1 billion to shareholders, which comprised GBP 1.3 billion in ordinary dividends above a committed distribution of at least GBP 1 billion, a special dividend of GBP 1.75 billion announced at the half year, the directed buyback of GBP 1.2 billion completed last March, and our third on-market buyback announced today of GBP 800 million. Our common equity Tier One ratio was 14.2%, in line with our target. Turning to slide four. We have made excellent progress on the strategic priorities we set out three years ago, we have remained focused on supporting our customers and delivering on our commitments.
We have delivered organic growth as we improved both our offering and service for our customers. We have maintained tight cost discipline, yet continued to invest for the future in our digital transformation. We have refocused our markets business and made significant progress on our phased withdrawal from Ulster Bank in the Republic of Ireland. We are now much more capital efficient. This has delivered a return on tangible equity of 12.3%, well above our initial target. Turning to slide five. Given the uncertain economic outlook, our purpose-led strategy has never been more relevant. We have continued to support customers by lending responsibly and helping them save for the future. With lending across our three business segments up 6.7% year-on-year.
We have also proactively contacted customers with advice on managing the cost of living, carried out free financial health checks, delivered hardship funding through charities, and offered targeted support for those in need. We have supported colleagues with targeted pay rise for the lowest paid, as well as enhanced parental leave and ongoing training and development. Turning now to slide six and the performance in the fourth quarter, using the third quarter as a comparator. Total income increased 14.8% to GBP 3.7 billion. Income excluding all notable items was GBP 3.8 billion, up 10.9%. Within this, net interest income was up 10.2% at GBP 2.9 billion, and non-interest income was up 13.2% at GBP 857 million.
Operating expenses rose 12.8% to GBP 2.1 billion, including Ulster exit costs and the annual U.K. bank levy. The impairment charge decreased to GBP 144 million or 16 basis points of loans. Taking all of this together, we delivered operating profit before tax of GBP 1.4 billion. Profit attributable to ordinary shareholders was GBP 1.3 billion after the benefit of deferred and other tax credits. Return on tangible equity was 20.6%, including a 6 percentage point benefit from tax credits. Before I take you through our performance in more detail, I'd like to share some of our assumptions about the economic outlook on slide seven. We're showing you here our current expectations for interest rates and economic activity. Clearly, the backdrop of low economic growth and high inflation makes this a challenging time for our customers.
There are signs that inflation peaked in October last year, though it remains high at around 10%. Our base case assumption is that this will fall to the Bank of England 2% target by mid-2024, resulting in interest rates reducing from the second quarter of that year to 3.25% at the end of 2024. We have not modeled any further increase in interest rates since the Bank of England's decision earlier this month to increase them to 4%. All in, our outlook is aligned to the consensus of economists' forecasts with both upside and downside risks. I'll move on now to net interest income on slide eight. As I said earlier, we saw continued strong momentum in net interest income and net interest margin, excluding notable items, increased 26 basis points to 325 basis points.
The increase was driven by wider deposit margins, reflecting the benefit of higher U.K. base rates, net of pass-through to our customers and higher spot rates on our structural hedge. This increase was partly offset by lower mortgage margins on the front book and by commercial and institutional fixed rate lending. Net interest margin of 285 basis points for the full year is in line with our guidance of more than 280 basis points. If the current U.K. base rate of 4% continues throughout 2023, we expect NIM to be 320 basis points for the full year. Turning to loans on slide nine. We delivered a strong year of balanced growth across the Group.
Gross loans to customers across our three franchises increased by 6.7% to GBP 350 billion, of which GBP 3 billion was in the fourth quarter. Taking retail banking together with private banking, mortgage balances grew by GBP 4.7 billion or 2.4%. Gross new mortgage lending for the full year 2022 was a record GBP 45 billion, representing flow share of 14%. Our stock share is 12.3%, up from 11.8% at the end of 2021. Unsecured balances increased by a further GBP 200 million in the quarter to GBP 14.2 billion, driven by higher spending on credit cards. In commercial and institutional, gross customer loans decreased by GBP 2 billion, driven by continued repayment of government lending schemes. I'd like to turn now to non-interest income on slide 10.
Non-interest income, excluding notable items, was GBP 857 million, up GBP 100 million on the third quarter. This was driven by fees and commissions, which increased GBP 62 million to GBP 650 million due to higher lending fees, increased investment fee income, and the end of our no fee foreign exchange offer for retail customers. There was a more stable trading performance in 2022 following the completion of our markets restructuring. Net fees and commissions grew 8% year-over-year as a result of increased customer activity, combined with the impact of inflation on nominal spending. Turning now to costs on slide 11. Other operating expenses for the go forward group were GBP 6.6 billion for the full year. That's down GBP 201 million or 2.9% on the prior year, in line with our guidance.
This was driven by continued automation of customer journeys. Now that Ulster is in central and other items, on this slide we show the walk from GBP 6.6 billion go forward group expenses to group other operating expenses of GBP 7.3 billion as per the income statement. Turning to 2023 costs on slide 12, we start with GBP 6.9 billion of operating expenses for 2022, excluding Ulster direct costs. Pro forma for acquisitions, 2022 costs are around GBP 7 billion, which I view as the business as usual cost base of the group. In 2023, we expect this to grow by around 5% to about GBP 7.3 billion. With another GBP 300 million of Ulster direct costs, we expect operating expenses of GBP 7.6 billion, excluding litigation and conduct costs.
We also expect a further improvement in operational leverage with a reduction in the cost-income ratio from 56% to below 52% for the year. Litigation and conduct costs were GBP 385 million for 2022, and we expect them to be broadly in line with this in 2023, though these can fluctuate. Turning now to credit risk on slide 13. We have a well-diversified prime loan book. Over 50% of our group lending consists of mortgages, with the average loan-to-value is 53% or 69% on new business. Overall, we have low levels of arrears and forbearance in our mortgage book. 92% of our book is at fixed rate, 4% on trackers and 4% on standard variable rate or SVR.
Our personal unsecured credit 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. For example, our commercial real estate exposure represents less than 5% of Group loans with an average loan-to-value of 47%. Whilst we have a well-diversified, high-quality loan book with a low level of defaults, we are mindful of the economic outlook. Let me tell you how we've addressed this on slide 14. We have four economic scenarios where we have updated our forecasts and relative weightings. For 2023, this has driven a slight improvement in our weighted average expectations for GDP, but a deterioration in levels of employment, the key drivers of expected loss.
In terms of sensitivity, 100% weighting to the extreme downside scenario would increase stage one and two expected credit loss by a further GBP 1.6 billion or around 40 basis points of loans. In this scenario, stage three expected credit loss would also increase, though this is not modeled here. The net effect of changes to economic forecasts in Q4 is an increase of GBP 171 million in the good book expected credit loss provisions. Overall, expected credit loss reduced during 2022, reflecting the phased withdrawal of Ulster Bank, stable trends in portfolio performance, and a related net release of post-model adjustments and write-offs. The post-model adjustment for economic uncertainty reduced by GBP 193 million in the quarter to GBP 352 million.
We continue to be cautious on the release of these provisions, as we have yet to see the full impact of the economic challenges play out. Turning now to look at impairments on slide 15. The net impairment charge for the group of GBP 144 million in the fourth quarter took our charge for the full year to GBP 337 million, equivalent to 9 basis points of loans. You can see that our impairment charge has largely been driven by unsecured lending and commercial property, where we have relatively small exposure. Our through the cycle impairment guidance is 20-30 basis points, and I continue to see this as an appropriate level for 2023, given both the economic outlook and relatively benign trends in our book. With that, I'll hand over to Donal.
Thanks, Katie. Good afternoon, thank you for joining today's call. I will start by sharing some highlights from the full year before moving into more detail on capital funding and liquidity. I will give an update on our funding plans for 2023 before we open up for questions. Starting with the highlights on slide 17, we ended the year with strong capital MREL and leverage positions, comfortably above regulatory minima with a CET1 ratio of 14.2%, leverage ratio of 5.4%, and a Total Loss Absorbing Capacity ratio of 31.5%. We continue to operate with a robust liquidity position with a Liquidity Coverage Ratio of 145% coupled with a strong deposit franchise.
We successfully completed our wholesale funding requirements for the year and saw an opportunity in early December to pre-fund some of our 2023 Tier Two requirements. We continued to reduce our legacy capital stack via calls and liability management exercises. At the end of 2021, we had GBP 3 billion of outstanding legacy securities which had no regulatory value from the first of January 2022. Our capital actions and maturities during the year reduced the outstanding balance to below GBP 600 million, and this will reduce to approximately GBP 300 million by year-end with further maturities this year. I was also very pleased with the Bank of England's first assessment under the Resolvability Assessment Framework in June, with no shortcomings or deficiencies identified in NatWest Group's preparations for resolution. Turning to our capital and leverage position on slide 18.
Our CET1 ratio at the end of the year was 14.2%, including the full impact of the GBP 800 million share buyback announced this morning. The CET1 ratio is well above the current Maximum Distributable Amount of 9.5% and well positioned versus our 13%-14% medium-term CET1 target. In December, the U.K. countercyclical buffer increased from zero to 1% in line with the Financial Policy Committee announcement in 2021, this equates to a requirement of 80 basis points for NatWest Group. A further increase in the countercyclical buffer to 2% is expected to take effect in July 2023. A 2% countercyclical buffer will translate to a requirement of approximately 170 basis points for the group.
Our Maximum Distributable Amount and supervisory minimum requirements increased in the second half of the year as increases in the countercyclical buffer took effect. However, these changes, in addition to the changes expected in July this year, will have no impact on our medium-term CET1 target of 13%-14%, as they are already built into our capital forecasts and plans. Our U.K. leverage ratio was 5.4%, leaving around 185 basis points of headroom above the minimum requirement. The leverage ratio minimum requirement also moved higher in the second half of the year as the increase in the countercyclical buffer took effect. The slide also shows the impact of the other systemically important institution group risk add-on, which although not part of our minimum ratio requirements or combined buffer requirement, is included in our minimum supervisory requirement.
Moving to slide 19 on our quarterly movements in CET1 and risk-weighted assets. We ended the fourth quarter with a CET1 ratio of 14.2%, down 10 basis points on the third quarter. We generated 59 basis points of capital from earnings, net of deferred tax credits, which are not recognized in CET1 capital, and changes to IFRS 9 transitional relief. This was offset by accruals for shareholder distributions of 79 basis points, including the share buyback and final pension accrual of 5 basis points. Given the strong funding position of the pension fund, we've reached an agreement with the trustees not to make a final GBP 500 million dividend link contribution payable in 2023, but have set it aside in case of future need.
While we view this as a low probability, we have deducted the potential impact from our CET1 ratio, and we do not expect any further capital deductions for pension contributions going forward. In addition, we have received regulatory approval to participate in a directed buyback from the U.K. government for up to GBP 1.5 billion, which equates to 4.99% of our issued share capital. The 14.2% CET1 ratio includes IFRS 9 benefit of 20 basis points. Risk-weighted assets decreased by GBP 2.4 billion in the quarter to GBP 176.1 billion due to reductions in counterparty credit risk and market risk and progress on our phased withdrawal from the Republic of Ireland. Procyclicality has remained positive through 2022 across the group, leading to a reduction in order RWA of GBP 4 billion.
We have incorporated our expectation of a normalization of risk parameters into our medium-term RWA guidance. We now expect RWAs could increase by 5%-10% by the end of 2025, which includes the day one impact of Basel 3.1. Turning now to our total capital and MREL positions on slide 20. Our total capital ratio at the full year is 19.3%, with an AT1 ratio of 2.2% and a Tier Two ratio of 2.9%. Given our medium-term 13%-14% CET1 target range, we expect to operate with optimal levels of AT1 relative to minimum requirements, and our future AT1 and Tier 2 requirements will be subject to the evolution of RWAs.
Our total loss absorbing capacity ratio continues to look healthy at 31.5%, significantly higher than our risk-weighted asset requirement. The total loss absorbing capacity ratio has reduced from 39.8% at full year 2021. That reduction has been driven by the increase in risk-weighted assets on the 1st of January 2022 due to the impact of regulatory uplifts, the removal of approximately GBP 600 million of legacy Tier One and Tier Two capital from loss absorbing capacity resources, and a reduction in our CET1 ratio for share buybacks and capital distributions. Turning to our liquidity position on slide 21. We have maintained strong liquidity levels during the year, although we are now seeing a reduction from elevated levels with an LCR ratio at 145%, reflecting over GBP 52 billion of surplus primary liquidity above minimum requirements.
The decrease in the ratio since full year 2021 is primarily due to growth in lending, reduced customer deposits, and shareholder distributions during the year. We continue to manage a high-quality liquid asset pool with primary liquidity of GBP 162 billion and secondary liquidity of GBP 64 billion. Looking at customer deposits on slide 22. Customer deposits at the end of 2022 were GBP 450 billion, resulting in a loan-to-deposit ratio of 79%. During 2022, balances reduced from the elevated position built up during the pandemic, reducing by approximately GBP 30 billion.
The two key drivers to note here are a GBP 12.2 billion reduction from UBI DAC due to our phased withdrawal from the Republic of Ireland and a GBP 14.2 billion reduction in commercial and institutional due to seasonality and overall market liquidity contraction in the second half of the year, including a reduction in foreign currency balances and a disciplined pricing approach with a focus on customer relationship, margin, and liquidity value. Looking at the deposit mix excluding UBI DAC and Treasury, around 60% of our balances are interest-bearing and 40% are non-interest-bearing. While this has remained stable during the year, we have seen some migration within interest-bearing balances as customers move from instant access into term accounts. Turning to slide 23 and the impact of deposit volumes on income derived from the structural hedge.
Our structural hedge notional balance at the end of the year was GBP 230 billion, of which around GBP 184 billion is allocated to the product hedge. The hedge notional was stable during the quarter, deposit balances reduced into year-end, and we do not expect to reinvest all the balances maturing during 2023, which is approximately GBP 40 billion. If there was no change to deposit volumes or mix from the end-of-year position, I would expect the product hedge notional to steadily reduce by GBP 5 billion over the next 12 months. Looking at income, as you can see in the chart, product hedges already written will deliver income of GBP 2 billion in 2023. That is before we consider any reinvestment of maturing hedges.
The actual amount of reinvestment will be driven by changes in the flow and mix of deposits going forward. We assume an average five-year reinvestment yield of 3.3% for 2023, compared to the current five-year swap rate of 3.75%, and relative to an average redemption yield on maturities of around 1.1%. Moving to funding on slide 24. We operate with stable and diverse sources of funding. Customer deposits represent approximately 86% of our total funding. Our wholesale funding is GBP 74 billion, and around 40% of that figure is to meet our senior MREL and non-equity regulatory capital requirements at the group holding company. We continue to look at all options available to us to assess the optimal blend and most cost-efficient means of funding.
Looking back at our issuance during 2022 on slide 25, I'm very pleased with transactions we executed during the year, particularly in light of challenging market conditions. Again, thank you for your continued support for NatWest Group and NatWest Markets. We have ended 2022 well-positioned from both a Holdco and Opco perspective. From NatWest Group, we issued around 3.7 billion equivalent in senior MREL format across sterling, dollar, and euro markets, including a EUR 1 billion six-year non-qualified green bond, demonstrating our continued focus on issuance in green, social, and sustainable format. We also took the opportunity to pre-fund a portion of our 2023 Tier Two requirement with a GBP 650 million sterling issuance in December.
From NatWest Markets Plc, we issued approximately GBP 4.6 billion in benchmark transactions across sterling, dollar, euro, Swiss franc, and our inaugural Aussie dollar deal. Looking at our 2023 funding requirements on slide 26. From NatWest Group Holdco, our issuance is expected to be in the range of GBP 3 billion-GBP 5 billion, primarily to refinance maturing senior MREL, and we aim to issue approximately 25% of this in GSS format. On capital, we'll look to raise Tier Two again this year with an anticipated volume of up to GBP 1 billion. We have no AT1 requirements given our next call is in 2025, although that will, of course, be subject to the evolution of risk-weighted assets. We intend to be active in dollar, sterling, and euro markets, and we'll also look for opportunities to diversify into other currencies.
Turning to our operating companies, NatWest Markets will have senior unsecured funding requirements of GBP 3 billion-5 billion in 2023, primarily to refinance maturing legacy debt, and we expect to be active with an inaugural benchmark public issuance from our Eurozone operating entity, NatWest Markets N.V. Turning to credit ratings on slide 27. It was pleasing to see progress in our credit ratings during the year. In September, Moody's upgraded the rating of NatWest Group plc to A3 from Baa1 and upgraded the ratings of NatWest Markets Plc and NatWest Markets N.V. to A1 from A2 with a stable outlook for all three entities. Moody's also upgraded the deposit rating of RBSI to A1 and the issuer rating to A2. S&P and Fitch assigned a rating to our ring-fenced subsidiary, NatWest Bank Europe, in January, which is aligned to the ratings of our U.K. ring-fenced banks.
Ratings outlook from S&P and Fitch are stable across all group entities. Our ESG ratings, including Sustainalytics, continue to remain strong, with MSCI at AA and ISS ESG upgrading us to C+ in 2022. We will continue to proactively engage with the agencies to support ongoing progress in our credit and ESG ratings. With that, I'll hand back to Katie.
Thank you, Donal. I'd like to finish on slide 29 and our guidance for 2023. We expect income, excluding notable items, to be around GBP 14.8 billion, net interest margin of about 3.2%, and group operating costs, excluding litigation and conduct, to be around GBP 7.6 billion, delivering an improvement on the cost-income ratio to below 52%. We anticipate a loan impairment rate in the range of 20-30 basis points. Together, we expect this to lead to a return on tangible equity of 14%-16% and to be at the upper end of this range. With that, I'd like to open the line for questions.
Ladies and gentlemen, 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'll pause for a moment to give everyone an opportunity to signal for questions. Our first question comes from Lee Street. Lee, if you want to press star six to unmute, you can ask your question.
Hello. It's Lee Street from Citi here. A couple of questions, please. Firstly, just on the funding plan for NatWest Markets. It's GBP 3 billion-GBP 5 billion is the runway to we should just be expecting every year. I suppose I've been expecting it to come down a bit given the restructuring. Any comments there? Secondly, on the risk-weighted asset guidance of 5%-10%, obviously, it's got the Basel part, and I presume there's loan growth in there. What else would be encapsulated in that 5%-10% guidance, please?
Thanks. Hi, Lee. Let me take the RWA, and then I'll hand over to Donal on the funding question. When you look at RWAs, we ended the year at 176. Within that, there's 6 billion of Ulster RWAs. You would expect them to come down materially as the rest of the books kind of move off next year. I don't think they'll completely disappear in one year. There'll be a little bit left, but all because of operational risk and things like that. The guidance we've given you of +5% to 10% is on the 176 number, so therefore, kind of, loan growth would be dealt with in terms of an offset to, kind of, Ulster.
Then as we look at that 5%-10% increase, there's two things going on within there. One is any procyclicality that might come through. It's been positive the last couple of years, but we'd expect as impairments increase it, we'd start to see a little bit of that, and then the impact of Basel 3.1 as well. Across both of them, we think the 5%-10% would cover it. Clearly, the consultation document is still out in draft, that kind of gives you a little bit of a guide. Donal, do you want to take the funding plan?
Yeah, sure. Hi, Lee. On NatWest Markets, yeah, GBP 3 billion-GBP 5 billion is not a bad run rate for the next few years. As you know, it's a non-ring-fenced bank, primarily wholesale funded. In effect, that requirement is really purely refinancing the maturing benchmark issuance. If I look at, kind of, over the next three years, we've GBP 4.3 billion maturing this year, GBP 3.7 billion in 2024, about GBP 5.2 billion in 2025. That GBP 3 billion-GBP 5 billion gives us a bit of flexibility within that range. It's a good run rate for the years ahead.
All right. Very clear on both. Thank you very much.
Thanks very much.
Yeah.
Thank you. Our next question comes from Robert Smalley from UBS. Robert, do you want to unmute and go ahead.
Hi. Thanks for doing the call and taking my questions. I have two. First, you mentioned the post-model release on reserves. Could you talk about what your thinking will be on that going forward, what you'll be looking for in the environment, et cetera, to do more? Can we expect this to be consistent over quarters, or will it be lumpier? Secondly on deposits. Last year we saw outflows of commercial and industrial institutional deposits. That makes sense, as I'm assuming most are non-interest bearing. Retail held up pretty well, which is notable given digitalization in the bank. So would you expect these retail deposits to stay or, as rates change, will we see a migration of those into either interest bearing or out of the bank? Thanks.
Yeah, sure. Thanks, Robert, and nice to hear your voice. As I look at the PMA, you know, we did do our a release within the year on that, and as I look at it's something we look at kind of multi-quarter. I'd probably expect some movements each quarter, but nothing. It's not a question of, you know, there's 352 left. I don't have a plan that would be 80 each quarter for the next four quarters. We'll just assess it as it comes through. We've been quite conservative on kind of holding it back, and we're comfortable with that, I think we'll just continue to assess it as we go through. What's been good is that it basically is now a PMA for economic uncertainty.
I mean, that's 352 of the 412 that we've got, if you look at the analysis in the accounts or also in the main area in 192, you can see that it's split, work quite well over commercial, institutional and retail banking. I think retail banking is very cost-of-living focused and, I mean, as is a kind of energy and gas kind of pressures on the commercial institutional space. We'll just see how that kind of rolls through. If we look to deposits, I think it's probably worth just spending a couple of minutes on C&I. Deposits went down GBP 50 billion in the last quarter. GBP 12 billion of that was from C&I. The way I look at them, there's kind of three more or less equal reasons for that.
First one, year-end balances, you know, and some just natural kind of liquidity kind of actions going on. The second, was around foreign exchange balances that left the U.K. at the time of the kind of mini budget. They were making more of a statement on U..K kind of PLC. The third is us very much managing our book. We're not looking to pay out for deposits that are kind of hot money or have poor income or liquidity value, or by paying, we'd end up kind of capitalizing the book. Very comfortable with what we lost. Overall, the GBP 12 billion had about GBP 4 billion liquidity value. Given our very strong liquidity position, that wasn't a big kind of story.
I think when I look at the retail piece, what we've seen is that the balance between IBS and NIBS has been quite standard, even from the end of 2021. I think one of the important things, Robert, that you have in the States that we don't have here is a very active money market investment process. That's not a feature of our kind of savings environment. I think what we'll see and what we have seen, and it started very much in November, is customers beginning to look much more for interest return, and I think at that point we didn't have a term deposit account. We've now got one, it's in place. It's been up since January, and that's really kind of helped, we think any kind of particular migration.
The way I look at balances is probably over the year that they'll be relatively steady. They'll move around on quarters. January is tax-paying season, so that has a bit of an impact on it as well. Kind of that's probably how we're viewing it, then we need to manage what we're rewarding on that as we move forward, that's probably the bit that we're learning more and more about as we work out customer behavior and kind of market dynamics.
That's great. Thanks for all the detail.
You're welcome, Robert. Take care.
Thank you. Our next question has been emailed into us from Paul Fenner-Leitão of Société Générale . It's split into three sections. The first section asks: What are you seeing in forward-looking metrics like debit card activity, spending, or deposits that signal potential weaknesses or yellow flags in asset quality? The second part asks: Are you seeing any change in behavior for mortgage borrowers coming off fixed rates and into new higher rates? The last part is: For Tier Two supply, what currency is most likely? Euro?
Okay, perfect. Let me take the first couple. As we look at asset quality, I would say at this stage we're really seeing very little. When I look to those customers that are in arrears, or what we call kind of heightened monitoring on the commercial side, those numbers aren't really yet back up to what they were pre-COVID. There's not any real kind of flags within there. What we can see, and it was confirmed again with some of the U.K. spend that came out today, is that people are continuing to spend and continuing to kind of use their funds. Though there's a lot of narrative about the concern of the cost of living, the reality is we're not really seeing that coming through in our numbers.
I think in terms of change of behavior, so when we look at our mortgage portfolio, it's 66% five year, and then 25% two year, and then balances on sort of tracker and SVR. What's been quite interesting, as people's mortgages were maturing last year, particularly when they were maturing into an environment where the rates were getting up into the five point something and the very low six point something, that's when we launched our tracker book. What we saw is people moving onto tracker to kind of wait until rates start to fall. If you look at rates, you can see that they're much more kind of low four point something. We can see people kind of moving back into those rates.
Definitely people leaving it as long as they could are taking a different product. With us, if you go onto tracker, you can move onto a fixed, within three months for free of charge. I think that has also kind of helped them kind of take opportunities there.
I'll take the one on Tier Two supply.
Perfect.
I think we've guided up to GBP 1 billion. I think we'll probably see that over two deals. We'll keep our options open, I think, across euro, sterling, and dollar.
Thank you very much. Our next question comes from Alexander Latter of PGIM. Alexander, do you want to unmute and go ahead?
Hi there. Just a couple of questions from me. Firstly, just wanted to ask about kind of Stage two balances. You haven't had a big increase in kind of total provisioning as you've kind of flagged, but the actual Stage two balances have gone up quite significantly, sort of quarter-over-quarter. It seems like you've added about GBP 9 billion in retail and GBP 4 billion in commercial institutional. Given that the IFRS 9 scenario hasn't changed massively, what exactly is driving that increase in Stage two loans? Then the second question is with your plans to issue from NatWest Markets N.V., what exactly is the rationale for issuing out of that particular entity?
Why not just issue it all from NatWest Markets Plc, keep the kind of structure simple, don't add more boxes to issue out of? It's kind of much easier to understand and then just pass it down internally.
Yeah, sure. I'll take the first one, and then, Donal, you can jump in on NV. If we look at the NatWest Group loans, they decreased by GBP 8 billion Q3 to Q4, driven by the significant reductions in center, which was obviously the withdrawal of Ulster Bank, and then that's also offset by growth. When you look at the stage two balances, they are up overall GBP 12.8 billion or sort of 37% to GBP 47 billion, and that's 12% of the group loans. I would probably highlight two items within there. The first one is retail mortgages.
That move was driven by our low SICR, which is a significant increase in credit risk threshold that we have, and it makes it very sensitive to model changes in the probability of default, which is caused by the update that we did on our economic assumptions in the quarter. What I would say, it's very high quality movement within there, so it's not really a sign of an underlying problem. It's just that as you made those economic changes. When you look at the stage two mortgage, the actual ECL, although you had movement in the balances, the ECL decreased by GBP 19 million . I'm not concerned about that migration. If I look at the unsecured, much, much smaller book, but there was a GBP 0.4 billion GBP increase there, and that again was our unsecured balances moving up.
Given that it's a smaller level of the book, we're kind of covered, very comfortable with the coverage levels and arrears trends that we've seen there. It's more, I guess, a sensitivity rather than an underlying problem. Donal.
Yeah, let me take the NV question. Just in terms of rationale for that entity, as you know, it's our European non-ring-fenced bank entity that's there to support our U.K. clients operating in Europe and also some European clients as well. The reason why we're looking to issue out of that entity, obviously, as the balance sheet grows, it is again similar to NatWest Markets Plc, going to be wholesale funded. The restrictions that we would have is issuing more unsecured out of NatWest Markets Plc is there'd be intergroup lending constraints just given the low capital base of those entities. That's really the primary reason why we'll go directly from the NV entity.
Thank you. 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. Our next question comes from Corinne Cunningham from Autonomous. If you could please unmute and ask your question.
Good afternoon, everyone. Thank you for the call. Could I just follow up on the RWA increase? I guess on the credit side, we've been used to you running with very high ratios of late. In 2022, your payout ratio, if you include buybacks, et cetera, was over 100%. How should we think about the 5%-10% growth in RWAs against the distribution policy? Is it coming down below the 100%? Just I think understanding the glide path from here with that kind of RWA headwind would be very helpful. Then the other one was on the NIM trajectory, or I should say the NII trajectory. You guide to a flat margin over the course of the year.
In terms of quarterly NII, when would you expect that to actually peak, if rates stay flat as you, as you forecast at 4%? Thank you.
Hi. Thanks. Thanks very much. Thanks for your question. I think on distribution, it's important to remember a little bit the journey that we've been on. If I go back, we were sitting at sort of 18.4% CET1 with a target to get into 13%-14%. We're now at 14.2%. Clearly the significant payout of last year and this year, we've paid over the last few years GBP 10.9 billion of distributions out via a variety of mechanisms, whether they're dividends, directed buybacks. That's been a lot of that story is about getting from that 18% cost number down to the 14.2%. What you would expect going from forward from here is the 40% payout ratio in terms of our dividends.
We've also said that we will maintain capacity to take part in buybacks. Our principal focus is the directed buyback, which we can buy up to 5% of the company from the U.K. government in any one year. This morning, we also announced a further GBP 800 million buyback. I'd say the next few years are much more about using the capital generated rather than trying to run down that excess capital. Comparatively, we'll see a slightly smaller number, but still an excellent kind of payout ratio, which will be in addition to that 40% piece. In terms of the NII, what I would probably guide you on revenue, there's lots of different things that are obviously going on in that line.
The interest rate is just one of them, and we've guided you to sort of around about 3.2 for the year. I think it's important also to think of what's happening in volume growth around the businesses. Clearly, a really strong growth last year at 6.7%. We don't expect to be quite as strong in mortgages this year, just given that market is a little bit smaller. Commercial, obviously, the level of growth will depend on the macro environment, and we're comfortable with, I guess, how the year has started. You know, we've also talked quite a lot this morning on the equity call around things like the structural hedge and how that will be reinvested. Obviously, that's been considered in NIM.
If I look at that in terms of where the five-year swap rate is, that's something else to kind of have a think about. We're not calling out quarterly NII at this stage. I mean, what we're guiding you to is GBP 14.8 billion total income for the year.
Okay, thank you.
Lovely. Thanks.
Thank you very much. There are no further questions. I'll pass back to yourself, Katie, for any closing comments.
Lovely. Thanks very much. Thanks, Dave, and thanks, everyone for your time this afternoon. We really do appreciate you getting on the call and having a chat with us. As ever, Paul Pybus from our debt IR is very happy to take any questions. Donal and I look forward to meeting with you over the coming months and then again when we talk again at HH one more formally. Thanks very much for your continued support. It really is appreciated.
Thank you.