Great. Thanks, everyone for joining this session with NatWest. Thanks, Paul Thwaite, CEO, for coming and joining us again this year. We're very excited to have you, and I'm sure it's gonna be a very insightful session, so thanks for joining us.
Good to be here, Alvaro. Afternoon, everybody.
We're gonna lead with a polling question so we can set the scene. What will drive the next leg of share price performance for NatWest Group? Number one, the GBP 12.2 billion-GBP 12.6 billion revenue guidance proves too conservative. Number two, NatWest achieves 4% annual growth in assets and liabilities. Number three, the company delivers on its GBP 8.2 billion guidance for this year and 45% in 2028. Four, successful integration at Evelyn. Number five, capital build to surprise and share buybacks to start before first half of 2027. Okay, that will set the scene.
All of the above.
All of the above. We don't put that in on purpose. We have the European Commission, and there was all of the above and-
Oh, okay.
Everybody goes for all of the above.
Okay.
Capital build to surprise positively.
There we are.
Bear that in mind. Let's start with Evelyn, obviously.
Mm-hmm
The biggest acquisition, the major financial, the biggest you've done since the GFC. Maybe you can run through the group in terms of the capability, the scale, the revenue mix, and why do you think it was the right time to do it?
Yeah, of course. First of all, I'd say very, very pleased with the acquisition. It demonstrably accelerates our organic strategy and in one fell swoop, I guess, creates in the U.K. the number one private bank and wealth manager. That feels a great start. If you look at some of the metrics, it gives us immediate scale. We double our AUMs. I think scale is incredibly important. It brings a lot of new capabilities. We can come back to some of them. It adds 20% to the group's fee income, which is a significant positive delta, and obviously it brings a lot of customers as well. In summary, you know, it brings a lot to the group. In terms of the capabilities, they're really compelling.
We spent a lot of time over the course of the last three or four years thinking about savings, investment, and wealth management. We're really clear on what capabilities we thought we had already in the group, primarily in our Coutts business, but the capabilities we had and the capabilities that we needed. Evelyn Partners from that perspective was very attractive. You know, it brings a financial planning investment advisor, the largest employed U.K. advisor network in the U.K.. That's a constituency, very experienced, very professional that we can expose to the client base of the group. That's a great first capability. Secondly, we acquire a D2C platform, Bestinvest.
We do have an offering within the group, but this is a significant upgrade both in terms of technology, product capability, platform, for example, 3,000 products. That's another big addition. Again, with 20 million retail and premier customers, it's a significant opportunity. We also get a broader range of kind of wealth management, financial planning solutions, including some neat tech as well. It's a very broad set of capabilities in addition to the scale, which we obviously get through the AUM. You wrap that all together and you wrap what we have already in NatWest Group and Coutts, you wrap it together with Evelyn. It feels like a significant opportunity. There's great regulatory tailwinds.
Yeah, I wouldn't underestimate how important the changes around Targeted Support and Simplified Advice under the FCA's Advice Guidance Boundary Review will be. We also think, you know, I'm sure we'll come on to it, the acceleration in some of the tech trends will help wealth businesses. It exposes us to a higher growth business, a higher returning business, and then by definition, we should become, you know, a higher growth, higher returning NatWest Group on the back of it. From that perspective, we feel pleased. Obviously, we've got a lot of hard work to do in terms of integration, but it's a great opportunity to create a third scale franchise to add to our corporate bank and our retail bank.
The acquisition is very much aligned with the strategy you had already laid out previously. Where there's been more debate, as you know, is on the price paid and that 11% return on invested capital, and also around the risk of some of the talent potentially leaving during the integration. What would you say to those points?
Well, remind me to come back to it 'cause quite a few points in there. Make sure I come back to all of them. First of all, I'd say very confident on the growth potential of the business, very confident on the value creation opportunity that there is from this transaction. I alluded it to it in the previous question. What it does is it creates a higher growth, higher return business, both our wealth business, but also overall NatWest Group. I think that's an important strategic framing. In terms of the financials and the transaction, you know, the bar that I've talked about previously, and I've talked about on this stage and previously, we had three high bars, you know, strategic, financial, and operational.
The test that Katie and I and the board set was, the Return on Invested Capital here needed to be greater than the buyback within the three-year period. We set ourselves that bar, and we're very satisfied that we exceed it. You touched on 11% there. I mean, we made a lot of disclosures on the Friday in our year-end results, and what we talked about was greater than 11%. That was the bar we set ourselves, and we're satisfied at the opportunity that drops out of the transaction promise. In terms of how we're gonna deliver that. In some ways you can explain it very simply, but obviously there's a lot of hard work that will go into it. Very clear on our commitments to the market around cost synergies.
You know, we believe there's around GBP 100 million of cost synergies from bringing the two businesses together. That actually represents about 10% of the combined cost base of our private bank and wealth management business and Evelyn. We feel confident about that. On the revenue side, we've said around GBP 200 million split equally between half of it from natural structural growth in the AUMs that are in the business. We've assumed a mid to high kind of single-digit growth rate. You can see that Evelyn's grown at kind of 7% the last couple of years. We've grown at a higher rate than that. We think that's, you know, appropriately prudent.
The other part of this, the revenue synergies come from deploying the capabilities that we've talked about, which is the financial planning, the D2C platform, putting that in as many hands of our NatWest Premier and Coutts clients that we can. All in all, very, very confident about the value creation opportunity. If you think beyond the three years, yeah, I think it's important we were clear around three years, but if you think beyond the three years, the returns will grow beyond that as well because you have the compounding benefit of AUM growth. From that perspective, yes, we're clear, and we're going after the synergies.
Great. I wanted to touch as well on growth. You've delivered very good growth in lending and deposits in AUMA, and you're guiding for that to continue with a greater than 4% compound growth in customer assets and liabilities going forward. Can you maybe touch on the outlook in each of those components? I'm particularly interested in corporate loan growth in particular. That's why it's been so strong and why do you expect it to continue to be strong?
I think on the broader, maybe start with the broader kind of growth piece. I think we've now established pretty clearly that for a number of years, we can grow, you know, on both sides of the balance sheet and our assets under management. I think we've got a strong multi-year track record there, which is great. As you rightly pointed out, for 2028, we've been more explicit on our growth targets. We've framed that through what we call kind of CAL, customer assets and liabilities. That's a kind of term and an approach that we use internally, but we've now kind of decided to externalize that. We think it's the best representation of our relationship, our client relationships over all their product holdings.
We've been explicit that we expect to grow greater than 4%. What I would say overall is, that's a kind of CAGR greater than 4%. I don't think everybody should be thinking every line of the balance sheet is gonna grow every year at 4%. Because what I'm very mindful of, and we're very thoughtful about as a management team, is where we deploy our capital to grow. We're gonna deploy our capital where we see attractive returns. That could vary depending on market. That could vary on external market conditions. It can vary depending on the competitive context. But we're very confident overall that, because we've done it previously, we'll deliver greater than 4%.
That's obviously powerful from a growth perspective 'cause if the balance sheet grows year-on-year, that's very helpful to EPS, DPS, TNAV per share, etc. I guess the other part of your question is, you talked about corporate lending, but in terms of before we deep dive into that, I would say I can see opportunities for the growth to come from different parts of our business. You take our retail business, we've made great strides over the last couple of years in mortgage lending, great strides in kind of unsecured lending. We still think there's more room there to go. We're thoughtful about how we do that. You can see growth there. Likewise, on the savings side of retail, we have kind of 16%-17% current account market share.
Actually on the savings side, you know, we have 10%-11%. We can see paths to growth within the retail business. On the wealth business, yeah, again, we had a pretty ambitious organic plan that we shared with the market last June. You know, that drove growth on the deposit side of the balance sheet and the AUM side of the balance sheet. That's where we'll be looking to there. In our, I guess our corporate and commercial bank, probably should take a step back first. We grew 10% last year on lending growth. Why are we able to do that? You know, we have got the dominant U.K. corporate franchise, no matter, you know, which metric you look at. We've got leading market shares, whether that's SME, mid-market, large corporate.
I think that gives us tremendous position in the market that when the demand is there, and bear in mind the level of, you know, I think the level of deleveraging that's happened over a long period of time means that commercial companies, corporate companies do have the capacity to borrow. When they've chosen to borrow, we've been able to capture that demand. I think we have, you know, our strong competitive kind of positioning there gives us confidence that we can continue to grow. You know, you look at we're the number one lender to infrastructure. We're the number one lender to social housing. We've got the biggest mid-market business. It just gives us confidence that, you know, if the environment supports it without any fundamental changes in our risk posture or risk appetite, we can drive growth.
It's a very, I guess, broad-based perspective to growth. What I'm not prepared to compromise on is returns. It'll only be growing at the right returns across all our businesses. You know, we're very focused on that capital deployment between the different business units, and I won't compromise on risk appetite either. This is growth at the right risk appetite, i.e. the current risk appetite and at the right returns.
We'll touch on some of the uncertainties shortly, but when I hear you around the growth momentum of the business, you do have a track record of beating revenue expectations, which makes me think that GBP 17.2 billion-GBP 17.6 billion looks too conservative. Maybe you can go through the moving parts, tailwinds, and drags you see on competition that may be behind that. I'm thinking deposits or mortgages, but maybe you can drill down into double click on that.
Yeah. Yeah. Happy to. Direct me where you wanna spend more or less time. Revenue growth was strong last year. 12% growth. What was most pleasing about that outturn to me was it was a combination of product volume, product margin and fees. It felt like a healthy mix of growth both across and within the businesses. That was good. As you rightly said, our guidance this year on income is GBP 17.2-GBP 17.6. I know your forecasts are at the upper end of that.
what we've tried to do there, and you'll recognize this, it's a narrower range than we've guided to before, so we're trying to give people a clear steer. That to us represents a sensible balance of the risks and opportunities. We expect to fall within that forecast, you know, based on a sensible combination of the risks that we face and the opportunities playing out. That's the philosophy that we've adopted with that income guide. I should say it obviously excludes Evelyn, and it also excludes any changes to economic assumptions on the back of the last couple of weeks conflict.
In terms of the tailwinds and the headwinds, I think on the tailwinds, it's volume growth. We've just had the discussion about volume growth. Volume growth is definitely gonna support the revenue momentum, especially as we target our greater than 4%. I would flag a couple of things on that. You know, we're expecting kind of margin pressure on the mortgage side. You can see from book pricing on mortgages. We know there's a whole slew of COVID five-year fixed rates kind of maturing this year, so that will put a bit of margin pressure on. Likewise, we expect fixed rate deposits to be competitive as well.
You've got the volume growth coming through, but you've also got a little bit of pricing and margin pressure that will play out. You've got rates. We expect the contribution from the structural hedge in 2026 to be GBP 1.5 billion greater than 2025, so that's a big tick up. We should also remember, we've got the annualized effect of a couple of rate reductions last year, which will work their way through. Our current assumptions, you know, had two rate cuts in for this year. That would, you know, up GBP 1.5 billion on the hedge and the combination of previous rate cuts and assumed rate cuts, and we'll likely have a debate about whether they play out, but would drop that by about GBP 500 million.
Then the other thing that's sometimes isn't as visible, but I think it's important that everybody realizes a third kind of component to our revenue line is as we've worked the balance sheet harder over the course of the last kind of three years, as we've, for very good reasons, and I think very return friendly reasons, entered into more kind of capital management actions, SRTs, credit risk insurance. Obviously, there's fees associated with them and they net off. You should think about about GBP 100 million on those as well as we go through 2026. They're the kind of they're the puts and takes. Specifically on competition in mortgages and savings, I would say first of all, in quarter one, I'd say volumes have been quite reassuring. You know, mortgage volumes have been good.
We've been able to take the volume we want at the returns that we're comfortable with. It has been competitive. There's been a lot of price changes. We've changed prices I think five times since the start of the Middle East conflict. It shows the agility that's needed, but also the flexibility and agility we have in our mortgage platforms to change rates. We expect that to continue. As I said, you've got this flow through in the market generally of five-year kind of, let's call it COVID mortgages at slightly higher rates. Likewise, on savings, I think it's gonna be a very competitive ISA season, given all the kind of government and regulatory changes. This is the last year of, let's say, the current ISA regime.
We think it will be competitive. We have less to defend there. You know, our market share in ISAs and fixed rate savings is circa 6%. We see opportunity there, but it will be competitive. That's the dynamics we expect to play out on the retail side of the business.
I'm gonna explore if part of the conservatism is in non-interest income. We've already discussed Evelyn. How do you think about the rest of the business lines in non-interest income? Obviously, you've got the markets business there within C&I, but will you touch on the visibility you've got for that business?
Yeah. We've been, as you know, very focused on kind of fee income and non-interest income over the course of the last couple of years. I'd say, you know, I'm pleased that we're now building a track record of growing, you know, that line. If you look back, I think we're about 32%-33% up since 2022 overall on fee income. So that's good growth. You're right to highlight commercial and institutional. That's about 70% of the total fees. Some good growth last year. FX business, which we've got a great FX platform, was up around 20%, some of that driven by the volatility, but actually a lot of it driven by just bringing more of that FX products to the rest of our commercial bank customers.
We also had, you know, mid- to high single-digit growth in our payment fees. As we extend our kind of payments and transaction banking product set, we think there's opportunity there. We also actually saw some good pick up in fees on the retail side of the business. It doesn't contribute in relative terms to the C&I business, but we saw some good pick up on the kind of credit card and debit card, which is really driven by customer activity. I think what we're building is kind of underlying fee lines in the respective businesses. You add on, as you alluded to our private bank and wealth management business. The organic plan has good 11% growth on fees. You take all that together and add 20% from Evelyn.
It feels like we're building organic fee lines, but also starting to diversify our income mix, which as you know, you know two or three years ago I said was important, but would take time to do.
Yeah. Let's talk about some of the uncertainties.
Mm.
Obviously, we've got the Middle East. How do you think that's affecting your clients? Are you seeing anything at this stage? It's early. We touched on markets, obviously.
Yeah.
Any comment there would be helpful. One thing that came up this morning in the polling is private credit.
Uh-huh.
As you know, is also a source of concern. Should we be worried about your exposure to private credit? Maybe you can give an overall sort of overview of
Of uncertainties in general. Okay.
Exactly.
Yeah. Well, let's start with the Middle East and the conflict. We genuinely run a series of geopolitical scenarios, how we respond to certain events. We were doing that as we came into this year. We don't have a Middle East business, as you know. From our perspective, the impacts are primarily second-order. You'd expect me to say that. How events play into energy prices, into inflation, into rates, and obviously our customers who are dependent on energy. That's how we think about it.
It would take a sustained, from our perspective, when we run the different scenarios, it would take a sustained conflict to have a, I'd say, a material impact on our kind of growth or credit outlook. I think that's the question we're all kind of wrestling with is this, you know, what is the duration of this conflict going to be, and therefore, what are the knock on impacts. That's how we're thinking about it. I think, you know, our view really only changes on the back of a sustained, you know, a sustained and long duration conflict. In terms of customer and client reaction, in some respects it's. I mean, it varies across the business. You know, it's very real and immediate in the markets business. You know, customers looking to manage their risk.
You see that in real time. No, you know, no different to whether it was tariffs or Russia-Ukraine. You kind of see that immediately and customers thinking about risk, managing risk, trying to get ahead of things. I'd say in the more kind of core franchises of retail and commercial, far too early to say. You know, on the retail side, definitely affecting sentiment. You know, you can't go through the last two weeks and customers not have a sense of perspective on what's happening. You hear the media narrative about the potential for energy prices. You start to see that showing up in sentiment, but not activity.
The other phenomenon on the retail side is it's obviously driven a much higher volume of mortgage applications. In as much as customers assume that rates might come down, now they're assuming that rates could or may go up. We've seen significant volumes of, from a refinancing, remortgaging perspective of customers looking to secure rates in anticipation that they might go up. That's probably been the most obvious and demonstrable kind of behavioral change. On the commercial side, I would say the commercial customers are very sanguine in as much as they've been through a lot of various kind of stressed events over the course of, I mean you could say the last decade, but you know.
Around the Morgan Stanley conference.
Yeah. Yeah.
Strong correlation.
Always around mid-March. That's right. The reality is customers are, you know, they feel more confident about their resilience. They're more used to dealing with events. We don't see knee-jerk reactions, which is good. They take confidence from how they've managed through previous kind of stresses. Where's the focus of their attention in the commercial base? Those who are exposed to energy prices are obviously very front of mind. They have a bit of a playbook from Russia and Ukraine 2022. That's obvious. On the wealth side of our business, again, a lot of client contact, kind of curiosity, interest in what's happening. Some client behavior, but relatively limited, I would say.
It feels, but sentiment is affected. It feels relatively early from that perspective. I think as we go through the next 2-4 weeks, I think certainly across the commercial and corporate client base, the planning will start to turn into playbooks. The big thing everybody's wrestling with is kind of what's the duration point. Then on, I guess the other big topic you referenced, which is private credit, very much topic du jour. Personally, I'd say on private markets generally is they are a really significant and important part of the U.K. economy, you know, and the world economy, but the U.K. economy. If you look across infrastructure, real estate, private equity, private credit funds, there's no doubt they've played an increasingly important role over an extended period of time.
My view is that structurally isn't gonna change. I think they'll continue to play an important role. Private markets will continue to play a really important role. In being a source of capital to the U.K. economy. Don't see that changing. We've obviously seen the various cases and items that are in the public domain. We haven't been involved in any of those. Where we do participate in private markets, you know, it's we've done so for a long time. We're very thoughtful in terms of the partners that we engage with. We look for structural protections, as you would expect, to make sure that. We stress against quite, you know, quite severe economic situations that would need to go well beyond the current situation to see any sort of stress.
Feel comfortable with where we choose to play, subscription lines, capital calls, private credit, supporting private credit providers. Feel very comfortable with the quality of the book, but we're very vigilant because it's obviously an area that's got a lot of attention. The one thing I would add is we're very supportive and pushing around the Bank of England's what they call SWES, the stress, the kind of stress scenario. Why are we doing that? I just think it would be very helpful to get for investors, for analysts to have more consistent disclosure in this space, because I think that would bring more transparency to the market, because there's a lot of things said about private markets and private credit, but people use the same phrases to mean different things.
There's some very different structures. You know, where we are at the moment is when you've got a very big market, there's some higher quality operators and some lower quality operators. Arguably, there's some cyclical things going on. You know, you've got the Middle East conflict, you've got some of the, I guess, the perceptions of risks in relation to AI. You've got the end of the rate cycle. It feels like you know, there's definitely different issues weighing on the sector generally. From our perspective, feel very comfortable with where we've chosen to participate.
Right. I wanna move on to costs. You have a GBP 8.2 billion cost guidance for this year, and the less than 45% cost income ratio for 2028. That was definitely better than expected. You said at the full year that you would expect further progress beyond 2028.
Yeah.
That's a point in time sort of target. Where do you see the potential in this in sort of more longer term for those cost efficiencies? Obviously, AI is a big sort of debate, even greater than last year. How's that gonna help? How should we think about the trajectory of the workforce?
Yeah. It's obvious we've got good momentum in our cost management and in our cost income ratio. It dropped 5 percentage points last year, which is great. We're now down at, you know, 48.6, I think 48.5 at the year-end. We're the most efficient large U.K. bank, so that feels a good place to start from. I think it's down 21% over the course of the last three or four years. It feels like we've got, you know, I think we have got a good cost management culture across the firm. What I would say is that's been delivered, you know, through a variety of things. What I would call is just good disciplined cost management.
We pulled a lot of levers to get to those numbers, whether it's simplification of the technology estate, whether it's simplification of the footprint, sensible things like organizational health, how we organize, removing duplication. We pulled a lot of levers, you know, on good cost management. I still think, and the management team still think there's a way to go on that. You know, there's still complexity in the organization that to me, doesn't befit the relatively simple business that we are. We keep going after that. I, you know, I think that will help drive us down to. That's why I was confident to say less than 45% in 2028. What I would say is we've put those numbers out there without any big.
I'm not assuming some kind of massive AI dividend that we can't yet see the path to. I'm very confident we can get to those numbers without the potential of, but not the ability to see it. I think any AI efficiencies will amplify that. I guess that's why I talked about, you know, beyond 28 and maybe the potential to go lower. These things take a lot of hard work, Alvaro. Cost management is tough. You need to keep going after things. We've right-shored things. We've eliminated legal entities. We've simplified management structures. We've really tested ourselves on a whole host of things to make sure we're driving a really effective operating model.
When I think about AI, I'd say 2025, we started to see some definite that I'd say scale opportunities emerging. They'll be the ones you've heard from, I guess, a lot of my peers. Whether it's coding assistants, customer contact centers, summarization tools, kind of risk, financial crime operations. To me, they're the opportunities that are coming into sight, and I think there was cost opportunities there anyway, but I think AI just amplifies the opportunity around that. I think what you'll also see more generally in AI is some of the that that's really focused on productivity and efficiency.
What we're starting to see and what we're starting to release to market now is capability that's driven by AI, but is really to drive a better customer experience or to hopefully drive revenue growth as well. I think you'll see a flex between AI for productivity's kind of benefit and sake, but also AI to help improve the customer experience and deepen the relationship and drive more revenues. On the FTE outlook, I think it's too early to say. You know, I've seen lots of forecasts out there. I've seen lots of people saying, you know, saying it will be this or it will be that. What I'm absolutely sure on is the work, the nature of the workforce is changing quickly.
If you think about us as a bank, we have 60,000 staff. Now we've got over 12,000 software engineers. You remember even five years ago, certainly ten years ago, you know, the composition of the colleague base is very different. I think it will continue to evolve. The mix of people will change. You know, you can see, you know, whether it's operations, whether it's services and functions, whether it's engineering, you can see that mix kind of constantly changing. It definitely lends itself to a more efficient and more productive bank. You know, I can, I could present it both ways, as in, you know, the kind of bull case and the bear case.
I think my view is that there will be significant efficiencies and productivity to be driven off the back of some of the technology developments. I think my point of view is that I'm not convinced 100% of that will drop to the bottom line of banks. I think what you'll see is some of that dropping to the tech companies or the model providers. I think they, you know, they will expect, you know. If there's a lot of value being created, I think it's not unreasonable to think some of that value will be captured by the technology partners and vendors.
The other thing which history suggests would happen is if you see those, the extent of some of the productivity gains, and rightfully some of that will find its way back into the customer pricing product proposition. I think that's what will evolve over the course of the kind of next 12, 24, 36 months. I don't think it's crystal clear yet. I think there's undoubtedly productivity and efficiency gains. How those gains will be shared between the different kind of participants, I think will play out over the course of the next 2 or three years.
The audience here we've of course polled about this, think it's AI's a net benefit for banks.
Yeah.
I think.
I'd buy that, yeah.
Yeah. You're in a friendly environment here. Of course, we've seen in some of the share price news before the Middle East around AI being a potential disruptor.
Yeah.
You've touched on it briefly, but if maybe we can deep dive a bit more. How do you think that's gonna impact competition? Because there's fears both on the deposit gathering business, but also wealth. Maybe you can touch on both-
Okay. Yeah.
the opportunities there.
Yeah, as you alluded to the audience, I'm definitely kind of an optimist and net positive on AI. I think it is gonna transform the way that we engage with our customers across our retail bank, our wealth business, and parts of our kind of corporate and commercial business. As I mentioned that, you know, I'm high conviction that will be around the customer experience as well as the kind of efficiency side. From that perspective, we're positive. To be able to take advantage of that, you have to have invested in your technology and data foundations. I'm delighted we've been doing that over the course of the last kind of three, four years. You know, ensuring you've got the right technology architecture, ensuring you've got the data clean in one place.
You know, all of our retail data is in one place. All of our kind of private bank and wealth manager data is in one place. Because without it's very hard to deploy some of the tooling and capability. So I think the benefits will lend themselves to the scale operators because they have the customer relationships, they have the data, they have the investment dollars to be able to to use the models at scale to the benefit of their customers and to their colleagues and to the productivity of the organization. In terms of wealth, you know, there's been a lot of debate about that, and I'm sure you've got some of the kind of listed wealth providers here over the next couple of days. I think it's gonna amplify.
You know, one of the biggest challenges in the U.K. is that not enough people have access to good quality, low-cost financial advice. To me, AI can be a real accelerant of that. You know, I think there'll be clients and customers who are very happy to go through that process led by the technology. I think for really big significant moments, the human, you know, human advisor will be very important. I do think it's a great accelerant to bring advice, good financial planning into the hands of much more than the 9% or 10% of the population that currently get it. On deposits, I have quite a strong view. You know, my view is that for customers who have savings, liquidity and want to get yield, it's a very competitive market.
You look at term products, you look at ISA products. We saw that during the interest rate cycle of the second half of 2023. You know, we saw our, you know, the amount of our deposits that went into term up to 16% or 17%. It's remained pretty flat for the last seven or eight quarters. My view is there's, you know, for those customers who are seeking yield, it's very easy to get it. There's a large volume of competitive providers. I don't see that being. It may influence search, but I don't see that influencing the kind of margin or product pricing. You may have to make sure you're discoverable in some of the models, for example. That might be a kind of marketing consequence.
Then you get to the operational balances, and my view on that is that the operational balances, first of all, they're a small percentage of the overall balances. Secondly, we're literally talking about, you know, for us, 19 or 20 million accounts with low average balances and what the customers who have those accounts, normal checking accounts, they have those accounts for other utility, you know, for their debit card or Apple Pay, for ATM access, for the mobile app, everything that comes with it. So the marginal benefit of small, you know, on small balances of yield pickup, to me, I don't see a model where that's worth it relative to all the other value that is being received. So I worry less about that. You know, we're mindful of it.
You take a lot of our, you know, high net worth customers, be it in our Coutts business or Premier business, they have automatic sweeping facilities. That's pretty BAU in, you know, those type of accounts. Yeah. As you can see, I don't really see a case of material change there.
Great. The last one for me, and then, I'll open it up for questions. It's about capital allocation. You've done a deal, obviously. You're guiding to high capital generation from here on. How are you thinking about the distribution and balancing that with the returns of greater than 18% in 2028?
Got you. Yeah. I guess the business we have, the model we have is highly capital generative, so 250 basis points of capital, just over 250 basis points of capital last year. We've been explicit with our guidance of greater than 200. We have a low risk business model, generates a lot of capital. That's great. The acquisition, in my view, gives us a chance to be higher growth, higher returning, and higher capital generative as to. In terms of the capital hierarchy, very simple from my perspective. You know, it hasn't changed. We'll deploy to grow. You know, we've got a scalable platform, so the returns on growth are good, hence the kind of greater than 4% target.
We'll do that in a disciplined way. We increase the ordinary dividend to around 50%, that's next. We'll distribute surplus through buybacks. We've got the GBP 750 million buyback happening at the moment. We've guided that we look to return to buybacks Half one 2027. As a board and as a management team, you know, we're committed to returning to buybacks at the earliest opportunity with surplus capital. That's it.
Great.
I should maybe finish, so I just on this. That's the hierarchy.
Mm-hmm.
I guess then if you take the step back, you look at our delivery in 2025, 19% return on equity. We've got three years greater than 17%. We've now put targets out greater than 17% for this year, greater than 18% in 2028. You'll have six years of Return on Tangible Equity greater than 17%. That's quite a strong record, high returns, and significant distributions off the back of that.
Founding business. Who wants to ask the first question? As I mentioned, it's a quiet crowd today. I've got a uncomfortable question around U.K. politics.
Oh.
If nobody asks the question.
That will discourage them because then you.
Go for it. Yes. Obviously, U.K. government has been pro-financial sector.
Yeah.
I remember Mansion House speech last year. Do you worry about some of the initiatives that some of these initiatives that are underway may stall if there's a leadership challenge or if the political-
Mm.
sort of leadership changes?
It's difficult to know. I would say I agree with you there. I'd say the last two years, I think the government's posture, the treasury's posture, the chancellor's posture, I think has been very helpful for financial services, not just the bank sector, but more broadly. You know, I think financial services has been very much and the banking sector has been very much positioned as part of the solution in terms of trying to unlock growth and productivity. We welcome that. I think there's also, not just in the political environment, I think there's also been some positive changes on the regulatory side as well.
I think if you look at the FCA, whether it's the changes to some of the mortgage changes, we've touched on, you know, the significant opportunity around the changes in the Advice Guidance Boundary Review. I think there's positive changes there. There's a lot of consultations out on the prudential side. You know, we will await to see the output of them. Will things change? You know, my answer to that is I hope not. You know, I think there is some momentum around the policy environment and the regulatory changes that are coming. I think people can draw the link between those changes and the opportunity around economic growth.
Some of them are already in train, you know, so the reality is that, you know, they will continue. I think it's beholden on the sector to ensure should there be any change in kind of political leadership or political posture. I think it's beholden on the sector to make its case, explain how it supports, you know, the wider economic agenda, the role we can play, whether that's helping more people save and invest, whether that's helping more businesses to borrow or to staff. I think it's beholden on us to, you know, if needed, to remake the argument that we successfully made over the course of the last couple of years. As I've said before, you know, the strong economies need strong banks, you know, and vice versa.
Strong banks need strong economies. We're very committed to playing our part in the U.K., and we need a regulatory and policy agenda that is supportive of that because ultimately that drives the best outcome for U.K. plc.
Right. I'm gonna give the audience one more chance to ask a question. If not, we're coming to the end of the session. Sorry, there's one back there. Apologies, I've just seen the hand.
You got the apology on the question.
Apologies if I hadn't seen you before. Go ahead.
We're looking.
Thank you for taking time. I will have two questions. The first one is on deposit. You said that you're expecting more pressure on deposit margin. So far, U.K. banks were saying that they're seeing stabilization in deposit mix. Does this mean that you are expecting more headwinds on the deposit margin front? The second question is on your investment on U.K. Gilts. What is the impact on your investment in Gilts in
Yeah.
In terms of the volatility we have seen so far?
Yeah. Thank you for the question. On the first question, what I was saying there is I'm expecting it to be a... The reality is we haven't seen a significant change in the mix of our deposits. What we've seen and what we believe will continue is it will be a competitive fixed-term savings product market. It already is. We're expecting that to continue. Because there are some one-off changes happening in the ISA market this year, we expect it to be a very competitive, we don't know, but we expect it to be a very competitive ISA market, both on cash fixed rate ISA. That's what I'm alluding to there. We think there will be a lot of competition on that side. But there already is.
In my view, it's a continuation of the existing competition, rather than some fundamental change from the status quo. On the second question, I assume what you're alluding to is in terms of the hedge. We've chosen to invest a little bit more in gilts rather than, given the yield pickup relative to swap rates. We have done that. We talked about that at the year-end. Obviously that flows through into the net return on the hedge. We don't disclose the component parts of that, but that supports the hedge returns. Remember, that's a five-year period. It's not, you know, a 2026 thing. Hoping that helps.
I think we've got to leave it here, but thanks very much, Paul. Very insightful.
Thank you.