Good morning, and welcome to NatWest Group's Q3 2026 results management presentation. Today's presentation will be hosted by CEO Paul Thwaite and CFO Katie Murray. After the presentation, we will take questions.
Morning, and thank you for joining us today. I will start with a short introduction. Katie will take you through our third quarter financial performance, and then we will open up for questions. As I said at the half year, we are building a diversified business that benefits from structural growth drivers so that we can deliver strong returns on a sustainable basis. Our track record demonstrates the success of our strategy, with three clear priorities driving our performance. First, disciplined growth. Our three businesses are working in collaboration to drive sustained momentum across the group. This marks the eighth consecutive year in which we expect to deliver growth in customer assets and liabilities of more than 4%. Second, we continue to increase our operating leverage through simplification. This gives us a significant competitive advantage as the most efficient large bank in the U.K.
Third, as we actively manage capital and risk, we expect to generate more than 200 basis points of capital for the third year running in 2026. This gives us the flexibility to continue to invest in our business, support customers, and deliver attractive returns to shareholders. In short, by driving disciplined growth, leveraging simplification, and actively managing capital and risk, we are delivering industry-leading returns, with an average return on tangible equity of more than 17% over the past four years. Our third quarter continued this strong momentum, so let me turn to the headlines. Customer assets and liabilities grew 14.2%, well above our target of more than 4%. Within this, customer lending grew 7.7%. This growth was disciplined and broad-based across all three of our businesses, with a strong performance in Commercial & Institutional, driven by infrastructure, renewables, housing, and technology.
Growth in retail and private banking was driven mainly by mortgage lending, which increased 4% or GBP 8.3 billion, as we grew our stock share from 12.5% to 12.7% over the first nine months. Customer deposits grew 4.3% in a competitive market. This reflects further growth in current accounts, as well as operational balances that bring strong relationship and liquidity value. In retail banking, we are delivering on our strategy of growing savings with the launch of new easy access products and channels. There was also good growth from mid to large corporates. Assets under management and administration more than doubled to GBP 132 billion, supported by our acquisition of Evelyn Partners. This includes new flows of GBP 1 billion since the deal completed at the end of June, with positive flows in both businesses. We are excited about the growth opportunity that Evelyn Partners represents for the group.
The integration is on track, and we look forward to providing further insight into private banking and wealth management at our spotlight in November. We continue to increase operating leverage, with income growth of 9.3%, well ahead of cost growth of 4.8%, and with a cost income ratio of 45.7%, down 2.1 percentage points as we move towards our 2028 target. Continued growth, strong operating leverage, and a low cost of risk have resulted in earnings per share of 57.4 pence, up 13.2%, and a 9.4% uplift in TNAV per share, excluding Evelyn Partners. We generated high levels of capital at 208 basis points. Our balance sheet is strong, with a capital ratio of 13.5%, and our return on tangible equity remains industry-leading at 20.2%. With that, I'd like to hand over to Katie to take you through the results.
Thank you, Paul. I'll cover the third quarter using the second quarter as a comparator. Our third quarter performance was driven by broad-based growth, driving sustained income momentum and continued high returns. Income, excluding notable items, increased 3.1% to GBP 4.6 billion, and total operating costs grew 2.8% to GBP 2.1 billion, with the cost income ratio improving further to 45.1%. The impairment charge was GBP 277 million, equivalent to 24 basis points of loans. This resulted in operating profit of GBP 2.2 billion. Profit attributable to ordinary shareholders was GBP 1.5 billion, and we delivered a return on tangible equity of 21.6%. Turning now to income. Income, excluding notable items, grew 3.1% to GBP 4.6 billion as a result of growth in customer assets and liabilities, or CAL, higher non-interest income from the inclusion of Evelyn Partners, and an extra day in the quarter.
Net interest margin was broadly stable at 250 basis points, in line with our expectations, as deposit margin expansion was offset by ongoing mortgage repricing, lending mix, and our regular annual review of customer repayment habits. Non-interest income grew 7.9%, or GBP 75 million, supported by the inclusion of Evelyn Partners and a gain on the sale of our SME consultancy business, Mentor. This was partly offset by the non-repeat of accelerated insurance income in retail banking in the second quarter. We now expect the Bank of England base rates to increase to 4% in the fourth quarter. As you are aware, given the lateness in the year, the resulting benefit in 2026 will be modest, and we continue to expect full-year income, excluding notable items, of around GBP 17.9 billion. Turning now to CAL. We continue to deliver a strong performance across our three businesses.
CAL increased by GBP 15.7 billion in the quarter, or 1.6%. This comprises GBP 8.1 billion of broad-based customer lending growth, GBP 5.8 billion of customer deposit growth, and a GBP 1.8 billion increase in assets under management and administration. I'll touch on each of these elements in turn. Strong loan growth of GBP 8.1 billion was broad-based. Retail banking and private banking and wealth management balances grew GBP 1.5 billion, or 0.6%. This included GBP 1.1 billion in mortgages and GBP 300 million in unsecured lending. Our mortgage stock share remained stable in the quarter at 12.7%. Commercial and institutional grew fastest at 4%, or GBP 6.6 billion. This was driven by corporate and institutions, where higher infrastructure and renewables lending was supported by structural growth trends such as digitization and decarbonization.
There was also healthy demand in commercial mid-market from sectors such as commercial real estate, manufacturing, and social housing. Turning now to deposits. Customer deposits growth of GBP 5.8 billion was well-balanced across both personal and corporate customers. Retail banking deposits grew GBP 3.1 billion as we attracted savings from the launch of new products and channels.
There was continued modest sequential growth in current accounts. In Commercial & Institutional, deposits increased by GBP 3 billion, with growth across both commercial mid-market and large corporates. Our deposit mix remains broadly stable, with a slight increase in term deposits, now representing around 19% of the total. Turning now to assets under management. Assets under management and administration closed the quarter at GBP 132.4 billion, an increase of GBP 1.8 billion. This includes net inflows to assets under management of GBP 1 billion, assets under administration net flows of GBP 0.4 billion, and positive market performance of GBP 0.4 billion. The net inflows of GBP 1 billion are equivalent to 3.4% of opening AUM on an annualized basis, and were positive in both businesses.
Turning now to costs. We are pleased with further improvement in operating leverage in the quarter, as we grew income faster than costs. Other operating expenses of GBP 2.1 billion take the total for the first nine months to GBP 6.2 billion. We delivered GBP 420 million of gross cost savings year-on-year, giving us the capacity to continue investing in the business. These savings partly offset increased investment spend, the inclusion of Evelyn Partners, and higher people-related expenses, including our annual pay award. As you heard from Paul, our cost income ratio reduced by 2.1 percentage points to 45.7%. We continue to expect around GBP 300 million of costs from the Evelyn Partners acquisition this year, and have incurred GBP 156 million to date. Overall, we continue to expect other operating expenses of around GBP 8.5 billion for the full year. Turning now to impairments.
Customers continue to demonstrate resilience, and our credit performance remains strong. Our growth is being delivered with a consistent risk appetite, supporting a structurally low loan impairment rate. The impairment charge for the quarter was GBP 277 million, equivalent to 24 basis points of loans on an annualized basis. This brings the charge for the first nine months to 21 basis points, in line with our full-year guidance of below 25 basis points. The increase relative to the second quarter was driven by the non-repeat of releases in the retail portfolios. We carry economic uncertainty post-model adjustments of GBP 288 million, with total PMAs of GBP 315 million. Turning now to capital. Our disciplined approach to capital allocation supports strong and sustainable capital generation going forward. We ended the third quarter with a common equity tier one ratio of 14.7% before distributions.
142 basis points of capital was invested in our acquisition of Evelyn Partners, and as you know, this is a highly capital-generative business, and we generated 288 basis points through strong earnings, which was boosted by 47 basis points from RWA management. Our ongoing investment spend consumed 30 basis points, and organic lending growth absorbed 96 basis points. We are reporting a CET1 ratio of 13.5% after accruing 50% of attributable profit towards the final ordinary dividend. We continue to expect capital generation before distributions and the impact of Evelyn Partners of more than 240 basis points in 2026. We ended the quarter with GBP 200 billion of risk-weighted assets, including some positive CRD IV model updates in our retail portfolios. Turning now to our CET1 requirements. As you know, we continue to target a CET1 ratio of around 13%.
We can confirm today that our Pillar 2A requirements will be reduced by 76 basis points as of January 1, including Basel 3.1 offsets. 43 basis points of this relates to our CET1 requirement, taking our supervisory minimum from 11.6% to 11.1%. This was expected, and we took it into account when we changed our CET1 target to around 13%. Our total capital and CET1 ratios both remain strong and comfortably above minimum requirements. Turning now to guidance. Our 2026 guidance remains unchanged, with one enhancement. We now expect risk-weighted assets of around GBP 210 billion as at January 1, 2027. This takes into account Basel 3.1 and CRD IV impacts, as well as other movements such as anticipated growth and operational risk in the fourth quarter. We will continue to operate with a CET1 ratio of around 13%.
As we told you in July, we expect to announce our next buyback with our full-year results in February. With that, we will now open for questions.
If you would like to ask a question today, you may do so 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 questions are limited to two per person to allow an opportunity for more people to ask questions. We are going to pause for a moment to give everyone an opportunity to signal for questions. Our first question today is going to come from Alvaro of Morgan Stanley. Alvaro, if you would like to unmute and ask your question.
Hey, Alvaro.
Good morning, Alvaro.
Good morning. Hopefully you can hear me okay.
Clear. We can hear you clear.
Thanks for taking my question. The first question is on sort of on, it is kind of the NII outlook, but obviously, I know you are not going to give guidance for 2027, but the volume growth, lending growth continues very strong. I assume that you expect that to continue. I am more thinking about the funding of that loan growth, and as you see it evolving going forward, deposit competition and deposit growth, and how much of that strong loan growth is actually going to feed into extra NII growth? Because when I think about the structural hedge, this obviously is a lot of tailwinds, but I wonder if the competitive dynamics of funding that loan growth will sort of hold back NII growth as we think about the NII going forward.
So maybe some color, if you do not give us guidance, some color as to what to expect from those moving parts in terms of competitive pressures eating up the hedge upside. Then on capital, I note your comments, Katie, on the 13% was taking already into account the reduction of Pillar 2A, but there is obviously the buffers are being reviewed, making them more flexible, encouraging the banks to use less management buffer. Have you taken that into account, or could that give you an extra visibility, sorry, flexibility next year when they have firmed up, the proposal firmed up? Thank you.
Thanks, Alvaro. Okay, Katie.
Perfect. Thanks. Morning, Alvaro. Good to hear from you. Let me It is quite a lot in that two questions there, so I will kind of take you through a few different bits. First of all, if we look at income in 2027, we remain on track to deliver income ex notables of around GBP 17.9 billion in 2026. So that is an increase of over 9% year-on-year. Alvaro, you are absolutely right. I am not going to give you specific 2027 income guidance today, but I can share how we are thinking about the drivers, several of which I think you have got correct in your head as well. First, we are confident that we will continue to deliver strong customer balance growth in line with our greater than 4% CAL growth.
On that CAL growth, we know that it supports both NII and non-interest income growth, including the AUMA income from our large and growing PBWM business. Secondly, we continue to expect income from the structural hedge to be more than GBP 1 billion higher in 2027 versus 2026. That will contribute over GBP 7 billion into the income line. We have got a high degree of confidence on that outcome, given that there were already three quarters of that hedge has been locked in, and the higher reinvestment yields in 2026 have underpinned that confidence. Finally, our current expectations of the mix of balance sheet growth across loans, deposits, and wholesale funding does mean that margin continues to be broadly stable through 2027. We do not assume any further changes in the bank rate during the year.
We're expecting it to remain at 4% throughout 2027, and that five-year swap rate to moderate to a 4% average for 2027 as well. You can be confident in the ongoing income growth in 2027 and beyond, driven by balance sheet growth, the strength of the hedge, and obviously, when we talk in February, we'll talk more about where we might land in terms of the actual numbers. If I then kind of jump onto funding and liquidity, look, we're pleased with what we've delivered in terms of the really strong broad-based loan growth in Q3. You can see the balances were up 2% or GBP 8 billion over the quarter, and 6.4% year-t o- date. We also saw strong deposit growth at 1.3%, and you can see that ourselves, like the rest of the industry, we are seeing that lending growth is outpacing that deposit growth.
To date, we've utilized our surplus deposit liquidity with minimal wholesale funding issuance to meet customer demands, with a loan-to-deposit ratio of 90% at the end of the quarter. We benefit from a strong liquidity position, high-quality deposit franchises, with the flexibility to access diverse funding sources across deposits and wholesale funding markets as well. What we're really seeking to do there is to manage both the lifetime value of our customers and also their liquidity value. You're really working me work hard this morning, Alvaro, I must say, for your two questions. If I jump onto capital and where we are there. Look, we did announce today our Pillar 2A requirement will be reduced by 43 basis points on January 1st, including the Basel 3.1 offset. So that takes our supervisory minimum from 11.6% to 11.1%.
This was expected, and we took it into account when we changed our CET1 target to around 13%. What I would say, it's one part of the regulatory change, a step in the right direction. We do await the next capital update in the Financial Stability Report on November 2026. We continue to engage very constructively with the PRA on the case for reducing overlaps for domestic exposures. So I would say, let's see what's announced, and then we will take stock.
Thanks, Alvaro.
Thank you, Katie. Thanks, Alvaro.
Our next question comes from Chris Cant of Autonomous. Chris, if you would like to unmute and ask your question.
Hey, Chris.
Hey, Chris. Chris, you there?
Can't currently hear you, Chris.
Trouble with his buttons this morning.
We're going to move on and come back to Chris in a moment. We're going to go on to Benjamin Toms of RBC. Benjamin, if you'd like to unmute and ask your question.
Hey, Ben.
Hey, Ben.
Hey, morning. Thank you very much for taking my questions. I just want to pick up actually on something you just said about stable NIM going into 2027. Can I just clarify that stable versus the Q4 exit rate, whatever that might be? Secondly, there's one-off gain in your other income. I don't think you class that as a notable item. If you can just help us quantify that to help with our run rate modeling. Mortgages continue to grow strongly in the quarter. What do you expect for mortgage growth from here? You've got Your First Home coming in the spring. Do you think that could lead to a loan demand over the next six months with first-time buyers making up 25% of volumes? Thank you.
Okay, so we got.
Shall I jump in, Paul?
Yeah, yeah. NIM, other income, and then mortgages.
Yeah, perfect. If I look at NIM, the simple answer is yes, I am thinking sequentially. We said we expect NIM flatter in H2, and so really those drivers are continuing into 2027. I guess as I kind of think of the drivers, you know, Ben, there's three things we think about. Lending margins, we continue to expect growth weighted towards lower risk, lower margin, attractive returns lending business, and for the front and back book mortgage margins to align by the end of 2026. On deposit margins, we see expansion driven by the ongoing tailwind of the structural hedge, with over another GBP 1 billion of higher hedge income in 2027 and then 2026. It's going to obviously be a little bit offset by mix. Funding another, that's going to be impacted in terms of the increased wholesale funding.
On interest rates, in my last answer, I said, 4% for the year, holding stable as we go out, and that five-year swap rate kind of moderating to that 4% as well, and let's see how that goes. I do think we need to think a little bit about what that means for customer sentiment and credit demand, but we are really comfortable in terms of growth. That together brings us to the kind of broadly flat that we've talked about. In terms of the one-off in terms of income, it was the sale of our Mentor business. It's a small SME consultancy business, and it's in the tens of millions, that gain. If I then jump over onto mortgages. It's been another good quarter of mortgage growth.
Balances up GBP 1.1 billion, or 0.5% in Q3, or that's 3.9% up for the whole year at GBP 8.3 billion for the first nine months. Our market share has remained stable in the quarter at 12.7%. That's up 12.5% from the start of the year. It's our ninth consecutive quarter of net mortgage growth. We've got healthy pipeline into Q4. When we look at the kind of market level, we can see that Q3 applications were 9% higher than Q2. You've got modest declines happening in house purchase numbers, and you've all seen that in the Bank of England data. But that's been offset by higher remortgage activity, especially during the period of rate volatility that we saw in September. As you know, we remain very dynamic and disciplined in our pricing throughout the period.
The book margin continues to be impacted by the roll-off of the higher margin five-year fixed mortgages, as well as the behavioral life adjustment that you saw come through in income as well. I guided you previously to, we expect to settle around 60 basis points for the year. No change in that guidance as we move forward from here. If we look forward, mortgage rates remain materially above 5%. There might be a little bit of a drag on house purchase lending with a bit of a mix shift towards remortgages. I think we'll see what the government's new Your First Home scheme, which was announced in the budget this week. We think it'll be supportive overall. While the impact will be modest for the market overall, we're positive about it.
I would say overall, we're really pleased with mortgages and the continuing growth that we're seeing in this area. We expect it to continue to grow, of course, at appropriate rates of return for us. Thanks very much, Ben.
Thank you, Katie. Thanks, Ben.
We're going to come back to Chris Cant of Autonomous, who'd like to unmute and ask a question.
Hey, Chris.
Hello. Can you hear me?
Yeah. Second time lucky, we got you.
I seem to now have three separate toggles between browser, headset, and the button on the website to play around with, so I apologize.
Almost has come.
Too much information, Chris.
Yeah, too much information.
Could I just come back on the capital and then one on rates looking into next year, please. In terms of thinking about the capital target, obviously, we knew Pillar 2 was going to come down a bit better than I expected, but ballpark. O-SII releasability is obviously a new development during the course of this year. If you didn't get any further reduction in MDA, but the Bank of England does follow through, are you going to respond there in terms of the targeted level of management buffer? They're doing that to try to encourage banks to run with smaller buffers. It's quite a material change in terms of your MDA being sort of 3% flexible under severe stress. If you could comment on how you're thinking about that. That presumably wasn't factored in when you set the 13.
On international competitiveness, which is something the Chancellor called out in his letter to the FPC this week, is there anything on your shopping list there beyond domestic overlaps? I know the Bank of England talked about that last year, but it felt like maybe there's something broader going on. Is there anything you think that is particularly penal in the U.K. framework? The final thing is on rate sensitivity looking into next year. I understand you've given us your rates assumptions. Quite a few European banks broadly this quarter are talking about deposit competition all of a sudden. I can't help but think that maybe partly this is about management teams trying to discourage analysts from taking stated rate sensitivities and sort of truing up previous guidance.
In terms of your own rate sensitivity looking into next year, you are planning based on flat NIM, 4% rates, 4% swap rates. That is not where rates markets are. Do you still believe the sensitivity disclosures you give us? If the rates outcome is different, is that still a reasonable basis for us to be thinking about adjusting your spreadsheet when we model our own spreadsheets? Thank you.
Okay. Katie, do you want to go with the narrower question on capital? I will talk a little bit about international competitiveness, and then for rate, you go for rates. Does that work?
Shall I do capital and rates together and then get back to you? Perfect. Let me kick off on capital. Perfect. If I look at capital, look, it is a relatively simpler sort of answer. The buffer usability is relevant in systemic stress rather than idiosyncratic stress, and we obviously manage for both. For us, the most important is that it has fallen to 11.1%, reflecting our strong and leading performance in the U.K. bank stress test that we saw last year. We are looking to see what the FSR comes out with next month, and then we will take stock at that point.
Do you want me to talk about that part of it?
Yeah, perfect. Yeah.
Chris, on the broader question around, I guess, international competitiveness around the framework, four things I would quickly call out where we think there are opportunities to calibrate the framework in a better way. First would be the countercyclical capital buffer, so bring us more in line with some of the other regulatory jurisdictions. I think that would be a simple and fast way to deliver capital relief. It also maintains the wider macro flexibility as well. That is the first one. Second opportunity would be, there is a cumulative capitalization of U.K. domestic risk. If you think about the interaction between the countercyclical buffer, the O-SII, and the Pillar 2A, the geographic aspect of that can mean that very similar risks are captured in different parts of the framework.
We think that is worth looking at to make sure it is proportionate and is not disproportionate vis-à-vis the domestic risk. Then you have, I would say, the third piece is making sure the risk weights are commensurate with the underlying risk. U.K. mortgage is a very obvious example, very historical low loss experience, and we need to make sure the levels of capital there generally reflect the risk and are proportionate. There are kind of different things to look at in that third piece. Then fourth and final, the output floors. The output floors inevitably reduce some of the risk sensitivity of the framework, but as other jurisdictions review their approach, we need to make sure the U.K. keeps its implementation under review as well, so we do not see regulatory drift or dissonance.
They are the four things that, from a framework perspective, we think offer opportunities, and they are about competitiveness, but they are also in part about resilience as well, so making sure we get the right calibrated framework, which ultimately obviously helps more lending get into the U.K. economy and, I guess, the wider challenge of growth and returns. Katie, back to you on rates.
Great. Perfect. Sure. Thanks very much. Chris, as we look at it, obviously, we are comfortable with the sensitivity we give you. It is a point-in-time sensitivity. I think there are other things you need to think about when you are looking about implications for customer behavior in response to higher rates, such as sentiment and lending demand. While accepting, we are confident on loan growth within there as well. We are encouraged by what we see in terms of that lending demand as we go through. And we have guided you to 4% for next year and the swap rate kind of moderating over the year. I would sort of say, as we looked at, we have been reinvesting our product hedge during 2026 at 4.2%, so a little bit higher than that. You know what markets are doing at the moment.
It is kind of difficult to give a number of any specific point. You can take your own kind of view on that, but you have the right tools within which to do that.
Good. Thank you, Katie, and thank you, Chris.
Next, we are going to go to Benjamin Caven-Roberts of Goldman Sachs International. Benjamin, if you would like to ask your question.
Hey, Ben.
Morning, both.
Hey, Ben.
Thanks very much for the presentation, and taking the questions. Firstly, just a follow-up on some of the helpful NII comments you gave earlier, Katie. If we zoom out and think about income overall, are there any comments you could give on how you think about the pace of income growth changing in 2027 versus 2026? As you say, you have been posting solid volume growth, but mentioned stability in the margins as one of the factors to bear in mind there as well, at least on the NII component. Secondly, just on asset quality, are there any comments you could give around the key moving parts you are seeing under the hood of the business, the impact from higher rates, which bits of the portfolio are more or less resilient right now? Thank you very much.
Great.
Let me, actually, I will start off with asset quality.
I'll come back to you on the pace of income. As I look at the asset quality piece, I think, Ben, you're familiar with our book. We remain pleased with the quality of our diversified prime loan book. There's no significant areas of stress that we see around the three businesses. The impairment charge for the quarter, GBP 277 million, up from GBP 140 million in Q2. That's really a question of non-repeating releases that happened in Q2, and so actually we see it as a more normalized charge. That's where we get to the 21 basis points for the nine months, so well within our guidance as we move forward from there. There was a slightly higher stage 3 charges in Q3, but not anything that I would highlight that I'm overall worried about. Total PMAs are stable in that quarter as well.
Small increase in economic uncertainty, but like GBP 4 million, not really that relevant. We remain confident about our impairment outlook for the remainder of the year. I'd probably also guide you, we still have that guidance out with you, the 20- 30 basis points on impairment through the cycle, and we see us very much operating within there. If I look at the pace of income growth, I've already spoken about how we think 2027 is not going to be, so I'm not going to go into that much further than I have done already. You can see how the pace of income growth, as you look at the quarters that's developed through this year.
One thing I think you should be mindful of, though, is the gap that we've seen in the growth of our lending and the growth that we see in our interest-earning assets, which is obviously correlated to the loan growth. What you've seen in 2026 within there is that we've utilized a lot of our surplus liquidity, so you've seen average interest-earning assets growth at 3% year- on- year, and where that's well below the 8% growth that we've seen coming through on the lending. That's been positive for NIM in 2026, and given the closer alignment going forward, means you should expect stronger average interest-earning asset growth and more stable NIM as a result of that. That strength comes from the strength that you see in our balance sheet growth, and it's very consistent with what we've delivered throughout this year.
I would say that is what's driving our stable NIM as we go forward from here. Lovely. Thank you very much.
Thank you.
Our next question comes from Sheel Shah of JP Morgan. Sheel, if you would like to unmute and ask your question.
Hello.
Hey, Sheel.
Great. Thanks for taking the questions. I have two, please. First on the LCR. That has been coming down quarter by quarter, and I see what you are saying in terms of the surplus liquidity being utilized that is driving some of that as well. Where do you think the floor is for this? How do you expect to defend that floor, and should we think about an impact on deposit and funding margins as a result of you trying to defend this floor as well? Then secondly, on the corporate momentum.
That seems to be broadening out to the mid-market space, which is encouraging. Can I ask about the sustainability of this, whether there were any factors that maybe uplifted that in the third quarter, or whether that is going to be more sustainable going forward, and the associated margins? Because you have talked about mix shift in terms of the corporate side of things driving the pressure, but in terms of pricing pressure, are you seeing any of that come through? Thanks.
Great. Okay, thanks, Sheel. Katie, why do not I talk a bit about corporate lending growth and commercial mid-market lending growth, and you cover LCR? Is that okay?
Sure, perfect.
Yeah. Sheel, as you rightly point out, another strong quarter from a corporate lending perspective. Pleased to see that. It is becoming a repeat delivery, really, and to me, that speaks to the underlying strength of the commercial and corporate franchise that we have got. The lending itself, in my view, is being driven by quite fundamental structural trends. They will not be new themes to you, digitization, decarbonization, infrastructure, et cetera. The reason for mentioning them is, that is what gives us confidence about the sustainability of the lending demand, and we can see that in strong pipelines that we have got. I am pleased that the growth is in the mid-market as well as the CIB end.
You can see nearly GBP 5 billion up in the mid-market year to date, GBP 12 billion up in the large CIB space, relatively flat in the small SME space, which is probably what you'd expect given the wider economic environment. Then if you ask ourselves, where's that lending growth coming from, and therefore, why should we feel confident it's sustainable? When you get to the detail in the disclosures, you'll see it's very broad-based. You'll see infrastructure, housing, renewables, professional services, utilities, tech. So, the strength is there across a broad-based set of sectors, but also across, as I say, both mid and large. When we look at the pipeline ahead of us, it looks strong. That pipeline is there, and we've kept our appetite very consistent and very stable, so encouraged by the demand.
From a mix perspective, I would say that the pricing dynamics haven't changed. Obviously, at the top end, it's lower risk weight, lower margin, but nicely returning business. In the mid-market, slightly wider margins. That's always been a competitive space because you're dealing with impressive mid-market companies who know the value of lending, but we're not seeing any new specific margin pressure there. But net-net, another good quarter of corporate lending demand, very good line of sight on the pipeline, and feel very confident we can continue to deliver that looking forward. Katie, LCR.
Perfect. Thanks, Paul. Hi, Sheel. So, look, we are seeing a normalization in U.K. banks' LCR from the elevated levels that we all saw post-COVID, and the same is obviously true for us. We reported an LCR of 137%. There's no change to our approach on liquidity. Whilst you would expect us to maintain a buffer over the minimum requirements of 100%, we do remain comfortably above that, and we have a broad range of funding options that are available to us. So, it's certainly not anything we see as a constraint to loan growth. As you would expect, we manage our funding and liquidity needs on a dynamic basis, seeking to optimize across the various levers depending on market conditions. First of all, we operate a high-quality deposit franchise.
We've got great flexibility across our multiple brands and product channels to grow deposits where we see attractive customer and liquidity value. Secondly, we've got significant funding flexibility beyond deposits to support future loan growth as that required. As you're aware, our non-ring-fenced banks are predominantly wholesale funded, as our retail and corporate deposit franchise sits in the ring-fenced bank. We've had minimal requirements for wholesale funding to date within the ring-fenced bank, which means we've got a lot of capacity to access secured wholesale funding markets to support growth when it makes sense to do so. So overall, we remain very well-positioned, strong liquidity position with levers across deposits and wholesale markets.
All of that is embedded into our outlook for NIM, which is a function of the growth of the balance sheet that will continue to drive strong top-line growth and support continued operational leverage and sustainable strong returns. Thanks very much, Sheel.
Thanks, Sheel. Thanks, Katie.
Next, we are going to go to Aman Rakkar of Barclays. Aman, if you would like to ask your question.
Hey, Aman.
Hey.
Hey, Paul. Hey, Katie.
Hey.
Yeah, just got a couple of questions, please. We are a matter of weeks away from the end of the year. Could you just help us tighten up NIM into Q4, your expectations for it? Your share price is clearly very sensitive to your commentary around forward net interest income, and in particular, your margin expectations for next year are clearly below where the street is. I think you have been pretty clear around the trajectory, but that jumping-off point for Q4, and if you are not able to just give us what you think that NIM will be in Q4, which I understand, could you just help us think about the sequential drivers that you have laid out in slide 24, lending margin, deposit margin, and funding, and other directionally what we might anticipate there?
Just coming back to your commentary around your expectations that average interest-earning asset growth might better reflect lending growth in 2027. Hopefully, I have captured that comment right. My question is around your view. What is your take on the sustainability of this loan growth rate? I mean, you have grown your loan book at 8% in Q3, I think actually both annualized and year-on-year. I think we understand that there might be some ease in mortgage momentum given higher interest rates, but I would be really interested to see your take on that lending momentum. Ultimately, it is the volume component to your NIM commentary next year, right? I guess you have guided down NIM. Is there a volume offset? Thank you so much.
Okay. Do you want to go NIM?
Do you want me to do a bit of average interest-earning assets?
Yeah.
Fun, yeah? Perfect. Okay, great. In terms of NIM, we previously have said that NIM would be flatter in H2, and I can't be more precise than that. We don't manage to NIM. We manage to returns, and you can see the returns that we printed this morning just show the real strength of that outcome and that focus on returns. In terms of your kind of average interest-earning assets, what I'd probably, to kind of help you a little bit, and this is not a section I send you to very often, but if you go into the kind of fin supplement that we've given you today, in kind of tab 2.1, you can see what's happening in the average interest-earning assets there by retail, PBWM, and by C&I.
The reduction we've had in that has really been about the deposits kind of moving in, and that's all kind of been happening within the central kind of space. As you look at them and think about how they might grow forward, that's where I think you might find some help as to why I've got such confidence in those interest-earning assets growing. But Paul, shall I hand over to you for the kind of-
The lending piece?
Strength of lending?
Yeah. So, hey, Aman. I guess it links a little bit back to Sheel's question from a lending demand and lending confidence and sustainability perspective. Feel very good about the corporate business. You can see our track record there over several years. The demand is there. It is geared to areas of specialism and strength we have, infrastructure, social housing. When it is there, we take the opportunity, and we continue to post very strong growth. So, we feel good about the commercial and corporate side. On mortgages, as Katie said earlier, we continue to grow. I think Katie referenced nine quarters in a run for mortgage growth. We have shown we can take share. We have grown our share this year, but we have been thoughtful around pricing. So, when the volume is there, we can move quickly and take share at the returns we want.
Net-net, I guess the message I am giving you there is we feel confident about our ability to grow on the asset and the lending side. We are confident because we have got a track record in doing that. That is the reality of it. Thanks, Aman.
Can I ask a follow-up?
Yeah.
Please.
Go for it.
Because I think it is quite important. There is clearly confidence in the outlook for lending growth from here, underpinned by corporate. If you were to sustain loan growth at this cadence, is it right to think that average interest-earning assets would grow at this level? If hypothetically it was loan growth +8% in 2027, should we be thinking about average interest-earning assets +8% also, please?
Yeah. That is what I would kind of guide you through. Growth in average interest-earning assets should now be kind of very much in line with our loan growth. You will see that come through. Yeah, definitely.
Okay.
Thanks, Aman.
Thank you so much.
It's precise. Thank you. Thanks, Aman.
Next, we're going to go to Guy Stebbings of BNP Paribas. If you'd like to go ahead and ask your question, Guy.
Hey, Guy.
Hi. Morning.
Morning.
Thanks for taking questions. One brief follow-up on margin again, then I was going to turn to costs. Specifically on the lending margin, in terms of the EIR hit, that shouldn't reverse, but it shouldn't repeat, I think is the right way to think about it. As we then look into next year, the mortgage spread headwinds should ease. I appreciate there's this mix point working through, but even so, shouldn't we be thinking quite a step down versus certainly Q3 in terms of that lending margin compression as sort of quarterly sequential basis? Is that sort of a fair assumption? Then on costs, really low this quarter. I appreciate the guidance doesn't change. There's quite a big step-up in Q4. How should we be thinking about that?
Is that sort of timing that you always anticipated, or does that mean that you're bringing forward investment that otherwise would have landed in 2027 and into part into the late 2026? Thanks.
That's good. Katie?
Perfect. Great. In terms of the lending limb, you are absolutely right. The EIR, 2 basis points of 6 basis points, and we talk about them from time to time. That is not something I would see as a kind of a repeating sort of event. Then in terms of kind of how that evolves, I really consciously do not guide on margin, but you are trying to squeeze the lemon here on me, Guy. I think it is not really how I would say. There would not be a particular change in that, particularly once mortgage repricing ends in Q4. It is really a function of mix. We have got stronger CMM growth, which is helpful, but mortgages are always going to be a little bit dilutive given the margins we have there. Overall, we are pretty comfortable in lending as we move forward from here. Costs, Guy.
Quarter three is just costs, are not they?
We have talked about this a lot over time. Our guidance is GBP 8.5 billion. There is a natural step-up that happens in Q4, with bank levies. At this time of year, and one you said earlier, there is only really a few weeks to the end of the year. What we are trying to do is to make sure that we really maximize what the benefit we get from costs, so whether we pull a little bit of investment forward or restructuring costs or things like that. You should think of GBP 8.5 billion for the year.
Yeah, I will just add one thing on that, Guy, which is, and you can obviously see in the year-to-date cost income ratio, the significant progress we are making towards our 2028 target already. We continue to feel good about the efficiency and productivity opportunities within the business. As Katie alludes to, the quarter-on-quarters can move around, but we feel very confident on this year and increasingly confident on the 2028 numbers that we put out for cost. Thanks, Guy.
Thank you.
Thanks, Guy.
Next, we're going to go to Ed Firth of KBW. Ed, if you'd like to unmute and ask your question.
Hey, Ed.
Hi there. Thanks very much. Can you hear me okay?
Yeah, we got you.
Great. I had two questions really. I guess the first one is really just about the outlook for profitability. Because if we are looking at flat margins next year, you have a higher capital requirement, I mean, through in terms of risk-weighted assets. We have probably got normalization of impairment. So, it feels to me like we are sort of flat, maybe down a little bit, or the risk would be to the downside in terms of profitability. I guess related to that, my question is, what is the story in that respect? Because we sort of lived off this wonderful improvement in profitability over the last three or four years. But as we look forward from here, I get the growth picture, but the U.K. is a low-growth economy.
We are talking about 1%-3%, some went 3% nominal maybe, but it is quite difficult to get people excited about. You might do it for one or two years, but structurally, it is not a growth economy. I am just trying to think, are we just, like I said, 20% less a bit stock, and you may sometimes do a bit better, sometimes a bit worse? Or what is the next What is going to get people excited now that the hedge is broadly there because margins The customer, customers get a benefit from any upside now broadly. That seems to be the message. I guess my second question is related to that, is in terms of capital. I know everybody is getting terribly excited or trying to get excited that maybe the Bank of England are going to release some capital, but the capital is not a constraint.
You are returning capital at the moment. You are doing share buybacks over the full year. I do not really understand how we get excited by that. Surely if there is a capital reduction, it is going to go to customers, same as the hedge is going to customers now. I am not complaining. 20% is a great return, do not get me wrong. I am just trying to think what is the story where we are going to see outperformance going forward. Thanks very much. Sorry, it is rather a long question.
No problem, Ed. Katie, why don't I start off? First of all, Ed, I'm glad you've recognized the last three years and the improvements and the progress. That's good to see. I think the story in my mind is very simple. I think when you think about ourselves as NatWest, the way I think about it is, we can clearly be a structural winner in the current environment that exists. Why is that the case? One is, we've got a clear growth track record, and we've got the potential to increase market share in all of our businesses. I hear your point about the U.K. economy, but I also believe we've got the opportunity to take share within the U.K. economy. Number one is we've got this growth track record, and we have the opportunity.
You think about the opportunities within our retail business, you think about the opportunities within our private banking and wealth management business, which whilst it's growing at a fast rate, in relative terms, it's still quite small vis-a-vis the size of the market. That's number one. Number two is, again, we've got a great track record around cost management and driving superior operating leverage. We are the most efficient large U.K. bank, and as that leverage continues through the simplification program, we have a virtual flywheel that we can fund investment and we can support growth. Growth, cost management. We've also got, if you look at the Bank of England stress tests, we're incredibly resilient under stress. That gives us a lot of defense and a lot of protection. You combine those three things, and what you've got is superior returns.
We're geared towards some of the structural growth opportunities in the U.K., and that drives a lot of cap gen, as you alluded to, and therefore stronger distributions. I think that's how you should think about us in the context of the story. Katie, anything to add on this?
No, I think for me, the real point is that strength of the capital generation, and that's why we do feel excited about capital. If we look at what we've done this year, so far, 280 basis points of capital generated from profit. We've then invested 30 basis points of that into investments, and then another 96 basis points into the kind of strength of our organic growth. Obviously, with Basel 3.1 moving on and Pillar 2A requirement, we're now sitting with a supervisory minimum of down at 11.1%.
Yeah.
We look to see what happens with the FSR, and then we will take some stock there.
Great. Thanks, Katie. Thank you, Ed.
Thanks, Paul. Thanks, Ed.
Our next question comes from Amit Goel of Mediobanca. Amit, if you would like to ask your question.
Hey, Amit.
Hey.
Hi. Thanks, guys, and thanks for taking my question. I appreciate maybe it is a bit more kind of follow-up, and I know you do not want to talk too much about NIM, but just a few more bits. I guess you said that the flat NIM for 2027 comes from the kind of mix and funding offsetting the hedge, and that you grow deposits selectively. I just want to check, in terms of the kind of the new easy access products, what are they paying against the back book, and what pass-through are you assuming on the November rise compared to the kind of 60% in your sensitivity?
Also, just, if I am looking a bit further out, I guess going into kind of 2028, once mortgage repricing has kind of ended and mix effects settle, I guess with the hedge yield still below the 4% swap rate, should we think about that NIM starting to widen again, or is that maybe just a bit too far out? Thank you.
Thanks, Amit.
Yeah, sure. I've got my father's phrase going through my head, Amit, of "God loves a trier." Let me see if I can help you a little bit on some of your questions. Look, in terms of pass-through, the sensitivity to take, excuse me. The sensitivity we give you on 60 is a 60% pass-through. I would work with that. Obviously, we'll look at what they actually do, and then we'll take it from there. A couple of things is mortgage repricing will kind of correct itself this year, so that's done, and then we'll get to the kind of book price of around 60 basis points, which we've kind of talked about. I won't repeat everything I said on lending a few moments ago as we go through from there.
You can see even in terms of the swap rate and how that comes through, as I look at the structural hedge, it's something that I think has changed this year in terms of that continuing growth, 2027, 2028, and out into those later years. Earlier in the year, we were worried about that you had this point where it was maturing at a level that's lower. For me, that's not really a concern because you've seen the structural hedge grow, and so you get the benefit in terms of the growth coming through on that. As I see it, is the hedge being something that will continue to add income at growing levels over the next couple of years.
It will moderate a little bit in the outer years, depending where we are, but we've talked about adding over GBP 1 billion in 2027 as we go through. Overall, I think, while I'd love to give you something more on NIM, I think we don't manage to, and broadly stable is as precise as I'm going to be. It really will be the output of the growth. We deploy our capital, as Paul says, where we see attractive returns, and you can see that in our numbers. Lovely. Thanks very much, Amit.
Thank you, Katie. Cheers. Thanks, Amit.
Next, we are going to Perlie Mong of Bank of America. Perlie, if you would like to ask your question.
Hey, Perlie.
Hello. Hello, Katie. Hello, Paul.
Hey, Perlie. Good to see you, Perlie.
Sorry to be circling back to this, but you can imagine with the reaction being what it is. Just to help us clarify, simplistically, if we take AIEA in Q3, let's say we have 1% or 2% growth in Q4, and then, I don't know, maybe 7%, 8% growth in line with loan growth in 2027, which is sort of what you've, I think, guided to. To me, it doesn't sound like consensus NII needs to change too much. So effectively, the AIEA, I suppose, change in guidance, or rather clarity on that, is offsetting some of the maybe lowering of the margin. Is that the right way to think about it, number one? Then I suppose if I step back, then 2027 on 2026 is probably about 8% growth, something like that, on NII. So that's basically in line with loan growth, which makes sense.
That does mean that basically all the structural hedge benefit is going to the customers. Is that a reasonable way to think about it? If deposit competition were to step up more in maybe Q4 or Q1, how would that feed into that thinking?
Okay. Thanks, Perlie. Let's move on from that.
There's a lot in there. Look, I guess, Perlie, I'm not going to be any more precise. I think you've got the message on average interest-earning assets. That's the right one to take. I think the key message today is that growth is going to be driving income. We're really confident about our ability to grow at attractive returns. The structural hedge is embedded within that. We see it continuing to be a positive as we move forward from here, and I guess we look forward to talking more about 2027 when we meet again in February. Lovely. Thanks very much, Perlie.
Thanks, Perlie. Thanks, Katie.
Our next question comes from Rob Noble of Deutsche Bank. Rob, if you would like to unmute and ask your question.
Hey, Rob.
Hey. Hey, good morning. I am a little bit confused on your average interest-earning asset guide as being close to lending growth. I thought that, like last five, six years, that the cash was falling because we have had massive TFSME repayments, quantitative tightening, and lending growth started growing faster than deposits. Those all look to continue next year, so why do liquid assets start to grow at the same rate as the loan book? Why would not you let it all run down? It kind of suggests that you are bound, a little bit bound by liquidity on your growth going forward as well.
Rob, if I can probably try to give you a simple answer. We have used the surplus of the surplus deposits, and what you will see happening is that we will start to issue more wholesale funding to support loan growth. Both sides of the balance sheet are growing. I think we have got a lot of capacity to do that, so I am very comfortable in terms of where we are on that capacity to be able to continue to facilitate our strong loan growth at the right returns.
Sorry. You have to This is kind of the point, right? You are having to hold the cash or the liquidity buffer at the same level, so you have to issue more. You cannot just run that down now. You are having to issue wholesale funding to support the balance sheet growth, effectively. That is the way to think of it?
Well, I think I would probably react a little bit towards you are having to issue. Look, as we look about it and we look about where we are, we have got opportunities to grow. We see that. We have got a number of different mechanisms that we can take to make sure that we fund that growth. We have got very little wholesale funding. We have issued about 2 billion of covered bonds this year. That is a very low number across the market, so we have got this good capacity. What we need to make sure is as we issue that wholesale, that it is reflected in the right returns that we get on the lending that we do. And overall, we will see our average interest-earning assets grow as we see that growth coming through.
Thanks, Rob. Thanks, Katie.
Our next question is going to come from Andrew Coombs of Citi. Andrew, if you would like to unmute and ask your question.
Hey, Andrew.
Morning. Thanks for taking the questions. I am going to come back to the stable NIM comment, I am afraid, just given the magnitude of the share price move. You flagged, obviously, the moving parts in there, some more wholesale funding issuance. You have talked about the hedge. A lot of this seems to be due to mix effects. Can I just ask a question on asset mix and then a separate question on deposit mix and what you are assuming in that stable guide? On the asset mix, you are obviously growing in CIB, particularly in the C&I segment. If I actually look at the gross yields, then they are actually ticking up nicely. If I look at the C&I NIM, it is ticked up, and I appreciate that captures some deposit expansion offset.
Where in the numbers can we pinpoint what the impact is on mix effect from growing that larger C&I segment, which understandably will be lower margin? I am going to tag one onto this, which is that you talk about it also being lower risk. Does that mean your through-the-cycle cost of risk guidance comes down as an offset? The second question on deposit growth. Again, you have seen 1 billion NIB growth, 5 billion interest-bearing growth. It is all in term. Is that the trend you expect to continue? Is all your deposit growth expected to come through predominantly in term going forward, or is this quarter distorted by behavioral changes given the BoE raise? Thank you.
Thanks, Andrew. Let me try to be helpful maybe for you and slightly taking you to look at the rates that we have got in a slightly different way. As you have heard today, we continue to have good top-line momentum. Our NII growth of 1.8% in the quarter. NIM is broadly stable, up one basis points at 2.5%. One of my favorite slides, without being too nerdy, is slide 30, and I think it can really help you. If you look there, your average yield increased 11 basis points in the quarter, while the average cost was up 10 basis points. That is a reflection of the higher interest rates.
If I then kind of dig in a little bit, and you have got there the results across the business, if I look at somewhere like retail banking, the average rate we pay on customer deposits is just three basis points up in the quarter, while lending rates are up four basis points. So, a net positive for us. Rising customer rates that reflect the higher swap rates, which feeds into our fixed mortgage and our deposit pricing, as well as the structural hedge. I guess while we see kind of competition in deposit markets and things like that, we are really thoughtful about where we are competing. I think if you look here, it will give you a little bit more guidance in terms of what we are talking about in that stable NIM number as we go through.
Overall, we are comfortable, and I keep reiterating, which I keep saying, it really is the strength of the growth of volume that we will see, which will help to ensure that we have ongoing growth in that income line, which we are comfortable about. Paul, can I hand back to you to chat about deposit growth?
Yeah, yeah.
A little bit?
Good. Hey, Andrew. On deposit growth, for the quarter, as you alluded to, it is about GBP 6 billion of growth. That is actually split 50/50 between retail and C&I. Andrew, as you said, there is some growth there in non-interest-bearing balances, and then the rest is kind of savings and/or term. It is worth bearing in mind for the term, that is across all three businesses. That is not just retail. That covers C&I, private banking and wealth, and retail. That can include, for example, in C&I, that can include kind of term money for one month, three months, six months, et cetera. I would not default to kind of retail one-year or two-year money. Obviously, where the growth in the retail savings business is coming is in the ISA market.
That's grown at 2x the normal savings rate, and now about 25% of retail savings deposits are in ISAs. You haven't really seen much of that material change in mix. You can see that NIBs are stable at 30. Corporate, drill down into corporate, very much no change in mix either. We're not seeing any significant change. I guess for the outlook, which was another part of your question, it really depends upon some of the competitors in the retail space, but also the swap rates as well. I always take the time to remind people that higher swap rates also come through in higher structural hedge margins as well, so there's a natural offset to that. Net-net, we're growing our deposits. It's across a number of our businesses. Some of it's term, some of it is non-interest-bearing.
It is competitive, but as Katie alluded to, we've got a lot of levers we can pull on the funding side, so we're going to be thoughtful where we compete from a price perspective versus where we access different sources of funding. Hopefully, that gives you a sense of how we think about it. Thanks, Andrew.
Thank you for your questions today. I'm now going to hand back to Paul to close.
Okay, thanks. I didn't say thanks to Andrew. Thanks, Andrew. Thanks, everybody. Thanks, Aurelie. We appreciate the questions. Hopefully, what you've seen today is that our momentum around growth continued in the third quarter. You've got all three businesses growing. You've got improvements in the cost-income ratio. We're obviously managing our risk and capital very well. So we're delivering the high levels of capital generation and high levels of returns, and we're very confident we can continue that on a sustainable basis. So wish you all a good weekend when it comes. Thank you.
Thank you.
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