Good morning, and welcome to the NatWest Group Q1 Results 2025 Management Presentation. Today's presentation will be hosted by CEO, Paul Thwaite; and CFO, Katie Murray. After the presentation, we will take questions.

Good morning, and thank you for joining us today. As usual, I'll start with a brief introduction before Katie takes you through the financial performance, and then we'll open it up for questions. Against the background of heightened global economic uncertainty, we continue to focus on advancing our strategy through 3 key priorities: disciplined growth, bank-wide simplification, and active balance sheet and risk management. Examples of our recent progress include the completion of our Sainsbury's Bank transaction yesterday, which adds around 1 million new customer accounts with about GBP 2.5 billion of unsecured lending and GBP 2.7 billion of savings. We launched a new mortgage enabling first-time buyers to combine incomes with a family member or friend, while retaining independent ownership to help them get on the property ladder sooner. In business banking, we marked the 10th anniversary of our Accelerator program, which has helped to grow and scale 10,000 small businesses across the U.K. by setting a new ambition to support a further 10,000 businesses in 2025. We also upgraded our ambition to lend GBP 7.5 billion to the U.K. social housing sector between 2024 and 2026 and announced that we're deploying GBP 500 million to retrofit social housing stock supported by financial guarantee from the National Wealth Fund. On bank-wide simplification, we are the first U.K. headquartered bank to collaborate with OpenAI in order to meet customer needs faster and increase productivity. And as we simplify the organization, we are moving our private banking investment operations from Switzerland to the U.K. and relocating their data and technology teams to the U.K. and India. On active balance sheet and risk management, we made further progress optimizing RWAs in the quarter. And in an uncertain environment, our prudent risk management gives us a competitive advantage. So let's turn to the financial headlines for the first quarter. We made a strong start to the year. Customer lending grew 0.9% to GBP 375 billion. Customer deposits increased 0.5% to GBP 433 billion with growth in both Retail Banking and Commercial and Institutional. Assets under management and administration of GBP 48.5 billion included net AUM inflows in the quarter of GBP 0.8 billion. We also provided GBP 8 billion of climate and sustainable funding and financing, bringing the total to GBP 101 billion since July 2021, exceeding our GBP 100 billion 2025 target. This activity clearly underpins our financial performance. Income increased 15.8% year-on-year to GBP 4 billion and costs were GBP 1.9 billion, resulting in operating profit of GBP 1.8 billion and attributable profit of GBP 1.3 billion. Our return on tangible equity was 18.5%, driving strong capital generation of 49 basis points before shareholder distributions. Earnings per share were up 48% to 15.5p and tangible net asset value per share was 347p, up 15% year-on-year. We continue to maintain a strong balance sheet with a CET1 ratio of 13.8%, and the government shareholding has reduced to less than 2%, in line with the stated intention to exit fully by 2025, '26. Given the strength of the first quarter, we are updating our 2025 guidance. We now expect to be at the upper end of the range for both income and returns. And with that, I'll now hand over to Katie.

Thank you, Paul. I'll start with our performance for the first quarter using the fourth quarter as a comparator. Income, excluding all notable items, was up 2.1% at GBP 4 billion. Operating expenses were 12.7% lower at GBP 2 billion, and the impairment charge was GBP 189 million or 19 basis points of loans. Taking this together, we've delivered operating profit before tax of GBP 1.8 billion. Profit attributable to ordinary shareholders was GBP 1.3 billion and return on tangible equity was 18.5%. Turning now to our income performance. Overall income, excluding notable items, grew 2.1% to GBP 4 billion. Excluding the impact of 2 fewer days in the quarter, income across our 3 businesses increased 3.7% or GBP 143 million. Volume growth was also supported by margin expansion as tailwinds from the product structural hedge more than offset the impact of the base rate cut in February. Net interest margin was up 8 basis points at 227, mainly reflecting deposit margin expansion. We continue to assume 3 further base rate cuts this year with rates reaching 3.75% by the year-end. Expectations for the U.K. bank rates moved down in April, closer to our base case. But we recognize that uncertainty remains and the actual outcome may differ. Noninterest income across the 3 businesses increased 8% compared with the first quarter last year and was broadly stable when compared with the strong fourth quarter. This reflected another strong quarter of customer activity in our commercial and institutional business, in particular, in capital markets, currencies, and fixed income. We were pleased with the strength of noninterest income, but the first quarter performance should not be taken as a run rate. Given the strength of total income in the first quarter, we now expect 2025 income to be at the upper end of our GBP 15.2 billion to GBP 15.7 billion range. Moving now to lending. We continue to be disciplined in our approach and deploying capital where returns are attractive. We were pleased to see a stronger mortgage market together with ongoing demand from larger corporates and financial institutions. Gross loans to customers across our 3 businesses increased by GBP 3.5 billion to GBP 375 billion. Taking retail banking together with private banking, mortgage balances grew by GBP 2.1 billion with strong gross new lending reflecting some pull forward of second quarter completions, ahead of the stamp duty changes for the first-time buyers on April 1. Our stock share remained stable at 12.6%. Unsecured balances increased slightly to GBP 16.9 billion, driven by higher personal loans to our retail customers. Our unsecured portfolio will benefit in the second quarter from the completion of our transaction with Sainsbury's Bank, which I'll talk about shortly. In Commercial & Institutional, gross customer loans, excluding government schemes, increased by GBP 1.6 billion. Within this, loans to corporates and institutions grew by GBP 1.5 billion, mainly driven by infrastructure and project finance. You will also see in the appendix that we have shown the split of our corporate lending exposure by sector as presented in our year-end Pillar 3 disclosures. I'll now turn to deposits. Fees were up GBP 2.1 billion across our 3 businesses to GBP 433 billion, continuing the quarterly growth trend of 2024. In Retail Banking, an increase in current account and term balances was partly offset by a reduction in instant access savings due to annual tax payments. This also drove a reduction in private banking balances of GBP 1.2 billion. The increase in commercial and institutional of GBP 2.4 billion was mainly from larger customers in corporate and institutions. Migration from noninterest-bearing to interest-bearing deposits was insignificant, and we have not seen any material change in customer behavior following base rate cuts nor since the onset of recent market volatility. Noninterest-bearing balances remained 31% of the total and term accounts are still around 16%. I'd like to turn now to our Sainsbury's Bank transaction, which completed yesterday. This transaction presents an opportunity to scale our customer base, adding 1 million new customer accounts, which deliver incremental income at low marginal costs through our digital platform, offering sustainable growth. It also accelerates our strategy to grow our share of unsecured credit in a disciplined way by increasing our credit card stock share to around 11% and improving profitability. The transaction is self-funded, bringing GBP 2.7 billion of savings, which increases retail banking deposits by 1.4%. We expect these portfolios to add income of around GBP 100 million this year, and we will incur one-time integration costs of around GBP 100 million this year. The unsecured portfolio attracts a day 1 charge for expected credit losses of around GBP 80 million. In terms of capital, the portfolios at around GBP 1.8 billion of risk-weighted assets with total day 1 impacts reducing the CET1 ratio by around 16 basis points. Sainsbury's customers will move to NatWest branded products over the coming months with access to all our products through digital, in-person contact and our branches. And we're engaging with our new customers to ensure a smooth transition, as they migrate. Turning now to costs. First quarter costs of GBP 1.9 billion were down 8.5% on the fourth quarter, mainly as a result of seasonality and lower severance and property exit costs. As you know, our cost profile can be lumpy, and you should not take this as the run rate. Our annual wage awards and higher national insurance contributions both take effect from April 1. We incurred just GBP 7 million of our guided one-time integration costs in the first quarter. So you can expect these to increase from the second quarter onwards. We remain on track for other operating expenses to be around GBP 8 billion for the full year, plus around GBP 100 million of one-time integration costs. And we continue to focus on delivering cost savings from our investment programs to create capacity for further investment to accelerate our bank-wide simplification. I'd like to turn now to impairments. Our diversified prime loan book continues to perform well. We're reporting a net impairment charge of GBP 189 million for the first quarter, equivalent to 19 basis points of loans on an annualized basis. In light of heightened global economic uncertainty, we have maintained our post-model adjustments at around GBP 300 million, despite our book performance indicating a small release. We have reviewed our macroeconomic assumptions. And whilst uncertainty has increased, we are comfortable with them at this stage, having embedded a combined weighting of 32% to both our downside scenarios. Our moderate downside scenario is closest to the modeled scenarios we have run and is worse than the latest economic consensus. We have no significant concerns about the credit portfolio at this time, and it is worth remembering that customer borrowing rates have been coming down in recent months together with inflation. Given the current performance of the book, we continue to expect a loan impairment rate below 20 basis points for the full year. Turning now to capital. We ended the first quarter with a common equity Tier 1 ratio of 13.8%, up 20 basis points. We generated 49 basis points of capital before distributions, including 68 basis points from earnings and 10 basis points from CET1 capital improvements. This was partly offset by RWA growth, which consumed 28 basis points. As you know, we increased our ordinary dividend payout ratio from around 40% to around 50% this year. Accruing 50% of attributable profits was equivalent to 33 basis points. RWAs increased by GBP 3.8 billion to GBP 187 billion. This includes GBP 2.2 billion from the annual update to operational risk, GBP 0.8 billion from initial CRD IV model updates, and GBP 2 billion of business movements, which broadly reflects our lending growth. This was partly offset by another strong quarter of RWA management, which included 2 successful significant risk transfers and resulted in a reduction of GBP 1.2 billion. We continue to expect between GBP 190 billion and GBP 195 billion of RWAs at the year-end, where the figure lands exactly within this range will largely depend on CRD IV model outcomes. Our target CET1 ratio remains 13% to 14%. Turning now to total capital and issuance. We have a robust capital position supported by strong capital generation from earnings and well-timed issuance over 2024 and 2025. Our total capital position comfortably exceeds minimum requirements for CET1, AT1, and Tier 2. You can see on the right the consistency of our capital generation from earnings each quarter. You can also see that our 2025 AT1 and Tier 2 issuance is well progressed, as we took advantage of market conditions in the first quarter. Overall, this puts us in a very strong position to deal with any changes in market conditions. Turning now to guidance for 2025. We now expect income, excluding notable items, to be at the upper end of our previously guided range of GBP 15.2 billion to GBP 15.7 billion. Other operating expenses to be around GBP 8 billion, plus around GBP 100 million of one-time integration costs and the loan impairment rate to be below 20 basis points. RWAs are expected to be between GBP 190 billion and GBP 195 billion. And based on the strength of income, we now anticipate a return on tangible equity at the upper end of our 15% to 16% range. Looking beyond 2025, we believe the business is well positioned to continue to grow income, control costs and maintain strong capital and risk management supporting our 2027 target for return on tangible equity of greater than 15%. And with that, I'll hand back to the operator for Q&A.

We will now take our first question from Sheel Shah from JPMorgan.

I've just got two questions, please, both on the income outlook. If we annualize the first quarter, we're running well above the target range you've indicated. So my question is more around the noninterest income. How much of the strength in the quarter do you think is sustainable? And if you can disaggregate between the various sort of segments within there, that would be helpful. Then secondly, on the lending margins, they've increased 2 bps in the quarter. Can I ask what was driving that and whether we should expect that same pace going forward?

Thanks, Sheel. Katie, both for you.

Thank you, Sheel. We've had a strong start to the year in our first quarter performance and are confident we will reach the upper end of our guidance. However, we do not expect Q1 to serve as a baseline for future performance, particularly for noninterest income. There are several positive developments as we progress, including continued growth in Q1, with 80% of our structural hedge tailwind already secured for the year, along with an additional GBP 100 million benefit from the Sainsbury's portfolio. That said, we anticipate three Bank of England rate cuts starting with the next one next Thursday, which will impact deposit pass-through and customer behavior. Additionally, we recognize the global economic uncertainty that may cause delays in customer borrowing and investment decisions. For noninterest income, various factors will influence the levels moving forward, largely related to customer activity. Regarding your question on Net Interest Margin (NIM), we saw an 8 basis points increase in the first quarter, with a lending margin up by 2 basis points. This reflects some pressure on mortgages but growth in unsecured and corporate lending, as well as a non-repeat of a mortgage Effective Interest Rate from Q4. Deposit margins were strong, contributing 4 basis points, with funding and other items adding 1 basis point due to our liquidity portfolio repositioning and AT1 issuance. While we often discuss funding and related aspects during these calls, I don’t see it as a key driver of our future NIM outcome. There may be some quarterly volatility in that area, but overall, I am pleased with our NIM performance in Q1, which supports our guidance towards the top of the income range. As a reminder, we do not provide specific NIM guidance on different components. Thank you, Sheel.

Our next question comes from Benjamin Caven-Roberts from Goldman Sachs.

So first, just on the backdrop for asset quality and the read across from tariffs. Could you share a bit more detail on your thought process for the Q1 impairment charge and the GBP 0.3 billion PMA you currently hold? I recognize the U.K. is, of course, impacted differently versus other countries in respect of tariffs, but I wonder how you're thinking around the more holistic impact of the slowdown in growth from global trade tensions? And then secondly, just on capital allocation a bit more broadly, where do you see the most attractive area of your business currently to allocate incremental capital? And has this evolved at all over recent months?

Thank you, Ben. Katie, I'll address both of those points. On the asset quality front, I'm pleased with how the quarter turned out. Asset quality remains strong. We reported a charge for the quarter at 19 basis points, which is within our guidance of 20 basis points. It is higher than the fourth quarter of last year, but we did have a release then, and it is lower than the third quarter of last year. We are encouraged that there's no underlying deterioration. Regarding your broader observations, we are actively monitoring the portfolio, examining different asset sectors, and keeping an eye on any emerging trends, but there is nothing significant to report at this time. Our customers have shown resilience, as evidenced by their ability to handle multiple challenges over the past decade, including Brexit, COVID, and various economic shocks. We have a total PMA of around GBP 330 million, with about GBP 300 million allocated for economic uncertainty. This positions us well, especially given the increased global uncertainty that has arisen since the end of the quarter. In looking at our portfolio, especially in our Corporate and Commercial business, which reflects the U.K. economy at 70% services, we've provided helpful disclosures regarding sector concentrations in the documents today. Around 2% of our exposure is in manufacturing, with low single-digit exposure from the U.S., primarily in investment-grade. While we are vigilant and monitoring the situation, we are reassured by the current asset quality and believe our clients are somewhat shielded from ongoing impacts. On capital allocation, to your second question, we ended the quarter in a strong position at 13.8%, which translates to approximately 50 basis points, specifically 49, in capital generation before the ordinary dividend. It’s important to note that this has stemmed from both earnings growth and effective RWA management, which puts us in a solid position to meet customer demand when it arises. We have seen growth in our retail and commercial asset books during the first quarter without fundamentally altering our capital allocation strategy. We are satisfied with the growth and returns in mortgages and unsecured lending, as well as on the corporate and institutional side primarily from our CIB business. There has been no shift in our capital allocation philosophy, but as always, I am focused on returns. If we identify better risk-reward scenarios, we will adjust our deployment accordingly, but that has not happened yet. Thank you, Ben.

Our next question comes from Chris Cant of Bernstein Autonomous.

I just wanted to ask about the headlines we've had in respect of ring-fencing, please. And just to understand, obviously, your signatory to the letter of the press asking for a review. What would you like to happen in respect of ring-fencing? And if you could explain a little bit your motivations for wanting to change this? Obviously, one of your competitors has argued we shouldn't get rid of ring-fencing because it's good for customer protection. What is it that you feel this is doing that's adverse for the business? What are the restrictions? Is it about costs? And if it is about cost in part, could you give us an indication of the rough quantum of duplicated costs for the group?

Thank you, Chris. I'll address the ring-fencing question. I've consistently emphasized the importance of having high-quality regulation. I believe it can serve as a competitive advantage for the U.K. sector. It's crucial to strike the right balance between risk and protection. The regulatory framework has significantly changed since the financial crisis, and it continues to evolve. For instance, recent regulations regarding consumer duty, recovery, and resolution have followed the introduction of ring-fencing. I believe there is significant potential for further progress and reform in this area, and I publicly welcomed the changes made earlier this year in February. The chance of reform seems promising for a few reasons. One key driver was financial stability, but the SOC review found that the recovery and resolution framework that emerged after ring-fencing is arguably more effective in promoting that stability. This drives additional costs and complications in how we serve our customers. While cost is a factor, the more significant concern is how it affects customers. It complicates delivering services to customers within the ring-fence, including U.K. commercial and SMEs. This can skew decisions, influence pricing, and potentially restrict banks' ability to foster economic growth. I can’t provide a specific cost estimate, as you asked, but that isn't my main focus. It's worth noting that we're the only jurisdiction with this particular regime, and it feels timely and appropriate to reassess it. We must ensure that the prudential framework supports banks' and the sector's capacity to aid U.K. businesses, which is why I advocate for a timely review. Additionally, I want to emphasize that deposit protection is vital, and I am not suggesting any changes that would compromise it. There are already numerous embedded protections through the FSCS scheme, MREL, and the capital and liquidity we maintain. So, I do believe there is ample deposit protection in place.

Our next question comes from Andrew Coombs from Citi.

A couple, please, one strategic, one numbers. On the strategic one, given that Sainsbury's Bank has now closed, perhaps you can comment on the strategy for that business from here, your ability to derive synergies to tap into the Sainsbury's customer base and potentially even more broadly the Nectar Rewards customer base. And then second on the numbers, the cash flow hedge. Thanks for the extra disclosure on Slide 9. You talk about 3p positive decay in the quarter, offset by yield curve steepening. Should we assume that quarterly decay run rate going forward? Is that fair?

Thank you, Andrew. I'll discuss Sainsbury's and then you can cover cash flow hedge. I'm pleased to announce that we finalized the deal with Sainsbury's yesterday, which brings 1 million customer accounts to NatWest. Strategically, this enhances our market share in the unsecured prime credit card sector, increasing it to 11% due to this transaction. While it’s not primarily a synergies-driven deal since we're not incorporating Sainsbury's Bank's infrastructure, we do see opportunities with the incoming 1 million accounts. We can provide a wide range of products, services, channels, and mobile app features to this customer base, creating an attractive offering as we transition these customers over the next six months. We maintain a strong working relationship with Sainsbury's in various areas that could allow us to explore targeted offerings using loyalty and Nectar points. We will approach this thoughtfully to ensure it adds customer value. You can expect to see this not just in the card portfolio but across all available opportunities. We are excited about where we stand with Sainsbury's. Katie?

Thanks, Andrew. Regarding the cash flow hedge, I want to reiterate my previous comments. We anticipate that most of the hedge will unwind over the next two years. The 3p noted on Slide 19 reflects this decline. There is some offset due to fluctuations in the yield curve. While I won't provide specific quarterly guidance, we do expect the hedge to be fully matured within the next two years.

Sorry, just to follow up on that, a bit of a pointed question, but do you think that's reflected in consensus in the tangible NAV because you've again been in this quarter on tangible NAV per share.

Yes. So I guess when we look at consensus, I do note that our average consensus is sitting around 27.8% for 2025. It's a better place than it was, but I would say it's broadly in consensus, but maybe not everybody. So maybe it's a useful reminder this morning for those that might want to look at it again.

Our next question comes from Aman Rakkar of Barclays.

I have two questions. First, regarding deposit income, you have shown impressive deposit margin expansion despite base rate cuts. I'm curious about the sustainability of this deposit margin expansion since there are many factors at play, like the structural hedge, base rate cuts, and pass-throughs with their associated delays. Can we expect this level of deposit margin expansion to continue in the upcoming quarters? Additionally, can you provide some insight into how much the structural hedge contributes compared to other factors? It's an impressive outcome, and I’d like to understand how long it might last. Secondly, I believe you are executing pass-throughs robustly, and I estimate around 60% to 70% in that regard. Do you think you can maintain this, especially with the three rate cuts ahead? Should we consider that as a potential trajectory? Lastly, there is uncertainty surrounding your guidance this year due to apparent upside risks, which makes us hesitant to rely on it. This is more of a statement than a question, but net interest income clearly appears to be increasing, margins are improving, and volumes have momentum. To reach GBP 15.7 billion, non-net interest income would almost have to experience a significant drop. Feel free to comment on that or just acknowledge my observation.

I think I have a few observations and hypotheses about our current situation. Regarding deposit income, Katie, I'll return to you on that. In terms of pass-throughs, I agree with your assessment. We've made significant progress with the current reductions and have provided you with some sensitivities. The numbers you referenced about the past interest rates are accurate and reflected in the data. Ultimately, our approach will depend on our funding needs, competitor actions, and customer reactions. However, we feel confident about our pricing strategy. We understand how price-sensitive our customers are, and we're managing the balance effectively. That's our current stance on pass-throughs, and we are carefully considering both the levels and timing. Now, addressing your broader question about guidance, we've had a solid start to the year and anticipate being at the upper end for both returns and income. We're satisfied with the income trajectory and have provided detailed guidance on various lines in our profit and loss statement. While there are scenarios that could lead to higher returns, it's been about six or seven weeks since we last communicated, and there continues to be significant uncertainty. I will keep you updated as we progress through the year, but we are quite pleased with our first quarter results. Katie, what can you tell us about deposit income?

In response to your question about deposits, I'll provide a broader context. While we don't provide guidance on net interest margin, we have observed consistent improvements in our deposit margin due to the effective hedge we have implemented. You’re already familiar with this aspect, so I won’t go into exhaustive detail. You have sufficient information regarding the hedge to make your own projections. As you noted, various factors are at play, particularly as we anticipate rate cuts, expected to occur quarterly for the remainder of the year. We project a pass-through rate of 60%, which has been fairly accurate based on our recent experiences. Additionally, competitive dynamics and changing trends in household M4 will influence these margins. Thank you for your question, and I believe you have enough information to draw your own conclusions.

Our next question comes from Amit Goel of Mediobanca.

I want to address the costs mentioned on Slide 10. I might not need to explain every detail, but when I analyze the underlying costs for the quarter, annualize them, and then factor in items like integration, NIC, 3.3% wage growth, and levies, I still find a gap of about GBP 150 million from the GBP 8.1 billion target for the year. I'm curious if this could be due to higher administrative expenses, premises costs, or depreciation. Is there potential for more upside in costs, or is there another reason why costs were particularly favorable in Q1 that may not recur in upcoming quarters? Additionally, regarding the ring-fencing question, I appreciate your insights on costs. If you could deploy more capital outside the ring-fence, to what extent would that support growth or volume, and would it enhance yields if you could access liquidity? Would better yields be possible if we see a relaxation in the current situation?

Thanks. I let Katie...

Absolutely. Thanks, Amit. Look, when we look at cost, our guidance is really unchanged from that. We are on track to deliver our full year cost guidance of around that GBP 8 billion, plus GBP 100 million of the one-time integration costs. And of that one-time integration costs, we spent GBP 7 million in the first quarter. So you're going to see that ramp up in the next few quarters as you go through. But you understand as well the costs are lumpy. And so I wouldn't expect Q1 to kind of happily feed through on the other quarters. But you've clearly got the component parts in terms of NIC comes in, in April or staff pay award of 3.3% comes in from April as well. So you see them kind of coming through. What Paul and I are really focused on as we go towards that GBP 8.1 billion number is really kind of focus on the creating capacity so that we can then reinvest that in the business. So I would really encourage you to take the GBP 8.1 billion, accept that it's lumpy in different quarters, and I know that's frustrating for you with your models. But that's certainly the number that we're aiming for, and we have every intention of hitting. And in doing so, make sure that we can drive the business to create capacity, continue to reinvest in our development. Paul, I hand back to you.

Thank you, Katie. Regarding ring-fencing, it is relatively straightforward. If there were any changes, it could enhance our efficiency in terms of funding, liquidity, and capital. Such changes would provide us with opportunities to choose how to allocate that capital and liquidity. Our commitment to capital discipline and prioritizing the best returning opportunities would remain unchanged. Ultimately, this could lead to better support for our customers and improved utilization of capital and liquidity across the organization.

Our next question comes from Ed Firth at KBW.

I wanted to revisit your interest rate sensitivity, which I believe you included in the appendix. It's around a couple of hundred million for 25 basis points of cuts. Over the past year, your margin has improved nearly 30 basis points. While I understand you will reference the structural hedge, which accounts for 15 to 20 basis points of that, it seems you've achieved an additional 10 basis points of margin expansion in a declining interest rate environment. I'm trying to grasp how this functions. The 25 basis point sensitivity appears to be a theoretical exercise for you. Does this imply you are adjusting product pricing effectively enough to offset that pressure? My first question is whether we can confidently disregard that interest rate sensitivity and expect that you will continue this trend moving forward. Secondly, is there a certain interest rate level where this repricing ability would diminish? Interest rate expectations seem to be decreasing rapidly. If rates were to fall to around 2.5%, would that be a point at which you struggle to reprice adequately due to pressures on deposit flows? Any insights you could share on this would be greatly appreciated.

Thanks, Ed. Katie, let me briefly discuss pricing developments in general, and then you can address some of the specifics.

Sure. Ed, I want to mention that since the second half of 2023, we've significantly invested in understanding our deposit pricing and elasticity. This has enabled us to dynamically price better for different segments. We have also expanded our product range, including various tiers within those products. This speaks to our enhanced dynamic use of pricing insights. It's important to keep this in mind alongside your observations about the structural hedge. Katie? Yes, absolutely. Ed, we've put a lot of effort into that sensitivity analysis, and I really encourage you to pay attention to it. You can see that we update it every six months and at year-end for your reference. However, it's important to keep in mind that it's based on a static balance sheet, so as circumstances change throughout the year, you'll see variations. We've noticed some shifts in account types between fixed-term and noninterest-bearing accounts, with an increase in instant access accounts which is beneficial for our deposit margin. Additionally, consider the dynamics of customer pricing and the positive effects from our hedges. The mortgage headwind has lessened, allowing for smoother transitions. You may recall my earlier comments about our funding strategy, where we aim to enhance margins by leveraging different market positions. In summary, we anticipate that our hedge will remain stable in size, and the deposit margins for various accounts have also been consistent, helping to mitigate the effects of rate cuts. So, I encourage you to review the different component parts and utilize the sensitivity analysis to understand the timing of potential rate cuts. Thanks, Ed.

Sorry, just as a follow-up, is there a rate at which that dynamic pricing becomes more challenging? And I guess one thinking about deposit flows.

I think we need to reflect on the history of the last five to ten years. Looking back a few years, we would never have expected to pay anything for our deposits on the receiving side, but that has certainly changed. Both consumers and ourselves have become more sophisticated, with increased flexibility regarding where we want to hold our deposits, including the resurgence of term accounts that offer better interest rates. Even if we were to reach lower levels, which is not something we anticipate in our own economics, there would still be movement and flexibility, reflecting past trends as well.

Our next question comes from Jonathan Pierce of Jefferies.

I have two questions. First, regarding ATier 1 costs, I'm focusing on the current situation. The ATier 1 socketing is now around GBP 6 billion, which represents 3.2% of your risk-weighted assets. I'm curious about the future direction because the annualized cost is currently about GBP 400 million, significantly above consensus, and you have some substantial potential calls later in the year. Slide 13 suggested that you might be mostly finished for the year, implying that you'll let the other ATier 1s later in the year lapse without replacement. Is that the correct way to interpret it? I would like more clarity on what to expect for ATier 1 coupons going forward. My second question is broader in scope regarding capital plans. With an equity Tier 1 ratio of 13.8%, you are generating considerable capital each quarter. However, the directed buyback opportunity seems to be diminishing. How are you approaching this? Are you reserving capital for potential inorganic opportunities? Should we anticipate announcements of market buybacks when we reach the interim results? Additionally, related to risk-weighted asset optimization, could you provide insight into the income cost associated with that? Since your capital position appears strong, it doesn’t seem necessary to pursue this if it incurs an income cost. As a rough estimate, what is the income impact from optimizing GBP 1 billion of risk-weighted assets?

Thanks, Jonathan. Katie, I'll address capital first and then get back to you regarding the specifics on AT1.

Sure. Thank you.

Okay. So Jonathan, regarding capital, we've achieved a strong figure of 13.8%, which is at the upper end of our target range. We are comfortable operating within a range of 13% to 14%, providing us with a solid buffer above our minimum of 11.7%. While the potential for a targeted buyback is diminishing, we still see the opportunity to engage if it arises. We will evaluate other buybacks with the Board, typically updating at mid-year and year-end, as is our usual practice. Our approach to capital allocation remains unchanged, and we recognize the importance of returning capital to shareholders. Hopefully, this gives you a clear understanding of our current position. Regarding RWAs, we focus on the cost of capital for trades, although we do not disclose those figures. We ensure that any trades we undertake provide satisfactory returns, allowing us to redeploy capital for higher returns. Essentially, we evaluate trades from a return perspective, considering both the trade's return potential and capital redeployment, rather than just the income impact. AT1s, Katie?

Yes, thank you for bringing that up, Jonathan. As you mentioned, we issued some AT1 in November and March. Some of the costs might not be fully accounted for in all the models, so it could be beneficial to review those again. The coupon cost is recorded as profit attributable to equity holders, which amounts to about GBP 100 million per quarter. The income from this is included in our overall income. As you can see on Slide 14, we are currently above our regulatory requirement for AT1, which is 2.1%, and we are at 3.2%. This is mainly due to some early issuances that allowed us to take advantage of favorable market conditions. While I can't comment on future calls, the excess we have provides an indicator that we are comfortable with our current position. I'm also glad we made our issuances earlier in the year. I hope this information is helpful.

And more broadly, Jonathan, just to close it off, we remain obviously very focused on capital allocation and distribution.

Our next question comes from Guy Stebbings of BNP Paribas Exane.

I have a couple of follow-up questions. First, regarding lending margins, what is your current view on new mortgage spreads compared to previous quarters and the 70 basis points observed for much of 2024? Is it accurate to think that application spreads may have dropped into the 60s today? Also, how much support are you seeing from the corporate book in terms of asset mix, and do you expect this trend to continue? Lastly, I want to revisit the risk transfer market, particularly in light of the recent comments from the PRA. It seems the concern focuses more on risks within the system related to bank funding for acquisitions rather than the overall market size. A peer of yours recently downplayed this issue, and I’m curious if you share that perspective.

Katie?

Sure. When we examine the mortgage margin, our book margin remains around 70 basis points, consistent with our previous guidance. This indicates the front book margin we aim for based on our risk appetite. We are aware that front book margins fluctuate weekly due to dynamic pricing and hedging, with positive returns available below the 70 basis point level, especially for lower LTVs. Regarding margins overall, we expect to be cautious about the volume of new business as we adjust our appetite at different times based on varying returns within the pricing framework. Our priority with mortgages and assets is on returns rather than margins. Looking at your question on the asset book within the corporate sector, our NIM walk shows a slight positive, with a small negative on mortgages, but a positive contribution from the corporate book and some from unsecured loans as well. For your second question, the CFO letter focused on financing significant risk transfers in the trading book, which does not impact us regarding the execution of our SRT transaction for our own assets as part of our capital optimization efforts. Additionally, we do not finance any of our SRT transactions.

Our next question comes from Robin Down of HSBC.

Can I just build a little bit on your comment there about mortgage spreads and appetite for writing business? I think you mentioned earlier that Q1 you felt was influenced by stamp duty on the mortgage side. But if we look at the Bank of approval numbers for March, they didn't really fall a great deal versus prior months. And certainly on a non-seasonally adjusted basis, they looked actually quite strong at the end of March. So I just wonder if you could give us an indication of where your kind of approval numbers were and what you're thinking about lending into Q2. And then maybe similarly on the...

Robin, we've lost you.

Yes. Unfortunately, we can't hear Robin anymore, but maybe you'd like to add...

Robin, we lost you there, mid-question.

Which question? The mortgage?

Yes, we haven't got at the end of your mortgage question.

Okay. It's because I got Bloomberg running in the background. It's just really a question of whether you could give us a sort of indication of where your mortgage approvals were at the end of March and what your kind of thoughts are in terms of mortgage growth in kind of Q2? Because it just feels to me like there's more underlying demand there rather than necessarily just being a stamp duty issue. And then the second question was around deposits. Obviously, Q1 seasonally is normally a very weak quarter for deposits. You've seen growth coming through, including in personal current accounts. So just wondering what your thoughts are there in terms of growth in Q2 and beyond and whether or not we should expect your structural hedge growing? I know you've talked about stability in the past, but whether we should actually be factoring in growth there?

Great, thanks, Robin. Katie, I want to discuss deposits with you. We agree on the mortgage side that application levels remained strong throughout the quarter. We observed an increase in first-time buyer transactions due to the stamp duty change. Our data indicates that our market share rose from 8% last year to 11%, while we maintained a steady share of the overall mortgage market stock. Therefore, application volumes continue to be strong, and we do not perceive the stamp duty change as a significant turning point. Katie, what are your thoughts on deposits?

Yes, definitely. When we examine the deposits, we anticipate that they will continue to grow in alignment with our economic indicators. We are largely moving in sync with the market in this area. Additionally, it's worth noting that the savings rate has shown improvement, which is advantageous. Regarding your questions about the structural hedge, we have experienced some growth this quarter in noninterest-bearing deposits, particularly in retail banking, and we expect to see this trend continue. To clarify how we manage our structural hedge, we utilize a 12-month look back period. The modest growth we've observed in eligible balances won't be reflected until after that period. Currently, we are projecting stability for this year around GBP 170 million, so I wouldn't anticipate immediate growth in the size of the structural hedge. However, if the growth trend continues and becomes significant, it will be captured, particularly in regard to our noninterest-bearing accounts. I hope this clarifies things.

Our next and final question comes from Alvaro at Morgan Stanley.

I have a couple of quick follow-up questions. Regarding the deposit mix, term deposits have decreased slightly, as you mentioned, Katie. As rates decline, do you think we might see an increase in that trend, or is it simply a seasonal fluctuation? People may not start rolling over some term deposits. If we approach 3%, could we see that effect more broadly? At what interest rate level do you think this could occur on a larger scale? Additionally, I want to confirm your intentions regarding the 13% to 14% range. With the government's quick response, do you still plan to operate within that range and distribute anything above it on an interim basis, such as every six months at midyear and at the end of the year?

Thank you, Alvaro. I'll address the second question first, Katie, and then I'll come back to you regarding the deposits. Regarding capital, we are pleased to operate within our target range of 13% to 14%. We view the lower end as a solid capital level. As I mentioned earlier, we will engage with the Board at the midyear and year-end concerning capital distribution, as we recognize its significance to our shareholders. Our philosophy on this matter remains unchanged. Katie?

Sure. Regarding the deposit mix, the term number has changed from 17% to 16%, which is within the rounding of those figures. It's important to consider the fixed rate ISA as April marked ISA season, and we observed strong performance in both sector data and our own metrics during that time. This informs how we expect things to progress. We pay close attention to account maturities, examining retention rates and movement into instant access accounts, which often return to fixed rates over time. The retention percentage has been notably strong. In my view, the ISA season contributes additional funds while individuals manage their term deposits. There is some variation across sectors, with the private sector being a bit different as some look for alternative investments. Commercial and industrial figures are significantly larger, reflecting a different theme. Overall, we're pleased with the progress and anticipate it will continue positively, although it will align closely with market trends. We’ll observe how things evolve from this point. Thank you, Alvaro.

Thanks, Alvaro. And I guess I'll wrap things up with the last question. So I guess to conclude, we're pleased with the performance in quarter 1. It's strong, and it shows the continued momentum in the business. We continue to believe the business is very well positioned to deliver strong shareholder returns. And to that end, we've updated our returns guidance to the upper end of the 15% to 16% range for '25. We will be holding a spotlight on our private banking business on June 25. So I hope most of you will get the chance to join that. And also the spotlight we held on our commercial business is available on the website. So wishing you all a good weekend. Thank you.

That concludes today's presentation. Thank you for your participation. You may now disconnect.